Activity Based Budgeting in Rio Tinto: Features, Differences from Traditional Budgeting, and Significance

MANAGEMENT ACCOUNTING
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Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
a) Description of organisation.....................................................................................................3
b) Concept of Activity based budgeting method and its features................................................3
c) Difference between traditional budgeting system and ABB...................................................5
d) Significance of ABB in Rio Tinto...........................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................12
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INTRODUCTION
The Management Accounting, for any organisation, is an important aspect in the financial
system which helps manage and evaluate the business performance effectively. It facilitates the
effective decision making through the collection and reporting of internal financial information.
Long and short term strategic decisions can be made by the owner of any corporation timely by
the critical evaluation and assessment of the financial performance of his organisation which
shall result into improved growth and utmost utilisation of the available resources (Hiebl, 2014).
It identifies measures, analyzes, interprets and communicates information to enable an
organisation to achieve its objectives. Some of the roles of Management Accounting are
identification of future goals, decision making, forecasting cash flows, analyzing the Rate of
Return and so on.
The report in question deals with a specialised technique of management accounting
which is activity based budgeting. It is an essential tool of management accounting. The
Assignment deals with features, advantages, importance of activity based budgeting and its
application in Rio Tinto Group which deals with world leaders in terms of production of many
important minerals like uranium, coal, aluminium, iron ore, copper and diamonds (Armstrong,
2014). The main purpose of report is to understand the various aspects of the application of ABB
(Activity Based Budgeting) in the company and its suitability within Rio Tinto Group. The
difference between traditional budgeting system and activity based budgeting method is also the
part of report.
MAIN BODY
a) Description of organisation
Rio Tinto Group, an Anglo-Australian multinational, founded in 1873, after the purchase of a
mine complex in the Rio Tinto, Spain by a consortium of multinational investors. It has turned to
be one of the world's largest mining and metals corporations with revenue of over $35 B. The
company has had long history of mergers and acquisitions to find a place among the world
leaders in the production of many minerals including iron ore, copper, diamonds, uranium,
aluminium and coal (Cánovas and et.al. 2014). Its primary focus was on extraction of minerals,
but it has diversified its operations in refining for bauxite and iron ore. The company operates on
six continents, but its main centres are in Australia and Canada, and own mining operations
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through a complex web of wholly and partly owned subsidiaries. The joint headquarters of Rio
Tinto are in London and Melbourne.
Rio Tinto Group is traded on both the London Stock Exchange, as a component of the FTSE 100
Index, and the Australian Securities Exchange, as a component of the S&P/ASX 200 index.
The New York Stock Exchange trades American Depositary Shares of Rio Tinto's British branch
which increases its count of listing to 3 main stock exchanges. Rio Tinto Group is listed on
London Stock Exchange in the name Rio Tinto Plc. and on Australian Securities Exchange as
Rio Tinto Limited.
The dual-listed structure of the company provides the same ownership rights in the Rio
Tinto Group and the same proportional economic interests to the shareholders of both the
companies in a way which is equivalent to all the shareholders of both companies unified as a
single entity (Ghadhab and Hellara, 2016). The purpose of such a structure was to avoid adverse
tax conditions and regulatory procedures. The dividends are paid and the company's accounts are
kept in US Dollars in order to avoid currency exchange issues.
b) Concept of Activity based budgeting method and its features
Activity based costing is one of the popular technique of management accounting where
the budgets are prepared on the basis of Activities to be performed by the organisation. The
activities are justified by the cost drivers along with the effective feedback procedures. These
measures leads to elimination of unnecessary activities which leads to reduction in the costs and
help serve the clients effectively (Haroun, 2015). It also helps in determining the future targets
and motivating the employees to work effectively and efficiently.
According to Müller, “Manager can evaluate each step that is required to produce product
and services. In addition to this, top management can get greater transparency into the budget
process”. In other words Activity based budgeting is a system that researches, records and
analyses programs that lead to costs for organisation.
The Activity Based Budgeting has three stages as follows:
 Identification of activities and their cost drivers,
 Forecasting of number of units of cost drivers for that activity
 Calculation of the rate of cost drivers.
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