ABB Implementation: A Case Study on A&I Coatings Budgeting

This report examines Activity Based Budgeting (ABB) and its application within a coatings manufacturing firm, A&I Coatings. It begins by introducing the company, its products, and its need for effective cost management. The report then defines ABB, explaining its principles of allocating costs based on activities and operations, and its advantages, such as improved cost control, enhanced quality management, and better identification of cost drivers. The report contrasts ABB with traditional budgeting methods, highlighting the inflexibility of the latter. The report also addresses the disadvantages of ABB, such as the initial setup costs and the need for employee training. The report emphasizes the importance of activity matrices in ABB implementation and concludes by summarizing the benefits of ABB in terms of accurate cost information, overhead allocation, and informed decision-making. The report also mentions the objectives of ABB and the application of ABB for the firm under consideration.

Running head: ABB BUDGETING
ABB Budgeting
Name of the Student
Name of the University
Author Note

1ABB BUDGETING
A) The firm’s client under consideration for this case is a coatings producing firm that
operates in the manufacturing industry. The client to the firm is A&I Coatings, one of the leading
developers and manufacturers of industrial coatings (Coatings, 2018). The goods produced by
the firm are highly innovative in nature and of the best quality in the country. The goods and
products produced by the country are essentially used for specific needs and by specific
industries. The vision of the firm is to exclusively provide highly innovated and scientifically
created coatings which are effective and advanced niche coatings. The products are designed in
technologically advanced ways and for a wide range of surfaces and needs. The different types of
coatings provided b the firm include fluoropolymers, polyurethanes, membrane coatings and
epoxies (Coatings, 2018). The supply of these products depend on the type of need and the
industry under consideration. The mission of the firm is to provide excellent services and
through tenacious methods of innovation and maintenance of product quality. The products and
goods of the company are designed in such a way that the firms using these products gain a
competitive edge in their respective industries against the rival firms. The firm is known for
strongly valuing customer servicing, competency and honesty. The firm is situated in New South
Wales Australia. The firm provides various options to the clients ranging from colours to
different ranges of services. The products and services from the firm can also be customised as
per their own needs.
As the firm is concerned with developing new products and providing customised
services, the firm needs to regularly invest in a number of different projects and research and

2ABB BUDGETING
development initiatives. The firm will also be exposed to a lot of changes in terms of addition of
new variables to the old existing system of costs. Hence, the use of Activity Based Budgeting is
very important in this case and it is the most appropriate kind of budgeting that can be used for
this firm.
B) Activity Based Budgeting is a form of budgeting and planning system increasingly being
used by firms. In this kind of planning the costs associated with each kind of activity and
operations are used for compiling expenditures depending on the level of activity or operations
taking place . Thus, for this kind of budgeting it is very important to take extensive note of the
kind of activity taking place and the volumes of each kind of activity related to the business
activities (Mahal & Hossain, 2015). This helps in maintaining high levels of refinement in the
case of cost planning. This particular type of budgeting will be used extensively by the
management of firms in order to reduce the excess activities in the process of revenue generation
so that in the end the levels of profit are improved at the end of every financial year (Noreen,
Brewer & Garrison, 2014). This also essentially causes the managers and higher authorities of
the firms to gain extensive knowledge and expertise into the various processes that help in
maintaining appropriate cost levels for the firm. This in turn helps to enhance the cost structure
of the business under consideration.
Another very important need behind the usage of the firm and the business is the linkage
between the costs and the ultimate goals of the parent firm which uses Activity Based Budgeting
(ABB). This particular type of budgeting is used by the accountants and the managers of the firm
to monitor the amount of costs associated with each step of the production process as well as
other processes (Massy, 2016). It helps in keeping a track of each step and each part of the entire
business. It helps to identify the different parts of the business that require greater attention as

3ABB BUDGETING
compared to other parts of the business that are less crucial or less important. This in turn helps
managers to focus greater attention and funds on the parts which are aligned to the achievement
of immediate goals or are more important compared to other parts of the business (Parker, 2016).
In the bigger picture, the firm helps to understand towards which part of the businesses do
resources need to be channelized and away from which parts of the business. This means that
this form of budgeting helps in better allocation of resources and funds on the whole for the
business under consideration. This again results in a shift of the total quantity of funds across
different parts of the business over the financial year. This type of budgeting is thus very
beneficial for the initiation of new processes within the different business units or even in the
case of geographical expansion of the business and development of new products and services.
However, on the contrary, the Activity Based Budgeting involves a lot of pressure for the
managers and the employees using this form of budgeting directly in the business (Olesen,
2015). It consists of a lot of work load which includes tracking of every system of operations and
parts of the business unlike the traditional processes which does not require extensive tracking.
Fir the parts of the business where there are no efficient systems in place it becomes very
difficult to keep a track of all the costs associated. Further, if the business considers the option
of setting a system that will track the different costs, then the installation of the system will itself
cause the firm to incur high levels of costs (Moreira, 2018). Apart from the costs of setting up of
the system, other problems will also be faced by the firm. These will include hiring the right kind
of people who will be able to maintain this kind of budgeting and handle the new system
installed (Dhubea, Salim & Al-Riami, 2017). Thus, it is feasible for organisations to try this
budgeting system on a pilot basis for one of the departments f the whole business and then apply
it to other departments so that resources can be allocated and channelized as per priorities.

