Activity-Based Budgeting for Adelaide Brighton Cement

This report provides an overview of activity-based budgeting and its suitability for Adelaide Brighton Cement, an ASX listed organisation operating in the Australian manufacturing sector. It discusses the features of ABB, differences between ABB and traditional budgeting systems, and how ABB can benefit the company.

Running head: MANAGERIAL ACCOUNTING
Managerial Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

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Executive Summary:
The current report intends to provide a brief overview of activity-based budgeting to the CEO
of an ASX listed organisation. Therefore, Adelaide Brighton Cement is chosen as the
organisation that operates within Australian manufacturing sector. With the help of activity-
based budgeting system, it becomes possible to remove all kinds of unessential activities,
which assists the business in saving its costs. The saved cost leads to the production of
products and services at lower cost compared to that of its rivals. It could be observed that
both ABB and traditional budgeting systems conduct costing of a cost object, which might be
a component, finished or semi-finished item, activity, customer, process including a group of
activities, supplier and others. However, the costing methodology in the two systems varies
from each other. Finally, it has been evaluated that activity-based budgeting system is
suitable for Adelaide Brighton Cement.

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Table of Contents
Introduction:...............................................................................................................................3
a) Description of the business of Adelaide Brighton Cement:...................................................3
b) Description of activity-based budgeting (ABB) and its features:..........................................4
c) Difference between ABB and traditional budgeting systems:...............................................7
d) Discussion on whether ABB is suitable to Adelaide Brighton Cement:.............................11
Conclusion:..............................................................................................................................13
References:...............................................................................................................................14

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Introduction:
For undertaking sound decisions along with coordinating the actions and decisions of
different departments, the business organisations have to develop a plan for profitability.
Generally, an organisation develops a budget annually, which, after approval, would become
the annual budget (Brewer, Garrison and Noreen 2015). The current report intends to provide
a brief overview of activity-based budgeting to the CEO of an ASX listed organisation.
Therefore, Adelaide Brighton Cement is chosen as the organisation that operates within
Australian manufacturing sector. The report is divided into four different sections. Firstly, a
brief overview of the business operations of Adelaide Brighton Cement has been provided in
this paper. The second part would include a description of activity-based budgeting and its
features. Thirdly, adequate discussion has been made regarding the dissimilarities between
ABB and traditional budgeting systems. Finally, the report would shed light on analysing the
suitability of ABB in Adelaide Brighton Cement.
a) Description of the business of Adelaide Brighton Cement:
Adelaide Brighton Cement is established in 1911 and it is a leading producer of
cement, lime as well as pre-packaged dry-blended products, which are engineered
particularly for fulfilling the needs of the customers. It mainly operates within the lime and
cement division of Adelaide Brighton Limited that has above 1,600 staffs throughout
Australia. Adelaide Brighton Limited has commenced its operations back in 1882 and at
present it is an S&P/ASX 100 organisation having primary activities including the production
of cement, clinker, premixed concrete, lime, concrete masonry and aggregate products
(Adelaidebrighton.com.au 2019).

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Adelaide Brighton Cement has diversified operational base facilitating prompt supply
to the customers along with allowing for strategic balance of production capacity for
fulfilling demands throughout the nation. As a result, it assists the organisation in offering a
supply package, which is supported flexibly with storage, transportation and supply logistics
for places across Asia and Australia. The diversified operational efficiency of the
organisation assists it in providing turn-key solutions, which assures the basic objective of
going beyond the expectations of the customers (Adelaidebrighton.com.au 2019).
b) Description of activity-based budgeting (ABB) and its features:
Activity-based budgeting (ABB) could be defined as the method of budgeting where
budgets are formulated with the help of activity-based costing (ABC) system after taking into
account the overhead expenses. More precisely, ABB is a tool of management accounting
that does not take into account the budget of the previous year for arriving at the budget of
the existing year (Apostolou et al. 2019). Instead, the activities incurring the costs are
analysed thoroughly and accordingly, adequate research is conducted on the same.
Depending on the research outcome, there is allocation of resources to an activity. ABB is
conducted for bringing efficacy in the activities of an organisation. After the cost drivers are
justified, there is preparation of budgets. Hence, activity-based budgeting is not function-
oriented; instead, it is activity-oriented.
ABB is deemed to possess a number of features, which are summarised briefly as
follows:
Evaluation:

