You already know that Budget Planning is a fundamental tool to ensure the healthy growth of a company and how important it is to have a well-defined business budget.
But for this budget to be prepared, there are several methodologies and models that must be used according to the needs and characteristics of each company. And today, in this new article, we will talk about the Activity Budget .
Follow and learn more about it.
What is the Activity Budget
Activity-Based or Activity-Based Budgeting, also called ABB (Activity-Based Budgeting), is a budgeting and financial system that reflects an organization’s activities and processes. There, costs are associated with activities and expenses are then compiled based on expected activities.
Thus, in the Activity Budget, the tasks performed within the organizational structure that involve costs are recorded, establishing relationships between them to later decide the amount of the total budget that should be allocated to each one.
It does not replace the traditional budget. It should be used as a managerial tool to indicate to the managers how much equipment, supplies, energy and employees will be needed for the company to achieve its strategic objectives for the organization. Being elaborated only after all the costs of an activity are correctly justified.
In addition, as you can imagine, the Activity Budget is related to Activity Based Costing (ABC) , a topic that has already been discussed here on the blog. Once the drivers of resources and activities determined in the application of ABC are known, it is possible to quantify and project them according to the increase in sales and business strategies, involving costs and performance.
Want to learn more about budgeting? Check out other articles from different types of budget:
Do you know what Zero Base Budget is?
What is the Matrix Budget?
What is Rolling Forecast – Continuous Budget
How to do a good budget planning?
How the Activity Budget is carried out
First, we have to make it clear what an activity in this budget system would be. Here, activity is the use of resources (personnel, machines, technology, materials), in order to produce some good or service.
Thus, when a shoe store sells a product in stock, for example, the following activities are involved:
- Issuance of the order by the seller;
- Issuance of the invoice;
- Product delivery;
- Duplicate issue;
- Duplicate collection;
- Accounting for the operation.
To start preparing an Activity Budget, it is important to create an activity sheet for each area. And for that, the Controller must talk to all the managers of the organization in order to identify all the activities involved in the production process. In other words, budgeting involves the entire staff (marketing, engineering, production and service areas).
Ideally, each of the managers should answer the following questions:
- What activities does the unit need to perform in order to comply with budgetary objectives?
- What resources are needed for these activities?
- What financial resources (revenue, cost, cash flow, etc.) are needed?
- What is the impact of these resources?
And, after the identification of each of the activities, it is necessary to identify the factors that generate or influence the volume of the expenses of an activity.
But in general, we can say that the Activity Budget includes the following steps:
- Determine the projected demand for each product.
- Identify the consumption rate of the activity.
- Multiply the product’s projected demand by the activity’s consumption rate, then calculate the activity needs (quantity) and meet the projected demand for the products.
- Predict the demand for activities.
- Identify the rate of consumption of resources.
- Multiply the total activities required by the rate of resources consumed, thus calculating the amount of resources needed to satisfy the projected demand for cost objects.
- Convert the total required resources to the cost of the required resources.
- Accumulate the total cost of estimated resources to meet the projected demand for cost objects.
Since the Activity Budget is based on forecasting sales volume, it is essential that sales planning and billing projection are very well prepared.
Advantages and disadvantages of the Activity Budget
Among the advantages of the Activity Budget we can highlight:
- Costs are associated with activities in a precise way, in each of the production stages, and with this, the budget planning process is much more accurate and the corrections that may be necessary become more effective.
- Since it allows for a more precise analysis, the Activity Budget eliminates unnecessary activities and thus reduces costs and expenses.
- If there is a reduction in costs and expensesin the production of goods and services, it is clear that there is an increase in the company’s competitiveness.
- It recognizes the cost drivers for each activity and with this knowledge, managers can better control the causes of these costs and thus work to reduce them.
- It serves as an excellent analysis tool for making strategic decisions, such as changes in the product line, changes in the price formation process , elimination or cost reduction of activities that do not add value, elimination of waste, etc.
Among the disadvantages of the Activity Budget, we can mention:
- It is a complex methodology, which may not be very worthwhile for a small company with few products or services.
- It requires a thorough understanding of the various areas of the company, otherwise it will not be accurate.
- This is a methodology that consumes many resources of an organization, since to be executed it is necessary to count on the help of collaborators from different areas.
- Its preparation requires the involvement of the board, which can involve many costs.
- The Activity Budget focuses on short-term goals, but long-term plans are more efficient to engage your employees with the company’s objectives and generate great satisfaction with the achievement of results.
Conclusion
In such a dynamic economic scenario, many companies are adopting modern forms of management in order to increase their profitability and competitiveness and the Activity Budget can be one of them.
However, it is necessary for managers to be aware of its limitations and disadvantages and that, once implemented, its success depends on the availability of the means and resources necessary for it to function effectively and achieve its objectives.
As you can see, the subject is interesting and quite complex, so the study and updating must be a constant in the life of managers and professionals in the financial area.
