Activity Based Budgeting for DHL Express (India) Private Limited

This assignment discusses the feasibility of adopting Activity Based Budgeting (ABB) for DHL Express (India) Private Limited. It highlights the features of ABB, the difference between ABB and traditional budgeting system, and the suitability of ABB for the company. The assignment also provides a brief description of the client company and its activities.

Accounting
Assignment

1
By student name
Professor
University
Date: 23rd Sep 2018.
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Executive Summary
We have prepared this assignment on the activity based budgeting and have considered the
feasibility report of DHL Express (India) Private Limited. All the discussions have been done on
the advantages and drawbacks of ABB and the reason for its adoption has also been discussed
below. The assignment highlights the different ways in which ABC costing can be put to use by
the company
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Contents
Introduction.................................................................................................................................................4
Key Points....................................................................................................................................................4
a). A brief description of the Client Company..............................................................................................5
b). Description of ABB and its features........................................................................................................6
Features of Activity Based Budgeting........................................................................................................10
c). Difference between ABB and Traditional Budgeting system.................................................................11
Difference between traditional budget and Activity based budgeting......................................................18
d). Discussion on the Suitability of ABB.....................................................................................................21
Conclusion.................................................................................................................................................21
References.................................................................................................................................................22
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Introduction
After viewing the current market trends and increasing competition in the industry, DHL Express
(India) Private Limited has become keen on introducing better reforms in the organization for
proper administration and cost management. The chief executive officer of the company has
stressed on replacing the current budgeting practices with a better and sound budgeting practice.
For this the chief executive officer of the company has been attending various seminars in this
regard and has recently come across activity based budgeting model (Andiola, et al., 2018). He is
considering the introduction of the activity based budgeting into the organization. But before the
adoption of this system of budgeting he wants analyze the system more deeply. The chief
executive officer of DHL Express (India) Private Limited approached ABC Management
Consultants for a proper evaluation of the system of activity based budgeting. The chief
executive officer need ABC Management Consultants to provide the CEO with a feasibility
report in this regard to analyze the viability of adopting activity based budgeting, the current
circumstances of the company (Bumgarner & Vasarhelyi, 2018).
Key Points
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a). A brief description of the Client Company
DHL Express (India) Private Limited is a wing of a German logistics company, being Deutsche
Post DHL, in India. It is one of the most renowned transportation and logistics company
involved in the courier services and logistics services to all types of customers being residential,
industrial, commercial and business customers. The various activities which are involved in the
business of DHL Express (India) Private Limited include repair and return, direct express
inventory and strategic inventory management. It is also engaged in the business of
transportation and has a fleet of vehicles (Charles H, et al., 2015). Apart from the above
mentioned activities the other value added activities in this business are services planning,
vehicles set up, customers order processing, manual loading, mechanical loading, fuel supply,
road journey, manual unloading, mechanical unloading, maintenance, technical support, etc, all
these activities have related activity drivers or cost drivers such as number of vehicles, site
orders, issuing fuel orders, number of liters, team working hours, loaded tons, distance
kilometers, unloaded tons, maintenance shop hours, etc. There were several non value added
activities as well like unnecessary transportation, waiting, non value added processing, excess
inventory, defects, unnecessary motion, etc. the company has spent a lot of amount on the
operational activities due to which the profit of the company in past few years were below
expectation. These costs were incurred in order to increase the quality of service provided by the
company to its customers. This has resulted in lower profits for the company.
There is cut throat competition in the market, which is ever increasing. Same has been the case in
the transportation and logistics sector (Garon, 2018). To face the competition the company has
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been transitioning from the older strategy to the newer strategy, that is, from strategy 2015 to
strategy 2020.
b). Description of ABB and its features
There are various types of budgeting of which, one is Activity based budgeting. The activity
based budgeting is a system of budgeting which involves researching, recording and analyzing
the various activities of an organization which leads to costs for a business. Activity based
budgeting is different from traditional budgeting in a way that it involves identification of
different cost drivers or cost activities. Which goes to say that it is closely related to activity
based costing (Kangarluie & Aalizadeh, 2017).
