Management Accounting Report: Activity-Based Budgeting at Pental

This report provides a comprehensive analysis of activity-based budgeting (ABB) with a focus on its practical application within Pental, an Australian soap manufacturer. It details Pental's successful implementation of ABB, highlighting its benefits in cost reduction and operational transparency. The report contrasts ABB with traditional budgeting systems, emphasizing the differences in cost allocation and strategic alignment. Furthermore, it discusses the suitability of ABB for companies like Pental, which operate with complex customer-supplier relationships and require a customer-focused, accountable organizational structure. The analysis covers the key features of ABB, including its emphasis on identifying cost drivers and eliminating wasteful activities, ultimately leading to improved profitability and competitive advantage. The report concludes that ABB is a valuable tool for modern businesses seeking to optimize resource governance and enhance customer satisfaction.

MANAGEMENT ACCOUNTING

MANAGEMENT ACCOUNTING: 1
Contents
Introduction...........................................................................................................................................3
a). Description of Pental........................................................................................................................3
b). Understanding of ABB and its features............................................................................................3
Features.............................................................................................................................................4
c) In what ways ABB is different from traditional budgeting systems..................................................4
Difference between Traditional and Activity-based budgeting system..............................................5
d) A discussion on whether the ABB is suitable for the company.........................................................5
Conclusion.............................................................................................................................................7

MANAGEMENT ACCOUNTING: 2
Introduction
Activity-based budgeting is a budgeting framework that is designed to manage the company’s
overheads and create greater transparency in the budget processes. This report brings out the
practical implication of Activity-based budgeting in the organisations. The organisations have
been experiencing elimination of wasteful resources by using this method. Moreover, the
companies have abandoned following the traditional method of budgeting.
The report has strived to use the Pental (a soap manufacturer in Australia) that uses Activity
based budgeting in its operations. Pental has managed to achieve growth since last the three
years where the overall industry was facing declined demand due to increased input cost
(ANNUAL REPORT, 2017).
The method identifies three major stages such as identify the business activities and their cost
drivers, estimate the sales volume, and finally calculate the cost driver rate. Activity-based
budgeting pulls the concern towards the overhead activities and the cost associated with these
activities. In recent times, the organisations tries to provide high quality products with low
cost to attract the customers. For marinating the quality, the company uses TQM (Total
Quality Management) accomplished with Activity-based budgeting.
a). Description of Pental
Pental (PTL) is the largest manufacturer of soaps in Australia. PTL has built a portfolio of
fourteen brands in the field of household care, personal care and fabric care. The CEO (Chief
executive officer) of the company who joined the company as chief operating officer earlier.
To maintain the customer transparency, the company estimates all its cost only after it has
reviewed and analysed the activity based budgeting on each of its product. Recently, the

MANAGEMENT ACCOUNTING: 3
company implemented its new supply chain which resulted in 15% cost reduction in soaps
due to implementation of activity based budgeting (ANNUAL REPORT, 2017).
After reviewing the cost of doing business with each customer, the company has released the
inefficiency in route and food service channels. By the time of existence of the organisation
in the market, the company has developed and enhanced the range of country life liquid
soaps.
After reviewing the commercial sector, the CEO agreed to continue its long-term objective of
expanding and diversifying its commercial channels with its numerous brands. However, to
expand the sales of these newly introduced liquid soaps, the company has to conduct its
operations transparently. Pental makes a separate cost statement of a product, which also
includes its factory overheads such as the process cost of saponification, bleaching, soap
cutting cost, and overwrapping. Initially, the company does not combine and cumulate its
overall cost. To win the trust that the company is not at all charging more prices from its
clients, it has to create transparency by providing them Activity-based budgeting on each
product (Annual report, 2016).
b). Understanding of ABB and its features
An activity-based budgeting is a system, which records and analyses the activities, which
lead to incurring of cost for a business. This budgeting activity not only manages and adjusts
the previous budgets due to inflation but also lead to develop efficiencies in business
operation. Activity based budgeting is the method of budgeting, which is designed to provide
transparency in the budget-making process (Hansen, 2011).
ABB enables guide to organisations to generate revenue from the research activities and
allocate to the unit that is responsible for the activity. Moreover, it is a planning system,
which ascertains the cost, which is associated with the activities. Further these budgeted

