Question

Explain why businesses are encouraged to adopt Activity Based Budgeting.

Answer 1

Activity Based Costing is an accounting methodology that assigns costs to activities rather

than products or services. This enables resources & overhead costs to be more accurately

assigned to products & services that consume them.

CIMA defines

"‘Activity Based Costing’ as an approach to the costing and monitoring of activities which involves tracing resource consumption and costing final outputs. Resources are assigned to activities, and activities to cost objects based on consumption estimates. The latter utilise cost drivers to attach activity costs to outputs.”

Businesses are encouraged to adopt Activity Based Budgeting because of its following advantages;

(i) More accurate costing of products/services, customers, SKUs, distribution channels.

(ii) Better understanding overhead.

(iii) Utilizes unit cost rather than just total cost.

(iv) Integrates well with Six Sigma and other continuous improvement programs.

(v) Makes visible waste and non-value added.

(vi) Supports performance management and scorecards.

(vii) Enables costing of processes, supply chains, and value streams.

(viii) Activity Based Costing mirrors way work is done.

(ix) Facilitates benchmarking.