Activity-based budgeting
Activity-based budgeting forecasts activity volumes and applies cost-driver rates to build costs from the ground up, rather than adjusting prior-year figures. It extends activity-based costing into planning.
FrameworkActivity-based costing
See it move
Activity-based budgeting starts with the volume of work expected, not last year's spending. If the firm expects to process 4,000 purchase orders next year and the driver rate is €12 per order, the procurement budget is 4,000 × €12, or €48,000 — a figure managers can challenge directly, by questioning either the forecast volume or the rate.
The formula
Variables
- Cost-driver rate for activity i, taken from the ABC system (€ per driver unit)
- Forecast volume of activity i's cost driver for the budget period
Repeated for each activity; summing across all activities gives the total budgeted cost for the department or process
Check yourself
A professional-services firm currently builds its annual budget by applying an inflation uplift to last year's approved costs and adding any newly approved headcount. A managing partner proposes switching to activity-based budgeting (ABB). What would change most fundamentally in the process?