Why Activity Based Budgeting Is Your Solution For A Cost Efficient Business Strategy.
It requires you to establish all activities that incur costs in each function of your business and then define the relationships between those activities.
The information you get will guide your decision on how much resource you should allocate to each activity.
ABB provides you with greater detail, especially regarding overheads, because it permits the identification of value-adding activities and their cost drivers.
This page will demonstrate to you the difference between ABB and other commonly used forms of financial forecasting, and also let you appreciate its strategic role as a cost and management tool, in as far as running your business more efficiently is concerned.
The Traditional Budgeting Approach
Traditional forecasting practices such as Zero Based Budgeting, Incremental Budgeting, are operated on the basis of predetermined maximum spending limits, and are normally characterized by the need to re-write the business plan to fit expenses.
The traditional process focuses on what managers are allowed to spend, and not the resources they actually need to add value to their business. Thus, the traditional budget process fails to identify waste, does not identify the incoming workload, does not support continuous improvement, does not identify cost drivers, and appears to have a general lack of ownership and buy-in.
Other criticisms of the traditional budgeting process are that it is extremely time-consuming for the benefits achieved, it results in arbitrary cost increases or reductions, and it focuses on resource inputs instead of the outputs generated by those inputs.
The true cost of producing a product caused by complex overhead activities such as research, marketing, human resources are simply not captured or measured with traditional methods.Indeed, traditional methods typically under cost low volume but complex products and over cost high-volume products.
In summary, traditional forecasting practices do not appear to serve the needs of modern organizational strategy, whose main objective is inclined towards efficiency and cost leadership.
A case for Activity Based Budgeting
Activity based budgeting in a Strategic Perspective
It is a management methodology defined by Harvard professors Kaplan and Cooper in their 1991 book Cost & Effect, in which they address the distortion problem of traditional costing methods for assigning overhead costs directly to product.
The Harvard professors have stated that ABB measures activities that consume company resources. Activity Based Management (ABM) manages resources to new and more valuable activities. Together, they enable fact based, quantitative management initiatives such as Cost Reduction, Business Process Re-engineering (BPR), Customer Relation Management(CRM),Value / Supply Chain Management and Benchmarking.
Bottlenecks to Activity Based Budgeting
Business acumen and the ability to properly apply powerful transaction-based systems are becoming an all important ingredient in today’s world of modern commerce.
Many companies around the world are undertaking ABB initiatives and are thereby experiencing positive results and solid improvements as a direct result. However, many companies are falling short of the greater goal of moving on to full-scale operational Activity Based Management.
Why is this the case?
Activity based budgeting is a fairly complex system to implement and monitor. We highly recommend that you employ or contact a certified accountant for professional guidance. Please don’t hesitate to contact us, for further online support on this subject and more.
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