In activity based budgeting approach, analysis is made regarding every activity of organization that is deriving strategic objective. Every activity is monitored to measure the cost it consumes as well as how it relates with other activities across organization. This budget is based on making value chain analysis and reaching at the budgeted data. In traditional cost based budgeting, budgeted data for the following year is produced by making incremental adjustment in previous year costs regardless of the benefit and driven by the underlying activities. While activity based budgeting focuses on the ultimate results achieved and how these result oriented generated cost. When linking these activities with other activities which combination is producing a product or delivering a service, we can see aspect where economies of scale can be achieved. Which area of work processes need training in order to improve quality and minimize wastes by reducing reject rate? This approach relates more with the long term goal achievement. Activity based budget have concern toward inward processes and activities that generate cost instead of looking for the external market factors like inflation to decide about the budgeted figure. It is the internal pattern of work that is reason of any volume of cost and not the external factors which will not effect unless the output is generated. Forecast based on activity based budgeting is resource oriented and it analyze the activities from start till end hence more accurate measurement is done. A value drive approach is applied while assessing the activities relation as a complete value chain. It may result in deletion of those activities which are not necessary with respect to overall origination success.
On the other hand, if we see the activity based budgeting critically, we come to the point of little inflexibility hidden. For example, activity based budget would be definitely accurate with respect to the current situation but it cannot idealize the impact of raising prices of material and labor. Hence it will not be incremental and up to date budgeted data no doubt bringing the economies of scale is still the most valuable benefit driven but a single ended budget would not be practical to apply when matter comes to match with the changing market conditions.
A deep functional analysis is made possible by activity based budgeting. Reasons of poor quality can be traced as well as over spending when work of three activities can be done by two or even single set of activity. This ensures more transparency in planning and decision making concerns. Strategies will be made to add creativity in the existing work activities and making them more capable of delivering product and service as per client’s expectation. Logics to bring amendments and modification in existing work methods will be investigated and implemented.
Activity based budget being the more realistic and equitable way of allocating costs also rectify the inequalities due to traditional cost based budgeting. This is an effective and two way mode of communication about the result of processes and a feed back with respect to achieve organizational success.