Activity-Based Budgeting - ABB

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Activity Capacity

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

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

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

    In managerial accounting, production costs that are incurred ...
  5. Variable Cost

    A corporate expense that varies with production output. Variable ...
  6. Zero-Based Budgeting - ZBB

    A method of budgeting in which all expenses must be justified ...
RELATED FAQS
  1. Which is a better measure for capital budgeting, IRR or NPV?

    In capital budgeting, there are a number of different approaches that can be used to evaluate any given project, and each ... Read Full Answer >>
  2. What is the difference between a Debit Order and a Standard Order in a bank reconciliation?

    While both debit orders and standard orders represent recurring transactions that must be considered in bank reconciliations, ... Read Full Answer >>
  3. How has Google's operations strayed from its original mission statement?

    Google's (GOOG) mission statement has been the same since its inception in 1998: "Organize the world's information and make ... Read Full Answer >>
  4. How can a company execute a tax-free spin-off?

    The two commonly used methods for doing a tax-free spinoff are either to distribute shares of the spinoff company to existing ... Read Full Answer >>
  5. How often should a small business owner go through a bank reconciliation process?

    Small business owners should go through the bank reconciliation process at least monthly, and many business consultants recommend ... Read Full Answer >>
  6. How is the marginal cost of production used to find an optimum production level?

    The marginal cost of production can be tracked to show the optimal production level where per-unit production cost is lowest ... Read Full Answer >>
Related Articles
  1. Budgeting

    The Beauty Of Budgeting

    Make it to the end of the month, before you run out of money.
  2. Budgeting

    How Budgeting Works For Companies

    Learn how to break down and understand a corporate budget.
  3. Home & Auto

    Are Home Inspections Worth It? - Price vs. Value

    If you’re wondering whether home inspection is worth the investment, the following information will help you decide.
  4. Economics

    Understanding the Product Life Cycle

    Product life cycle is the period of time during which a product is conceived and developed, brought to market and eventually removed from the market.
  5. Economics

    What Does Business-to-Business Mean?

    The term business-to-business refers to transactions or communication that takes place between two or more businesses.
  6. Economics

    What are Barriers to Entry?

    A barrier to entry is any obstacle that restricts or impedes a company’s efforts to enter an industry.
  7. Investing Basics

    These Four Industries Must Change to Survive

    Tech innovations from new companies are threatening long-time industry stalwarts in transportation, hospitality and finance.
  8. Investing News

    How China's Lenovo Makes Money

    Lenovo has emerged as one of China's most renowned multinational corporations. We examine the strategy and business model underlying its success.
  9. Investing Basics

    Is Lenovo A True Disruptor Of The Laptop Industry?

    Lenovo has cut costs, taken market share from top competitors and caters to both consumers and institutions, but is it a disruptor?
  10. Budgeting

    How to Defray Long-Term Care Expenses

    Here's a handful of options on what you can do to defray long-term care expenses.

You May Also Like

Hot Definitions
  1. Topless Meeting

    A meeting in which participants are not allowed to use laptops. A topless meeting organizer can also ban the use of smartphones, ...
  2. Hedging Transaction

    A type of transaction that limits investment risk with the use of derivatives, such as options and futures contracts. Hedging ...
  3. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  4. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  5. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  6. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!