4ABB BUDGETING
There are several advantages of the implication of the Activity Based Budgeting (ABB)
which is similar to the usage of Activity Based Budgeting (ABB). These are pointed out and
described as follows:
 It is very useful in drawing the attention of the managers to the overhead costs in the
various processes and helps to differentiate the minimum cost from the overhead costs
 This kind of a system helps in efficient management of quality, that is, Total Quality
Management (TQM). This is maintained by associating the costs with the level of service
provided by the firm
 It also helps in efficiently identifying the particular activities and operations that help in
driving costs, that is, helps in identifying the factors that drive costs in the firm.
There are some disadvantages of the system as well:
 A considerable amount of cost and time is invested in setting up and installing the
systems and providing training to people for operating the Activity Based Budgeting
(ABB)
 In case of following this particular kind of budgeting, it may at times get difficult to
clearly understand the individual responsibilities of the different employees working
under the same department
 The situation also becomes questionable in the short run as in this case, the overhead
costs are not really controllable or measurable in the most appropriate ways. This is so
because the costs associated with the different activities do not vary completely
proportionately to the volumes of these activities. The costs in the short run are usually
found to vary depending on the overhead cost variances

5ABB BUDGETING
The entire process of Activity Based Budgeting (ABB) is implemented in the best way
possible using the activity matrix. In these matrices the activities required are mentioned in the
columns and the resources required to carry out these activities are mentioned in the rows. This
is the basis of the allocation of the cost drivers and the resources towards the more crucial
activities and away from the less important ones. In these matrices essentially cost are divided
into two types of costs. One of these are the activity related costs which are variable costs and
the other is the sustaining costs which are fixed costs.
Thus, the basic features of the Activity Based Budgeting system are summarised as follows:
Firstly, the total amount of costs incurred by the firm is essentially didvided into two parts-
fixed costs and variable cost. This is extremely important in determining which costs are more
important than others are. It helps in building effective cost structures for the firm for the
financial year.
Secondly, this form of budgeting helps to effectively differentiate between the various cost
and behaviour patterns.
Thirdly, this process helps to relate costs incurred by the firm to four major variables of
operations of any business, which are volume, diversity, time and events.
Fourthly, in this kind of budgeting system the drivers of cost determine the pattern of
behaviour of the costs.
Finally, it helps in investigating, identifying and monitoring the appropriate driver of cost so
that the overhead costs of producing a particular product can be traced.
The basic objectives of the Activity Based Budgeting are:

6ABB BUDGETING
 To rectify inaccurate information regarding costs
 Allocation of the overhead costs on the basis of different activities
 Assisting the management in taking well informed and timely decisions
C) Traditional method of budgeting involves the usage of the previous year’s budget as the
basis for the current year’s budget formulation and monitoring (Réka, Ştefan & Daniel, 2014). In
this type of budgeting the framework for the present year’s budget is prepared by making and
including changes in the last year’s budget depending on the circumstances facing the firm in the
current year. The change in the expenditures of the firm in the present year which are included in
the base framework of budgeting in the last year depend upon variables like changes in the
inflation rates, situation prevailing in the market and the total change in the demand of the
consumers of the firm. Since the basis of the budget is the budget formulated in the previous
financial year, the costs incurred by the firm last year and the revenues generated on the whole
by the entire firm as well as the revenues generated by each department forms a very important
part of the traditional budgeting framework (Dudin et al., 2015). The parts of the traditional
budgeting system that need justification include the costs and the revenues which are varying and
are extra as determined by the last year’s budgeting framework. This means that all costs ad
revenues that exceed the previous year’s costs and revenues need to be justified in the present
year’s budget (Henttu-Aho, 2016). This is considered the easiest method of budgeting that is
implemented by firms. This process of budgeting also varies largely from a strategic method of
planning. It simply makes the assumption that all the costs and investments made by the firm last
year are also applicable in the current year without screening and filtering out the ones which are
relevant to the current year. Since this form of budgeting does not require any form of cost
analysis and identification, it requires lesser effort and time to formulate and generate. The most