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This method of budgeting analyses all cost drivers. It takes into account all the steps
associated with an activity. There is elimination of irrelevant activities and only the essential
activities form portion of the business.
Competitive edge:
With the help of activity-based budgeting system, it becomes possible to remove all
kinds of unessential activities, which assists the business in saving its costs (Apostolou et al.
2015). The saved cost leads to the production of products and services at lower cost
compared to that of its rivals. It aids the organisation in gaining competitive advantage in the
market.
Business as a unit:
With the help of activity-based budgeting technique, the business could be viewed in
the form of a single unit and not as departments. The top management or the managers
formulate the budget for the overall business unit by not bearing in mind any single
department as made in the other budgeting methods (Cardoş 2014).
Removal of bottlenecks:
The budgets formulated under activity-based budgeting system are made after
conduction of adequate research and analysis. The use of such research assists in the
elimination of all unessential business activities of an organisation (Collier 2015). By
conducting the same, it becomes possible for the business organisation to eradicate all kinds
of bottlenecks related to an activity and there would be smooth conduction of the business
functions.
Improvement in relationship:

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By using activity-based budgeting system, it becomes possible for an organisation to
enhance the relationship with its customers. The primary goal of the budgeting system is to
eradicate all unessential activities so that best quality products could be served to the
customers at the best prices (Elmassri, Harris and Carter 2016). This has indirect enforcement
on the staffs of the organisation for serving the customers in the most suitable manner along
with assuring customer satisfaction. This, in turn, would help in enhancing the relationship
between the organisation and its customers.
Discussion on operational terms:
Since activity-based budgeting system provides a clear overview of the relationship
between resources and activities, it could help the staffs and managers in understanding and
communicating budget information in tangible non-financial terms. As a result, they could
have a better understanding of the requirements for further improvements and accordingly,
they could perform better in their jobs (Gitman, Juchau and Flanagan 2015). With the
improvement in the flow of resources and activities, it becomes easier to analyse performance
by specifying the respective personnel responsible for certain activities that could have
overlapped in several departments. Thus, the managers could be highly agile when it comes
to contingency planning, performance measurement, decision-making and evaluation by
utilising this budgeting system.
Increased traceability and transparency:
By using sophisticated operating model, a richer group of tools could be enabled for
balance of capacity. It becomes simple to alter demands or changes in the allocated resource
amounts and it would be easier in adjusting the activity or rate of consumption resources
owing to the resource capacity analysis made in this kind of budgeting system (Hoque 2018).
Such increased traceability and transparency related to consumption of resources could result

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allow the business organisations in detecting the capacity issues through which it is possible
to make timely adjustments.
c) Difference between ABB and traditional budgeting systems:
Certain differences are deemed to be observed between activity-based budgeting
system and traditional budgeting system and they are summarised briefly as follows:
Assignment of cost:
It could be observed that both ABB and traditional budgeting systems conduct costing
of a cost object, which might be a component, finished or semi-finished item, activity,
customer, process including a group of activities, supplier and others (Kaplan and Atkinson
2015). However, the costing methodology in the two systems varies from each other. For
example, it is assumed that a particular component consumes specific amount of material and
labour, which could be measured effectively. The material and labour costing treatment is
same under both the methods, as it is obtained by multiplying total material consumed by the
component by the unit price of the material and by multiplying the overall labour hours that
the component has utilised by labour rate per hour. However, in ABB, the proportion of
overheads would be added, which is consumed by the component. In the conventional
budgeting system, it is conducted by loading a portion of the overall overhead cost of the
organisation to the component (Kotas 2014).
Generally, the proportion is either percentage of labour cost or the proportion of
material cost of the component or machine hours or labour in contrast to the total labour cost
or material cost or overall labour hours or machine hours of the organisation. Hence, there is
absence of any rationale to the same, as the component might not have attracted actually the
overheads in this procedure of percentages. However, in ABB, the actual overhead activities

