Budgeting is an activity that plans for future expenditures. Traditional, or fixed, budgets are inflexible in the sense that they allocate a specific amount of funds for a particular period of time in the future. They focus primarily on the financial aspects and don't pay enough attention to the activities in which an organization partakes to produce services and goods. Activity-based budgets, alternatives to fixed budgets, are prepared after the costs of individual activities are calculated. They, therefore, focus on activities and business processes and not only the financial aspect of the budget.
Preparing an activity-based budget entails a comprehensive review of each organizational and departmental activity. This process is costly and may prove to be even more so for smaller companies that offer a limited number of products and services. Companies typically use specialized software to prepare activity-based budgets. This further hikes the cost of preparing the budget as computerized software packages and licensing fees are expensive.
An activity-based budget is prepared after a thorough review of each organizational, departmental or project activity. Don R. Hansen and Maryanne M. Mowen, the authors of the book “Management Accounting,” state that the process can be time-consuming owing to the time and effort associated with thoroughly reviewing each activity. Budget preparation is typically an ongoing process. Several adjustments are made to the first draft before the final budget is approved. Fine-tuning an activity budget, therefore, can further prolong the process. Activity-based budgeting becomes even more time-consuming for larger organizations that have many departments and are engaged in numerous activities.
Activity-based budgeting is complex. Budgeting teams start by using activity based budgeting techniques to identify all those activities that consume resources. They then assign costs to each activity. Much of this requires experience and a keen sense of cost estimation. Activity-based budgets become even harder to prepare and implement in companies that undertake many different, unrelated activities.
Organizations are involved in numerous different types of activities, such as those related to sales, production, human resources and others. Different organizational activities are not equally important or critical. For example, activities critical to a hospital include those directly related to patient health and well-being. Other activities, such as those related to accounting and inventory control are non-critical and can be delayed without posing a threat. Activity-based budgeting keeps this factor in mind when allocating costs to activities. This causes anxiety due to job insecurity among employees working on all non-critical activities. Job insecurity is greatest during periods of economic recession and budgetary cuts.
- "Management Accounting"; Don R. Hansen, et al.; 2006
- "Role and Effects of Budgeting in Managerial Practice"; Christoph Butz; 2011
- "Cost Accounting Theory And Practice 12Th Ed"; Bhabatosh Banerjee; 2006
- "Planning and Budgeting for the Agile Enterprise"; Richard Barrett; 2007
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