The concept of activity based budgeting is very much like that of the activity based budgeting. In
order to understand this system of budgeting we have taken an example, which is presented
below:
Activity-based budget:
Research:
Salaries $ 24000
Internet connection 1,860 $ 25,860
Shipping:
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Salaries $ 26,800
Telephone 2,300
Ship sleepeze 634,000
Ship plushette 550,000
Ship ultima 274,000 1,487,100
Jobbers:
Salaries $ 15,900
Telephone 1,680
Commissions 280,000 297,580
Basic ads:
Salaries $ 12,000
Advertising 17,000 29,000
Digital ads:
Salaries $ 10,890
Advertising 680,000 690,890
Office management:
Salaries $ 15,000
Depreciation 10,000
Supplies and Internet 11,500 36,000
Total $2,566,430
2. The data given above provides the activity based budget, which shows the various activities
and its related costs. It is clear from the budget that which activity is consuming what
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portion of the company’s money. For example, we can say from looking at the budget that
the most cost intensive activity is advertising, where the highest amount of cost is involved
and jobbers is second costly activity in the budget. With the help of this budget, the
management of the organization can take measures to reduce the cost related to advertising
and jobbers. However, reducing the cost of advertising becomes quite problematic in case of
first year of operation of the company. Hence the management is required to look into this
matter with other possible measures (Mock, et al., 2018).
While the development of the activity based budgeting, there are several things that is needed to
be identified. Some such things have been mentioned below:
i) The association of the activity level volume driver with the source of an activity level
volume driver within the organization.
ii) Ways in which the main source of the activity level volume driver can affect the
requirements of resources in respect of an activity and how it can be changed.
iii) The activities being performed by the organization should be performed with efficacy
and should meet the levels of standard as laid down for this purpose (Lessambo,
2018).
While executing the process of activity based budgeting there are various other things which
requires attention. Some of these activities includes recognition of the resources which are used
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in the production process along with the recognition of outputs that are being produced by the
organization. Just like activity based costing, the activity based budgeting is about allocation of
the costs to the respective activity on the basis of activity driver in respect of every products and
services. Such allocations are based on the characteristics of those products and services in
relation which they are being allocated.
We have already mentioned above the connection of the activity based budgeting with the
activity based costing. This connection is very important for the implementation of the aqctivity
based budgeting in an organization, since the implementation of the activity based budgeting
requires the organization to follow activity based costing as the system of cost account of the
organization or else the activity based budgeting will not work (Mock, et al., 2018).
There are several fundamental principles in relation to the activity based budgeting which the
organization is required to take under consideration. These fundamental principles are as
follows:
i) Proper and sufficient connection should be formed between the organization’s
activities and its strategies.
ii) Gap analysis should be conducted in order to form the connection between the
activities and organizational strategy.
iii) It is necessary to ascertain the management of the capacity and a sound prediction of
the company’s revenue.
iv) There must exist, a proper connection between the business of the organization and its
business processes.
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The activity based budgeting is considered to be more effective in case of those organization
where the indirect costs consumes considerable portion of the total operational costs. As we
know that activity based budgeting involves allocation of costs based on cost drivers to their
respective activities, it is very famous in such kind of organizations where indirect cost is too
high and the organization is engaged in performing various kinds of activities (Mubako &
O'Donnell, 2018).
Features of Activity Based Budgeting
The key features of Activity Based Budgeting are being mentioned below:
i) Activity based budgeting is being considered as a participative process in order to
control and sustain continuous improvement (Eddy, et al., 2004)
ii) Activity based budgeting integrates the activity planning with accounting to provide
effective control within the organization
iii) Activity based budgeting enables the establishment of performance targets in the
organization for the purpose of control
iv) Activity based budgeting enables the management in the identification of various
opportunities for the improvement of the entity’s costs
v) Activity based budgeting assists in analyzing the various discretionary spending
options and prepares a priority ranking
vi) It is being considered as a process which links the organization’s strategic goals and
objectives to the planning process
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vii) Activity based budgeting uses those activity analysis techniques which are well
proven, which is the source of all activity based system
viii) Activity based budgeting involves lots of complexity as it requires a thorough
research and assessment on the different activities and resources which are crucial for
the entity
ix) The orientation of the activity based budgeting is toward short term goals and
objectives of the organization instead of long term goals (Abdullah & Said, 2017)
x) This has been considered the best method of budgeting since it helps in the
identification of the value added and non value added activities in the organization
xi) Activity based budgeting is a process of planning which is connected to the strategic
objectives of the organization
c). Difference between ABB and Traditional Budgeting system
Traditional system of Budgeting
Traditional budgeting is method of budgeting which has become quite outdated in today’s
time. It is process of preparation of budget by taking the budget of the previous year as base.
The projection of the business revenue and business expenses of the current year is done on
the basis of those of last year. It is an accounting tool which helps in the prediction and
analysis of the earnings of the business along with its expenses. The budget of the last year is
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being considered as a template for the preparation of budget of the current year. The business
tries to stick to it last year’s budget as closely as it can (Webster, 2017).