7ABB BUDGETING
important advantage of this kind of budgeting is that it promotes a lot of stability and helps in
smooth functioning of the organisation. It also provides with the opportunity to consolidate and
collaborate various projects of the firm together and helps in easy transmission of resources from
underperforming projects to projects that are yielding handsome revenues. However, the
framework used for traditional budgeting is very rigid and fixed, it does not provide a flexible
platform for carrying out changes in ongoing projects and new projects as well. It is also
associated with lots of inefficiencies in the form of risk like deliberately increasing the budgeting
costs by the managers or accountants so that there is more money that can be spent by them for
various other purposes (Réka, Ştefan & Daniel, 2014). It also does not involve the prioritisation
of certain projects which are more important or new as compared to other projects. Further, a lot
of inaccuracy is also involved in this type of budgeting. This is so because as this type of
budgeting is too dependent on the previous year’s budgeting, if there are flaws in the previous
year’s budgeting, it will be carried over to the present year without being altered in the manner it
should be (Barr & McClellan, 2018). This excessive reliance on the previous year’s budget will
only cause the flaws and mistakes in the last year’s budgets to be carried on to the present year’s
budget. This over dependence on the last year’s budget will only cause the mistakes to be carried
on every year in the budget formulated and this in turn will be harmful in the lon g run for the
business and might even cause it to fall apart (Lorain, García Domonte & Sastre Peláez, 2015).
Hence, it can be easily asserted that the two forms of budgeting, that is, Activity Based
Budgeting and Traditional Budgeting have a lot of differences. These are mentioned below:
Firstly, the Traditional Budgeting framework is very rigid and fixed and does not take
into consideration several factors unlike the Activity Based Budgeting System (Cardoș, 2014). It
only considers few major variables like inflation, consumer demand, market share of the

8ABB BUDGETING
business and overlooks the consideration of .many other variables that affects budgeting on a
year to year basis.
Secondly, the Activity Based Budgeting considers identification of the patterns of costs
incurred by the firm depending upon the drivers of cost and hence divides costs into fixed and
variable costs. There is no concept of differentiation of costs in the form of sustained and
overhead costs in the case of Traditional Budgeting.
Thirdly, in case of Activity Based Budgeting, the process helps in identifying the projects
which are more important and need to be completed faster as compared to others. This helps
managers to allocate resources in an efficient manner. There is no provision for this kind of cost
maintenance and resource allocation in case of Traditional Budgeting.
Fourthly, in case of Traditional Budgeting, there are chances and opportunities for
managers to use this form of budgeting in an unethical way such that they can use it for showing
more costs incurred than the actual costs incurred to spend on other purposes. However, in case
of Activity Based Budgeting, the mangers are required to be intimated about the various
departments and ongoing projects of the business and monitor the costs incurred in each step of
the business. It helps in increasing the knowledge of the managers in every step of the various
projects and in turn increasing the productivity of the business as a whole.
Lastly, the Activity Based Budgeting helps in establishing a direct relationship in
between the objectives of the firm for the financial year and the budget, whereas, in case of
Traditional Budgeting, this is not possible and there is over reliance on the last year’s budget
framework. This causes the flaws in the previous year’s budget to be carried on every year which
proves to be detrimental for the firm in the longer run.

9ABB BUDGETING
D) A&I Coatings operates in the manufacturing industry and is committed in providing
highly innovated products and services to the customers based on their needs. Hence it is very
important for the firm to keep an account of the drivers of costs and the various costs depending
upon the activities taking place under each project. Further, the firm will also have to determine
the level of importance attached to every activity and project so that there is better and mpre
efficient allocation of resources and costs for the different levels of activities. This is a very
important reason as to why the firm should employ the use of Activity Based Budgeting System.
This type of budgeting will enable the firm to use resources in the right mix and help the
managers of A&I Coatings to remain updated about the various needs and progress of the
different processes and projects going on in the firm. It will also enable them to set and
determine the immediate and the far sighted goals of the firm. This is very important for this
particular firm as it will help to better monitor and reduce the overhead costs and find out the
variable costs for every project. The managers will also be able to find out the fixed and
sustaining costs which render the basis of the entire cost structure of the business. This is very
crucial for incorporating changes in the cost structure of the firm. Usage of the Activity Based
Budgeting will help in constructing time frames of different projects depending on the changes in
the cost structure. A&I Coatings being one of the most well established and successful firms in
the manufacturing industry, will not face issues in the context of implementation and installation
costs pertaining to the systems that help in maintaining the Activity Based Budgeting. Further,
the use of Traditional Budgeting system will only cause the firm to not have a robust framework
of budgeting and will cause the firm’s budgeting to carry the flaws of the previous year’s
budgeting in the current year. Even though the use of the Traditional Budgeting system will not

10ABB BUDGETING
require lots of effort, time or implementation costs it will not be as effective as the Activity
Based Budgeting as it not consider small variables that change the entire budgeting structure and
cost priorities of the firm. Hence, it is only apt to use the ABB system of budgeting for A&I
Coatings. It will also greatly increase the chances of the firm to gain the competitive edge in the
market as it will be able to earn greater levels of revenue by cutting down and reducing excess
costs. With the use of this form of budgeting the firm will also be effectively be able to reduce
employee redundancy in terms of customer servicing, productivity and increasing the total
potential of the various departments. Thus, usage of the Activity Based Budgeting will
efficiently reduce the inefficiency of the operations of A&I Coatings as a whole.

11ABB BUDGETING
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http://www.aicoatings.com.au/category/faqs/project-news
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from http://www.aicoatings.com.au/home
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