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need to be identified, which are carried out on the component. All overhead activities are
gauged in terms of cost drivers or in other words, the number of units of the cost driver that
the component has used actually (Kravet 2014). On each overhead activity, the overall cost of
that overhead activity is gathered at the organisational level. This is denoted by overhead cost
pool related to the activity. In addition, the cost per unit of each activity driver is calculated
by dividing the overhead cost pool of that activity by the overall units of the cost driver,
which are utilised at the organisational level.
This would provide the actual cost per unit of the cost driver related to that activity.
By multiplying the cost driver units that the component has used by using the cost driver rate,
it is possible to obtain the actual cost of overhead activity conducted on the component
(Mahieu, Vroman and Calluy 2015). In this way, there is allocation of overhead cost to the
component for all the overhead activities used by the component.
Therefore, ABB has separate overhead cost pools for each activity at the
organisational level. More precisely, each overhead activity has cost driver having
measurement unit and all cost drivers have unit costs or the cost driver costs. As a result,
there is improvement in product costing procedure under activity-based budgeting in contrast
to traditional budgeting, since it realises that the fixed overhead expenses vary in percentage
to changes besides the units of production (Miller-Nobles, Mattison and Matsumura 2016).
Two-stage allocation:
It has been identified that both traditional budgeting system and activity-based
budgeting system are involved in following two-stage allocation system. In the initial phase,
under traditional budgeting system, there is allocation of overhead costs to the production
departments (Narayanaswamy 2017). However, in the initial stage, under activity-based
budgeting system, there is allocation of overhead costs to each significant activity and not the

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departments. Under the traditional budgeting system, there is pooling or collection of
department-wise overhead. However, under activity-based budgeting system, there is creation
of various cost centres or activity-based cost pools.
Under traditional budgeting system, there is allocation or reapportionment of service
department costs to the production departments and therefore, in this system, there is
existence of only fewer cost pools in the final stage. However, there is creation of separate
cost pools under activity-based budgeting system for the service activities and there is direct
allocation of overhead costs of these service activities to particular products by the
application of the cost driver rates (Oseifuah 2014). Therefore, the ABB system eliminates
the need of allocating or reapportioning service department overheads.
Usage of historical costs:
Another difference between traditional budgeting system and activity-based budgeting
system is related to historical orientation. It is usual for any organisation to use the actual
historical cost as the base in order to develop manufacturing cost standards. Such historical
costs often constitute of rework, waste, duplication, redundancy and inefficiency
(Pazarceviren and Celayir 2014).
The acceptance of historical costs as provided and representing such costs in
standards does not provide support to the continual improvement. In a competitive condition,
in which the competitors are proactive to remove waste along with enhancing activities, there
is chance for an organisation to go out of business at the time of fulfilling its standards
(Ponisciakova, Gogolova and Ivankova 2015). Despite the fact that activity-based budgeting
is computed with the help of historical resource costs, difference in orientation could be
found. The proponents of the ABB system are worried regarding future competitive positions

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and they only consider the historical cost only in the form of a baseline in relation to
improvement.
By taking into account all the above-discussed facets, the following differences are
observed between activity-based budgeting system and traditional budgeting system:
Basis of Comparison Traditional Budgeting System Activity-Based Budgeting System
Cost pools Only one or limited cost pools Numerous cost pools for
representing a number of activities
Applied rate The cost drivers are based on
volume
The cost drivers are non-financial
and activity-based (Popesko and
Šocová 2016)
Suitability Low-overhead and labour
intensive organisations
Product-diverse, capital-intensive
and broadly diverse group of
operating functions, alterations in
numbers of production runs and
high-overhead firms
Benefits Inexpensive and simple Correct product costing and
probable removal of non-value
added activities
Cost management Overhead costs are assigned first
to departments and then to
services or products
Overhead costs are assigned first to
cost pools of activities and then to
products or services
Focus Concentration on managing costs
of responsibility centres or
function departments (Raudla and
Concentration on process
management along with handling
activities and solutions of cross-

