Activity-based budgeting Activity-based budgeting (ABB) is most frequently adopted by organisations that implement an activity-based approach to costing. This is because it requires the identification of cost drivers (the various operating activities that cause costs to change) to determine the expected costs to be included in the budget. Identifying cost drivers is a time-consuming exercise in itself, requiring individual activities and associated costs to be easily identifiable. ABB is particularly useful for new organisations that have little historic information to use and those that have a high level of fixed overheads. The costs of implementing ABB are high and can often outweigh the benefits obtained. The process of ABB involves the following: Identifying the activities of an organisation and their drivers Establishing the volume of cost drivers for the activity level forecasted Calculating the cost driver per unit Advantages and disadvantages of ABB The main benefits of ABB include the following: It easier for many managers and staff to think and talk in operational terms rather than financial terms. ABB focusses on what the organisation does before considering the costs. By focussing on activities, rather than just the level of costs, ABB allows the organisation to identify (and eliminate) activities that do not add value to the end product or service. There is more control over the budgeting process than with traditional incremental budgeting. ABB looks at the activities that will deliver the company’s goals, asking managers to justify all planned activities and their costs. However, ABB is a costly process that requires a significant investment of resources and is suitable only for organisations with a high overhead cost base.