Activity Based Budgeting (ABB)

Management Accounting

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
A) Brief description about client of firm (Holden)................................................................1
B) Describing about activity based budgeting and its features..............................................4
C) Outlining ways in which ABB is different from traditional budgeting systems...............5
D) Discussing whether ABB is suitable to organisation........................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Management accounting plays an important role in every business entity especially in
manufacturing industry. The present report will discuss about activity based budgeting (ABB) in
context of Holden. ABB is replicated as a planning system in which costs are directly associated
with activities along with budget expenditure which are compiled on the basis of expected
activity level. This report will give brief description about Holden which consists of its facilities,
operations and annual sales of past 10 years. It will give explanation on Activity based budgeting
with its major characteristics in specified organization. In the similar aspect, it will articulate
various variations among ABB and different traditional budgeting system such as consideration
of budget and expenditure of current year. Further, it will provide discussion on the suitability of
ABB to Holden.
A) Brief description about client of firm (Holden)
Holdenwas formerly known as General Motors Holden which is an Australian auto
mobile importer and former manufacturer of automotive. It is headquartered in port Melbourne,
Victoria. This organization is main stay in Australian Automobile manufacturing as it tracks its
origin from year 1856. Many years ago, it was exclusive producer of its car bodies for base
frame of General motor vehicles which are imported into Australia. It is operating under GM
Holden Ltd as these two are always linked to each other. In the present era, Holden is considered
as one of only seven fully integrated global General motor’s operations which build, sell and
design vehicles for Australia and whole world (Holden Overview, 2018).
Its main business is to manufacture and distribution of motor vehicles, components, parts
and engines. On the current aspect, it has employed approx. 3150 people on national basis. The
operations of Holden vehicle produce 45 models from six vehicle body style and core vehicle
architectures for domestic and export customers. It began with Cruze production as fuel efficient
global and small vehicle which helps for growth of Holden's expertise in manufacturing and
engineering of these types of automotive. It consists of press plant and operation of metal
assembly, plastics operation, vehicle assembly operation, hardware facility, body assembly and
paint shop.
It is the centre of expertise in engineering and design for GM globally. It is one of the
nine global design centres which are responsible for vehicles like Chevrolet Camaro and Holden
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Commodore along with main string of global concept related to car for multiple GM brands.
Holden is also replicated as a centre of expertise for rear-wheel and large drive vehicles in GM
family along with powertrain engineering centre with R&D and customer program expertise,
LPG and CNG applications (Holden at a glance, 2018).
It would be continuing to reflect significant presence in Australia beyond 2017 which
consists of national sales organization, a national parts distribution centre and global design
studio. In the similar aspect, its leverage of GM's global portfolio which gives the best cars for
Australian market. It is committed for selling Holdens in country from various coming years.
Currently, it offers various cars in more segments as compared to before from Barnia small car
range to class leading infotainment via game changing world class VF Commodore range and
Volt electric car. It is directly committed for giving the best cars to Australia for viewing full list
to Holden world class vehicle.
It provides various facilities like:
 Head office and design as well as engineering centre
 Holden engine manufacturing operations
 Holden vehicle manufacturing operations
 Automotive proving in ground
 Holden national distribution centre
 Holden innovation
 States sale office
In the similar aspect, Holden has manufactured more than 7 million vehicles and engines
more than 10 million for overseas and local sales. It has sent more than 780000 Holden vehicles
across world in 5 decades and 4 million export engines in 27 years. It is the major representative
of Australia's largest automotive export program. The GM product programs are supported by
specialist Holden engineering services in Asia Pacific region and in Europe as well. Its network
of dealer is very strong as its nationwide Holden network comprises over 200 authorised stores
along with 12 authorised service centres. The dealership of Holden promotes and represents its
services and products for employing more than 13500 people from entire Australia. Their unique
strategy positioning is because of technology which is very strong.
The trend annual sales of past 10 years is stated as below:
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Year Annual sales
2007 146680
2008 130338
2009 119568
2010 132923
2011 126095
2012 114665
2013 112059
2014 106092
2015 102951
2016 94308
2017 90306
The above graph and chart represents annual sale of last 10 years from 2007 to 2017. It is
decreasing because of ceasing operations of manufacturing (Emma Griffithe, 2014).