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Savi 2015) functional issues
d) Discussion on whether ABB is suitable to Adelaide Brighton Cement:
Activity Based Budgeting management accounting technique is considered to be
suitable for Adelaide Brighton Cement as it facilitates in recognising the activities of the
company along with allotting the cost of all the activity source to every cement products as
per their actual utilisation (Weygandt et al. 2018). Through implementing the ABB the
company will be able to correctly anticipate the costs related with its products so that the
organisation can eliminate the ones that are not advantageous along with decreasing the
prices for the ones that are costly. The ABB technique implemented by Adelaide Brighton
Cement Company can also be beneficial for it in allocating its resource costs through
activities to products that are offered to the consumers. The important purpose of this
technique used by the company is to effectively understand the product as well as consumer
cost and the profitability (Smith 2017). ABB is also deemed to be suitable to implement by
Adelaide Brighton Cement for attaining support in its strategic decisions like outsourcing,
pricing, identification and management of the process development approaches in the
company. It is deemed that if the cement company considers implementing ABB in their
management accounting process it can facilitate the company in attaining reliability and
accuracy in its product cost determination through focussing in the cause and effect
relationship within the cost incurrence (Shields 2015).
Implementation of ABB can also facilitate Adelaide Brighton Cement Company in
recognising that the activities are the root causes of increasing costs and not the products and
it is the products that devour activities. In the advanced cement manufacturing environment
of Adelaide Brighton Cement Company along with the technology that supports functions

12MANAGERIAL ACCOUNTING
overhead is deemed to include a huge share of total costs. Considering same, ABB can offer
most realistic product costs to the company (Raudla and Savi 2015). Implementation of this
management accounting technique can facilitate the company in developing a reliable and
accurate product cost data in a situation of high diversity among the manufactured cement
products like low-volume and high-volume products. Traditional costing system
implementation in Adelaide Brighton Cement Company can result in causing high errors and
approximation in determination of product cost because of employing absorption techniques
and arbitrary apportionments (Member.afraccess.com. 2019). Moreover, in case of Adelaide
Brighton Cement Company it is observed that through employ ABB it successfully attains the
ability to trace activities for the cost object. This management costing technique employs
several cost drivers that are mostly based on transactions rather than the product volume.
Moreover, through its implementation the cement company remains concerned with every
activity in and being the manufacturing factory in tracing more overheads to the cement
products.
Adelaide Brighton Cement Company has also observed that ABB management
accounting techniques used in the company facilitates in better decision making process
(Member.afraccess.com. 2019). This technique has contributed greatly in improving the
decision making process of the managers as they can employ highly reliable cement product
cost data. This technique has also facilitated in fixing the selling prices for all the company’
selling products in consideration to the fact that most accurate product cost based data was
made readily available. Another reason for which ABB is observed to be suitable
management accounting technique to be used in Adelaide Brighton Cement Company is that
it supported in better cist management. Using of this technique provided cost diver rates
along with the transaction information volumes that proved to be useful for the company’s
management for better performance appraisal and cost management (Weygand et al. 2018).

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The cement company successfully used rates related with cost drivers advantageously
in order to design new cement based products or certain existing products as they signify
overhead costs that are deemed to be considered wile product costing. Implementation of
ABB in Adelaide Brighton Cement Company also proved to be suitable in facilitating the
many to make efficient use of cost reduction and excess capacity. Implementation of this
management accounting technique has facilitated in managing the process of pooling activity
costs along with recognising the cost drivers which can result in a range of applications
(Weygand et al. 2018). In case of Adelaide Brighton Cement Company these applications
include identification of spare capacity along with cost reduction fostering through
comparing their resources required under ABB technique with the resources that are offered
recently. This serves as a platform for better development of ABB in the cement company
here the resource relations are effectively recognised by the technique. This can be further
employed by the company in anticipating its future project needs.
Conclusion:
From the above analysis, it has been found that Adelaide Brighton Cement is
established in 1911 and it is a leading producer of cement, lime as well as pre-packaged dry-
blended products, which are engineered particularly for fulfilling the needs of the customers.
With the help of activity-based budgeting system, it becomes possible to remove all kinds of
unessential activities, which assists the business in saving its costs. The saved cost leads to
the production of products and services at lower cost compared to that of its rivals. It could be
observed that both ABB and traditional budgeting systems conduct costing of a cost object,
which might be a component, finished or semi-finished item, activity, customer, process
including a group of activities, supplier and others. However, the costing methodology in the

14MANAGERIAL ACCOUNTING
two systems varies from each other. Finally, it has been evaluated that activity-based
budgeting system is suitable for Adelaide Brighton Cement.

15MANAGERIAL ACCOUNTING
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