Activity-Based Budgeting - ABB


DEFINITION of 'Activity-Based Budgeting - ABB'

A method of budgeting in which the activities that incur costs in every functional area of an organization are recorded and their relationships are defined and analyzed. Activities are then tied to strategic goals, after which the costs of the activities needed are used to create the budget.

Activity based budgeting stands in contrast to traditional, cost-based budgeting practices in which a prior period's budget is simply adjusted to account for inflation or revenue growth. As such, ABB provides opportunities to align activities with objectives, streamline costs and improve business practices.

BREAKING DOWN 'Activity-Based Budgeting - ABB'

By looking at the cost structure of an organization via the processes that are actually being performed, managers can more effectively analyze the profit potential of a company's products and services. Cost efficiencies can be found by comparing activities performed in different areas of the organization and consolidating or rerouting certain functions.

At its essence, activity-based budgeting begins by looking at results and the activities that created them, as opposed to cost-based budgeting, which often begins with raw input and material and works outward. ABB can also help firms create more accurate financial forecasts.

  1. Cost Accounting

    A type of accounting process that aims to capture a company's ...
  2. Activity Capacity

    The degree to which a particular action is expected to perform. ...
  3. Activity Cost Driver

    A factor that influences or contributes to the expense of certain ...
  4. Avoidable Cost

    An expense that will not be incurred if a particular activity ...
  5. Batch-Level Activities

    In managerial accounting, production costs that are incurred ...
  6. Zero-Based Budgeting - ZBB

    A method of budgeting in which all expenses must be justified ...
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