For continuation of present opportunities of Holden for supplier, customers and
corporation, they have laid emphasis on building various vehicles at competitive price according
to affordability of consumers. In context of global purchasing and supply chain, their major
responsibility is to procure services and parts which develop “Gotta Have” vehicles. In the
similar aspect, their next responsibility is to drive cost and waste of corporation for improving
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overall value to shareholders, consumers and suppliers. They highly rely to attain sourcing
decision on the basis of technology, quality, price and service. Suppliers have consistently
performed outstanding contribution for accomplishing success. The whole global purchasing and
team of supply chain of Holden has focused on performing suppliers' growth and for developing
opportunities.
B) Describing about activity based budgeting and its features
Activity based budgeting (ABB) is referred as a method of budgeting which is designed
to give high transparency in context of budget process. In its basic form, it is a budgeting method
by which revenues are created through research and instructional activities as they are
appropriately allocated to particular unit which is responsible for activity. Generally, it is found
in cost accounting. Budgets are prepared through managers and spending propositions on the
basis of activities of past production (Oseifuah, 2018). In simple words, the cost of performing
certain activities has been examined through management such as budget of overall cost for
production of particular product.
It is stated as a system which traces, researches and analyses such activities which lead
costs to Holden. It is more than adjusting budget of previous account in context of business
development and inflation. The efficiency in business operation is extracted through activity
based budgeting and budgets are developed related to these activities. Local planning and
accountability have been empowered through ABB and incentives are created for managing
expenditures along with resources in an efficient aspect in Holden. In the similar aspect, direct
control of resources is generated by particular activities which create incentives for setting
priorities and new tasks are developed consistently with overall strategic objectives and mission
of Holden (Gerwin, Norinsky & Tolwani, 2018).
The dependency among two activities helps in saving money of company by raising
batch production. It also helps in reducing time or combination of two activities. By performing
ABB, management could become familiar with process of production as this knowledge might
lead to huge cost savings. Manufacturing and product innovation might give outcome for
understanding and knowing the process of production. It is very important for each
manufacturer. It allows for providing control over the process of budgeting. The planning of
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expenses and revenue incur at precise level which gives essential details in context of forecast. In
the similar aspect, it aligns budget with the overall objectives of company (Wegmann, 2017).
Features of activities based budgeting
The basic feature of practising ABB in Holden is to bring efficiency in each activity. The
budgets are prepared after justifying its cost drivers. It is termed as activity oriented not as
function oriented as it focuses on activity instead of function. The cost driver data has been used
in activity framework with implication of setting budget and process of variance feedback. The
simpler form of ABB with its cost drivers is to help in deriving budget. It draws attention
towards overhead activities and each linked cost. The intensity of activity cost might be
controllable along with the volume of each task. It takes approach on the basis of results as it
recognises activities which drive cost. It views business as an activity collection with perspective
that is associated to organizational strategy. It provides useful information in context with total
quality management environment associated to activity's cost with level of services given.
It allows business owners and managers to view business as a system from start to finish
instead of annual departments. It generates culture of giving more focus on customers when
employees give importance for producing services and products. It is considered as a strategic
costing technique. Team work has been promoted among various other departments. It evaluates
each cost driver and provides competitive edge. It considers whole business as a unit.
Bottlenecks have been eliminated through ABB in Holden. It has a huge requirement of
understanding of each activity and relationship is improved along with the resource consumption
(Mauro, Cinquini & Grossi, 2017). The budgeting process consumes various resources of
Holden. It has huge requirement of employing top officials for performing appropriate analyse. If
resources are directly employed in operational activities which would lead to better returns. ABB
lays special emphasis on short term objective of organisation as it avoids long term scenario
which proves fatal for business entity.
C) Outlining ways in which ABB is different from traditional budgeting systems
Budgeting is one of the vital techniques for carrying out analysis regarding future
expenses so that it may be managed according to the actual costs. It helps to ascertain that
company should meet requirements in accordance with the budget set so as to overcome extra
expenses in an effective manner and attain actual expenditures quite easily. In relation to this,
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there are various budgeting systems such as traditional and ABB which can be used by Holden
Company as per its suitability. ABB has evolved as a major budgeting system that is the best
suitable for manufacturing organisations as in production, various costs are incurred like direct,
indirect, fixed, variable and semi-variable costs for carrying out desired production (Dudin &
et.al., 2015). Since, Holden is engaged in automotive sector in Australia which attains production
in order to achieve demand of customers in the best possible manner.
ABB is suitable for organisation as it does not consider or take into account previous
year’s budget for making the current one. This helps to effectively attain activities with prior
study of costs to be incurred by company. In simple words, entire study of activities is conducted
and budget is prepared with ease. It eventually benefits Holden as it is able to allocate resources
which help organisation to manage all its spending on various activities leading to optimum
resource allocation and consecutively attaining desired level of production. It is different in ways
from traditional budgeting system. This type of budget usually takes base of previous year in
which firm is able to make budget for current year without taking figures from the complete
scratch. On the contrary, ABB does not take into account past year's base and arrives at current
period budget. Traditional system of budgeting uses previous period base and as a result,
prepares budget by just adjusting costs based on inflation rate prevailing in the country, demand
of customers and market situation up to a major extent (Bogsnes, 2016).
ABB is beneficial because all activities are studied in an in-depth manner and budget is
produced afterwards leading to optimum allocation and utilisation of resources effectually. On
the other hand, traditional budgeting is used by old budgets which are rigid in nature and thus,
wastage of resources takes place because only figures are merely increased without analysing
actual need of company. In this way, ABB is suitable for Holden as it can study costs to be
incurred on activity basis leading to enhanced production level. Cost drivers are established for
activities to be undertaken and as a result, departments of Holden effectively allocate resources
quite easily. Traditional budgeting systems are of lesser motivation for personnel which are
directly or indirectly related with company's operations. This is due to the fact that top
management only increases expenditures without justifying it which promotes bureaucracy
inside organisation and hence, affecting employee's motivation up to a high extent.
Excessive reliance on previous year’s budget incorporates hurdles in the current year as
well. This is because; if any inaccuracy is present in old budgets, then same is carried forward to
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next year and hence, accurate budgets cannot be prepared by implementing traditional system. In
contrast to this, growth of Holden may not get hampered by applying ABB because no reliance
or reference is made to generate current period budget as everything is entirely studied and so, by
considering cost drivers, proper and accurate budget is produced with ease (Rosenberg Hansen &
Ferlie, 2016). Another way by which ABB differs from traditional system is that no priority is
listed in the preparation of budget. In simple words, it does not consider whether higher ranked
project should be used or not because it is much important than the other one. This indirectly
affects company as profitability gets hampered particularly in long-run as allocation relies
heavily on the past levels. In contrast to this, ABB overcomes such limitation by giving priority
to projects which are of utmost importance and as a result, manufacturing can be attained in
accordance with the budget.
Deliberate making inflation is another disadvantage by which Holden can overcome the
same by implementing ABB system as it has immense benefits. This is essentially required so as
to attain desired level of production by which demand of consumers can be met with ease. In
relation to this, in traditional budgeting, middle level of management deliberately increases
budgeting expenses and requests higher management to allot the same which are obviously not
justified and hence, leads to spoilage of scarce resources. Another way incorporating differences
among traditional system and ABB is that potential profitability cannot be ascertained with the
help of older budgeting (Henttu-Aho, 2016). It is crucial to note here that objectives of business
are aligned with activities needed for achieving profits. Hence, it helps to determine the
profitability of business quite effectually which cannot be done by traditional budgeting system.
Thus, by listing various ways of differences, it can be analysed that Holden may be able to
accomplish to receive benefits by implementation of ABB.
D) Discussing whether ABB is suitable to organisation
ABB has plenty of benefits for company which helps to ascertain production level in the
best possible manner. Traditional budgeting systems have certain drawbacks which are attained
by the implementation of ABB as it is accurate and reliable for Holden in order to determine
manufacturing of automotive with ease. Efficiency in activities of firm can be accomplished with
the help of ABB and thus company is able to attain benefits out of it. One of the main reasons
which makes suitability for client organisation is that justification of cost drivers is made in ABB
and afterwards, budget is produced in a better way. In relation to this, organisation is able to
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make analysis of costs in an effective manner as expenditures are assessed by taking into
consideration with the help of activities in production by justifying cost drivers. This helps
company to make proper allocation of activities as unnecessary ones are ignored and thus, firm is
able to attain desired level of production.
Unnecessary activities are sorted out and eradicated which helps firm to carry out more
production with the reduced costs. This leads to cost-saving for it which helps company to
effectively attain production more than its competitors leading to attainment of more customer
base with ease. In this manner, company is able to accomplish competitive advantage quite
effectually. Moreover, it is suitable for another reason such as ABB considers business unit as a
whole and does not consider various individual departments. This helps to prepare budget
keeping in mind the activities to be attained for entire organisation and not separately for units
which is done in other budgeting techniques (Amans, Mazars-Chapelon, & Villesèque-Dubus,
2015). On the other hand, there are bottlenecks which usually hamper production level and so,
smoother operations cannot take place. This helps business to make proper and deep analysis in
order to remove bottlenecks from the operations and thus, desired production could be achieved
by Holden with ease. Activities can be assessed with the help of cost drivers leading to smoother
operations.
Another reason enhancing suitability of ABB for Holden is that it may be able to improve
the relationships with employees and customers. This could be attained as the main objective of
ABB which is to eradicate those activities that are not necessary in business and thus, the best
quality automotive can be offered to customers leading to have better advantage for organisation
to strengthen relationships and attain higher customer base getting ahead of rivals. Hence, firm is
able to serve consumers indirectly and as a result, satisfaction level of customers can be
accomplished in a better way (Raudla & Savi, 2015). This means that Holden will be able to
ascertain production with the help of ABB so that it may meet demand of customers. It can be
said that ABB is a widely used modern budgeting system which helps company to take into
account necessary activities in order to achieve production and various costs can be categorised
as well as assigned to cost drivers, thereby leading to attain efficiency in operational activities.
Thus, ABB is suitable for company as it is a highly productive budgeting system in comparison
to traditional system.
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CONCLUSION
Hereby, it can be concluded that budgeting system plays an important role for company
so as to make proper analysis of costs and related expenses in a better way. In relation to this,
ABB system of budgeting is quite important for company as activities can be analysed in the best
way possible and thus, costs can be assessed with ease of entire business as a whole. Moreover, it
is required that traditional system should not be used as it has various limitations which are
effectively overcome by ABB. Features of ABB are discussed from which outcomes can be
attained that traditional budgeting is rigid in nature and as a result, Holden should go for ABB in
order to accomplish business goals with the help of such budgeting system.
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REFERENCES
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complexity: The case of performing arts organizations. Management Accounting
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Bogsnes, B. (2016). Implementing beyond budgeting: Unlocking the performance potential. John
Wiley & Sons.
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budgeting.
Gerwin, P. M., Norinsky, R. M., & Tolwani, R. J. (2018). Using a Time-Driven Activity-Based
Costing Model To Determine the Actual Cost of Services Provided by a Transgenic
Core. Journal of the American Association for Laboratory Animal Science. 57(2). 157-
160.
Henttu-Aho, T. (2016). Enabling characteristics of new budgeting practice and the role of
controller. Qualitative Research in Accounting & Management. 13(1).31-56.
Mauro, S. G., Cinquini, L., & Grossi, G. (2017). Insights into performance-based budgeting in
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Oseifuah, E. K. (2018). Activity based costing (ABC) in the public sector: benefits and
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Raudla, R., & Savi, R. (2015). The use of performance information in cutback budgeting. Public
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Rosenberg Hansen, J., & Ferlie, E. (2016). Applying strategic management theories in public
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Wegmann, G. (2017, November). A Typology Of Cost Accouting Practices Based On Activity-
Based Costing–A Strategic Cost Management Approach And A Case Study. In ASIA
PACIFIC MANAGEMENT ACCOUNTING ASSOCIATION CONFERENCE 2017
(13TH) ANNUAL CONFERENCE.
Online
Emma Griffithe. 2014. Holden to cease manufacturing operations in Australia in 2017. [Online].
Available through: <http://www.abc.net.au/news/2013-12-11/holden-to-cease-
manufacturing-operations-in-australia-by-2017/5150034>.
Holden at a glance. 2018. [Online]. Available through:
<https://www.holden.com.au/corporate/inside-holden>.
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Holden Overview. 2018. [Online]. Available through:<https://www.cargurus.com/Cars/Holden-
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