Activity Based Budgeting
Traditional approaches to budgeting are effective for unit level activity costs where the consumption of resources varies proportionately with the volume of the final output of products or services. However for those indirect costs and support activities where there is no clearly no defined input-output relationship and the consumption of resources does not vary with the final output of products or services, traditional budgeting approaches merely serve to authorise levels of spending for each budgeted item of expense.
Activity budgeting approach demonstrates an activity based costing approach to the allocation of costs. The main aim of this approach is to more accurately identify product costs where the production process involves a high level of fixed costs.
The key stages in activity based budgeting are to:
Identify the organisation 's activities;
Determine the cost drivers;
Spread departmental costs to costs drivers;
Calculate budgeted activity levels.
The potential advantages of the activity based model are that:
It identifies the cost of activities;
It allows for resource allocation at different activity levels;
It establishes a link between decision making and cost behaviour;
It fits in with control systems.
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This mean that existing operations and the current budgeted allowance for existing activities are taken as the initial point for preparing the next annual budget. During the budgeted period the base is adjusted due to changes in product mix, Volumes and price. For example, the allowance for budgeted expenses may be based on the previous budget allowance plus an increase to cover higher prices caused by inflation. The major advantage of the incremental approach is that most of the expenditure that are associated with the base level of an activity remains