The various features of Traditional Budgeting is given below:
i) The basis of the preparation of a traditional budget is the budget prepared in previous
year. The previous year’s budget is the base budget.
ii) The traditional budget justifies only those items in the current year which are over
and above the last year’s budget.
iii) The traditional budget focuses on the long term goals and objectives of the
organization.
iv) The traditional budgets are not totally revised but are only updated on the basis of
changes in the market.
v) The traditional budget does not stress on the various issues prevailing amongst the
departments of an organization.
The following points are required to be kept in mind while preparing the traditional
budget:
i) The management is required to consult each and every department for the
inputs needed in the preparation of the budget during the initial stages in order
for the even application of this budget.
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ii) The management, for the purpose of evaluation of the target required to be set,
should compare with its associate organizations the targets being set.
iii) The budget being prepared should be subject to the managers’ observations
and feedbacks. Any important point noted by the managers after the
preparation of the budget should be taken under consideration and appropriate
changes should be made (Giacomo, et al., 2013).
The key limitations of the traditional budgeting system are as follows:
i) The preparation of traditional budget is based on the budget being prepared in
the previous year. The standards remain the same, only the figures are
updated. The approach is outdated and also it lacks accuracy.
ii) The traditional budgets are administered by the management, which is subject
to many wielding and as a result the budget is unsuccessful in reflecting the
primary objectives and goals of the organization.
We have taken help of the following example in order to understand the concept of traditional
budget with more ease:
Classification Last Fiscal Current Next Fiscal
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Year Budget Year
Personnel Services
1110 Salaries $428,656 $600,500 $775,625
1120 Wages $45,000 $55,000 $68,000
1130 Overtime Payments $24,600 $40,555 $58,400
Subtotal: Personnel Services $498,256 $624,050 $902,025
Contractual Services
1210 General Repairs $360 $420 $615
1220 Utility Services $505 $1,020 $3,020
1230 Motor Vehicle Repairs $1,250 $4,540 $5,805
1240 Travel $1,000 $2,800 $4,100
1250 Professional Services $3,400 $5,800 $7,220
1260 Communications $625 $880 $1,010
1270 Printing $1,000 $2,100 $3,990
1280 Computing Services $3,525 $5,650 $8,000
1290 Other Contractual Services $3,000 $4,010 $6,040
Subtotal: Contractual Services $14,665 $27,220 $39,800
Supplies and Materials
1310 Office Supplies $3,504 $5,200 $7,040
1320 Fuel Supplies $5,450 $7,890 $8,905
1330 Operating Supplies $2,160 $4,150 $5,980
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1340 Maintenance Supplies $1,780 $3,070 $4,620
1350 Drugs & Chemicals $6,880 $8,625 $10,075
1360 Food Supplies $2,465 $4,700 $6,010
1370 Clothing & Linens $7,256 $9,650 $11,850
1380 Education & Recreation
Supplies
$3,026 $5,420 $6,500
1390 Other Supplies $2,000 $4,050 $5,750
Subtotal: Supplies & Materials $34,521 $52,755 $66,730
1410 Office Equipment $34,750 $41,500 $68,000
1420 Electrical Equipment $10,400 $24,500 $34,480
1430 Motor Vehicles $150,000 $255,000 $454,000
1440 Highway Equipment 0 0 0
1450 Medical & Lab Equipment 0 $100 $300
1480 Data Processing Equipment 0 $1,000 $3,500
1490 Other Equipment 0 0 0
Subtotal: Equipment $195,150 $322,100 $560,280
Current Obligations
1530 Rental Charges 0 0 0
1540 Insurance $4,200 $5,800 $6,900
1550 Dues & Subscriptions $40 $65 $105
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1560 Electrostatic Reproduction $200 $430 $650
1590 Other Obligations $50 $70 $110
Subtotal: Current Obligations $4,490 $6,365 $7,765
Employee Benefits
1610 Retirement & Pension
Benefits
$63,300 $78,300 $90,450
1620 Social Security Contributions $40,000 $55,005 $67,500
1640 Group Insurance $14,580 $26,000 $38,400
1650 Medical/Hospital Insurance $100,500 $214,550 $317,290
Subtotal: Employee Benefits $367,990 $373,855 $513,640
TOTALS $965,462 $1,406,345 $2,090,240
The traditional budgeting enjoys several advantages, some of the advantages are being
mentioned below:
i) The traditional budget plays a great role in coordinating the financial activities of an
organization; it also creates a point of reference to some extent. It helps in controlling
which leads to proper management of activities.
ii) There are so many organizations which prefer decentralization. Traditional budgeting
is quite helpful in such kind of organizations as it makes use of the budget cost
centers.