MANAGEMENT ACCOUNTING: 4
expenditure activities are compiled to the expected activity level. Activity-based budgeting
system allows a high degree of modification in planning the cost statement and focus on
volume and type of activities that are occurring in business (Noreen, Brewer, and Garrison,
2014).
The most likely outcome of using activity-based budgeting is the management plan, which
reduces the level of activity required for revenue generation that lead to improve profits. In
order to achieve a successful management plan, the manager of the company is forced to
attain a detailed knowledge of the operational processes if they contribute to enhance the cost
structure. For example- if a company manufactures four watches, the cost of each is
calculated based on its operation on each product. Despite this, the company do not form
cumulative cost statement rather it drafts different cost statement for each product (Ekholm,
and Wallin, 2011).
Features
Activity based budgeting is a method in which the budgets are prepared by using Activity
based Costing after the consideration of overhead costs.
Activity-based budgeting is an management accounting tool which do not consider the cost
incurred in the past years to reach current year`s budget (Yalcin, 2012).
The method evaluates and analyses each one of the cost driver. It considers all the steps
involved in an activity of manufacturing a product. The irrelevant activities are all eliminated
from the activity (Gurcanli, Bilir, and Sevim, 2015).
The method “Activity based budgeting” eliminates all categories of unnecessary activities,
which can help the business reduce and save costs. Activity based budgeting is a cost

MANAGEMENT ACCOUNTING: 5
reducing strategy which leads the saved cost to enhance production of goods and services at
an competitive cost, which helps the company to gain competitive edge in the market.
Activity-based budgeting technique helps to interpret the business in different departments
but as a single unit. The top-level cost manager prepare the budget for all the business
activities as a whole without focusing on any one department.
The most important feature of budget is elimination of bottlenecks. This budgeting method
removes all the unnecessary cost of the business. By doing so, the organisation is able to
eliminate all sorts’ bottlenecks.
Activity based budgeting estimates the total cost which is divided into fixed cost and variable
cost. It provides the necessary information that helps in designing a suitable cost system.
The method provides a proper distinction between cost behaviour patterns. Different cost
behaviour patterns are diversity related, volume related, event related and time related.
c) In what ways ABB is different from traditional budgeting systems
The method of costing is used in business, which can relate to their accounting strategies.
These accounting strategies provide a way to determine the cost of manufacturing products in
context of what revenue can be generated by the particular product. Several costing systems
determine the overhead cost of production and allocate this cost to the business product
(Talib, and Rahman, 2015).
The approach of ABB (Activity-based Budgeting) is different from the traditional budgeting
system because in other budgeting methods the cost levels are adjusted based on inflation and
revenue changes, which is used to derive annual budget. There are two most common method
of allocating indirect cost to products. Both the traditional method and the activity-based

MANAGEMENT ACCOUNTING: 6
budgeting method assess overhead costs then associate this overhead cost to the product
(Hayden, 2018).
Difference between Traditional and Activity-based budgeting system
Traditional budgeting system Activity based budgeting system
In traditional costing, direct labour,
material, expenses are identified during the
job and all other expenses are accounted in
head “overhead.” These overheads are
charged to job work based on measuring
this overhead as either direct material or
labour (Pietrzak, 2013).
Activity based budgeting is more realistic
estimation of overhead cost which is
identified as overheads in traditional costing
system. Most of the time when small
changes in each cost of product can make a
larger differences overall. Activity-based
method is most appropriate and make it easy
to understand all the indirect cost (E-finance
management, 2018).
This method is the oldest method that
assigns and allocates the costs to the
products based on average overhead rate.
This method brings all the indirect costs in
production and allocate this cost equally.
This method emphasizes on value-added
activities and activity costs. Moreover, it
helps to coordinate and synchronise the
activities of whole organisation. It also
encourages teamwork, customer
satisfaction, and continuous improvement. It
eliminates the wasteful activities and
motivates cost reduction (Hayden, 2018).

MANAGEMENT ACCOUNTING: 7
Traditional budgeting considers the last
year`s budget as the base. The changes are
done based on market situation, inflation
rate and consumer demand.
Activity-based budgeting is a method in
which the budget is prepared after the
consideration of cost drivers. This method
leads to in-depth analysis of certain
activities that incur cost (Tse, and Gong,
2009).
Traditional costing is an easier method to
determine the cost of the product because it
relies more on allocating average overhead
rates. This method does not lead to accuracy
because it does not affect non-
manufacturing expenses. Moreover, it
becomes difficult to determine which
overhead cost affect which specific product
(Accounting tools, 2018).
Activity-based costing is more accurate but
at the same time, it is equally complicated
and time-consuming. It considers important
factors before assigning any cost to a
product (Obeidat et al., 2016).
d) A discussion on whether the ABB is suitable for the company
The company produces numerous products at the same time and has a complex network of
customer-supplier relationship. Allocation of cost of all the direct and indirect activities
directs to addition of cost to the final product and ignores the importance of internal value
chain. