Activity-Based Budgets

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Permalink Reply by Thong Teddy Mulianto on July 18, 2010 at 11:53pm

In my company (plantations), we use activity base cost and budget because we have so many activity to be identified.

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Permalink Reply by Ahram Tauseef Khan on July 19, 2010 at 12:51am

ABB is useful in a company where production costs are derived from cost drivers resulted from activities (e.g set up costs, rescheduling cost etc) being carried out. It is not helpful in organisations where processes are same throughout the year.However, there are limitations that may cause difficulties in applying the same such as find out the cost drives for the costs to be identified.

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Permalink Reply by William Wun on July 19, 2010 at 5:54am

Hi all,
Theorectically speaking, ABC is better than other costing methods in terms of determining the true costs of certain operational activities and assisting decision making. For example, traditional costing, e.g., absorption costing or standard costing, usually understate or overstate the product costs which lead to misled cost information.

Practically speaking, however, ABC and ABB are not easy to implement on the face that many companies lack IT supports and well-organized structures. Simply put, ABC processes are flowcharted as follows:

Activities-------> Cost pools -------> Cost drivers --------> Product cost

First of all, you must define and investigate the operational activities of which the costs are not varied and related with the levels of production, e.g., logistics, sales or purchases activities. Then you must identify all relevant costs which are arisen from a particular activties. For example, sales activities may includes such processes as receiving order from customers, checking customers' credit status, preparing shipping documents, issuing invoices and chasing payments etc. You must identify all relevant costs related to the sales activities and then pool them together, which is termed cost pool. Thereafter, you must identify and define the relevant and appropriate cost drivers, which is necessarily and sufficiently related to the costs in the cost pool. For example, the number of sales transactions give rise to the costs of sales activities and then would be the right choice of cost driver (more sophisticated, we can use the linear regression analysis or other statistical tools to look for the correct cost drivers). Lastly, we can either choose to allocate the activity costs to the product costs by using the matrix of cost driver/BOM (so it is a lit complicated) or assist some more sophisicated analysis (e.g., CRM or product profitability).

A word of warning, don't confuse the ABC with standard/absorption costing althoug they look like a lit the same as they use totally different costing methodologies.

Hope this can help.

William Wun

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Permalink Reply by Vitun Sharma on July 19, 2010 at 6:40am

hello

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.

Hope this helps

Thanks
Business Analysis

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Permalink Reply by Richard J Petti on July 19, 2010 at 8:24am

Thank you Thong, Ahram, William and Vitun all for your thought-provoking responses.

Perhaps I can summarize your responses with this: ABB is most valuable in situations in organizations where actual costs rise and fall with activity (which also have the necessary data and analysis capabilities). Let me try to list examples of good and bad fit for ABB

Good fit for ABB: (1) a factory or farm where labor hours depend on production volume; that is it is possble to increase and decrease the work force each day or week or month depending on volume. (2) Toll collection on a highway that normally has multiple toll collectors, so it is possible to vary the labor cost as traffic levels change. (3) in real estate, the electricity costs for lighting, elevators etc. that depend on usage.

Bad fit for ABB: (1) a factory or farm where union agreements prevent labor cost from varying from week to week or month to month. (2) Toll collection on a highway that normally has only one toll collector who is underutilized (because you can't increase or decrease the work force within the normal range of traffic). (3) In real estate, the cost of maintenance that is due to aging and not wear and tear caused by human usage-- such as roof, exterior paint, perhaps plumbing repair .

Tahnk you.
--D***

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Permalink Reply by rajnikant bharatiya on July 19, 2010 at 12:33pm

It is very helpful in cash flow management and mange a working capital. Each activity has a different purpose. It has need manpower, material, finance and time. What we are gain from that activity in our organisation it is also major important for organization.

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Permalink Reply by Mohamed Amin on July 21, 2010 at 2:44am

dear All,

i need the steps of building ABB system ,specially for Service companies.
any body can help?

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Permalink Reply by Richard J Petti on July 21, 2010 at 1:05pm

ModelSheet Software has a customizable spreadsheet for ABB. Customizable means that you can make many changes to fit your own situation by filling in a web form. See http://templates.modelsheetsoft.com/modelsheettemplates/activity-ba... .

Full disclosure: I am a co-founder of ModelSheet Software. I started this discussion to get a better idea to market this product.

--D***

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Permalink Reply by Dipu James on July 25, 2010 at 12:00pm

ABC Template Free of cost

http://www.finance30.com/forum/topics/activity-based-costing?commen...

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Permalink Reply by dqjkpzw on July 21, 2010 at 8:15pm

very good

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Permalink Reply by neelkanth mehta on July 24, 2010 at 11:04pm

Activity based costing is an approach to costing and managing activities that involves tracing resource consumption to the final output. Resources are assigned to activities and activities to cost objects, on common criteria. The later uses cost drivers to identity the level of cost to assign to the product. And in Activity based budgeting is based on such cost objects.
This activity is helpful when:
1. Production overheads are high in relation to direct costs,
2. There's a great diversity in product range,
3. Each product in product range consume amounts of the overhead resources &
4. Consumption of over heads is not primarily driven by production volume. So to say, they could either be, unit product driven, batch driven, product line driven or facilities driven.

So you can infer that in Activity based budgeting, there are no costs considered as absolutely fixed cost; and the decision makers can understand behavior of different cost objects. One can perform Direct product profitability analysis, or customer profitability analysis or even the entire operations profitability analysis.

Do you see your organization in this kind of situation, then may be ABB's highly recommended.

But one must also be aware of some pitfalls:
1. A little discretion will still be necessary to apportion the overheads to various products.
2. Sometimes there would be more than singly cost driver for a particular cost object; identifying each cost driver and relating to the product could be a tedious and sometimes daunting task.
3. Care should be taken the cost overruns of ABC don't surpass its benefits.

Hope this feedback works, should you need any clarifications, feel free to reply to this mail.

Thanks.

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