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iii) The preparation of traditional budget does not involves complexity. Hence, it is easy
to understand and use.
iv) The traditional budgeting is being used by many organizations for a quite long time
now. They have become comfortable with this system of budgeting and do not
consider replacing it as it would be quite risky.
Apart from the advantages being enjoyed by the traditional budgeting as mentioned above, it
does have many disadvantages too, these are stated below:
i) The traditional budget lacks strategic focus and is often contradictory.
ii) The traditional budget focuses only on reduction of cost rather than creation of
value for the organization.
iii) The traditional budget is being prepared on the basis of last year’s budget, this
as a result acts as a barrier to change and constrain flexibility and
responsiveness (Andiola, et al., 2018).
iv) This type of budgets tends to be bureaucratic and does not add much value to
the business. It does not encourage creative thinking.
v) Analysis of the previous year’s budget is required for the preparation of the
current year’s budget, this makes it time consuming and costly.
vi) The traditional budget is rarely updated and revised, since only appropriation
is done to the values appearing in the budget.
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As we can observe from the information being provided above, there are many disadvantages
of traditional budgeting as compared to its advantages, this paved way for the introduction of
two approaches. These approaches are, firstly beyond budgeting which focuses on the
measurement of problems relating to performance and secondly better budgeting which
focuses on solving various other problems.
Difference between traditional budget and Activity based budgeting
The major differences between the activity based budgeting and traditional budgeting are
being presented in the table given below:
Sl No. Basis Activity Based
Budgeting
Traditional
Budgeting System
1. Orientation The activity based
budgeting is being
towards activity and
process
The traditional
budgeting is oriented
towards outcome.
2 Nature The nature of
activity based
budgeting is
dynamic
The nature of
traditional budgeting is
static
3 Goal The primary
objective of activity
The primary objective
of traditional
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based budgeting is
short term goals
budgeting is long term
goals
4 Approach The activity based
budgeting adopts the
participative
approach.
The traditional
budgeting does not
follow participative
approach.
5 Control The activity based
budgeting enable
more control over
the system
Under traditional
budgeting the level of
control over the system
is less
6 Complexity The complexity
involved in the
activity based
budgeting is more
The traditional
budgeting is very
simple
7 Accuracy The result provided
by the activity based
budgeting is more
accurate
The result provided by
the traditional
budgeting is less
accurate
8 Support In case of activity
based budgeting the
support of the lower
management is more
In case of traditional
budgeting the support
of the higher
management is more
9 Implementation It is quite difficult to
implement activity
There are no such
difficulties in case of
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based budgeting
(Bumgarner &
Vasarhelyi, 2018)
traditional budgeting
10 Wasteful
Expenditure
The identification of
the wasteful
expenditures are
easy in case of
activity based
budgeting
No such ease is
provided in case of
traditional budgeting
11 Time The time required
for the preparation
of activity based
budgeting is more
Traditional budgeting
is less time consuming
12 Volume of overhead Activity based
budgeting is
preferred in those
organization where
overhead cost is
high
Traditional budgeting
is followed by those
entities where
overhead cost is low
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d). Discussion on the Suitability of ABB
We have done a detailed discussion on the activity based budgeting, but before deciding on its
suitability to DHL Express (India) Private Limited, following points needs to be considered:
i) What impacts will the activity based budgeting have on the all over performance of
the business of DHL Express (India) Private Limited?
ii) Does the introduction of this system of budgeting improvise the system of cost
allocation within the organization?
iii) Are there plenty resources available with the organization for the implementation of
ABB?
iv) The initial implementation of ABB is cost intensive; will the company be able to bear
it?
DHL Express (India) Private Limited is engaged in the business of transportation and logistics,
there are various kinds of activities involved in such business and moreover the overhead cost is
also high. The introduction of ABB would bring about various improvements in the operational
system of the company. We would suggest DHL Express (India) Private Limited to adopt ABB
as their budgeting system. However, before its implementation the management should consider
the above-mentioned points.
Conclusion
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We have done the in-depth study on ABB and on the basis of so many advantages
attached to it, we have suggested DHL Express (India) Private Limited for the adoption of the
same. This will help the management of the company in more than one way.
References
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and Closing Review Notes in the Audit of Accounts Receivable. Issues in Accounting Education, 33(2), pp.
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Bumgarner, N. & Vasarhelyi, M., 2018. Continuous auditing—a new view.. Continuous Auditing: Theory
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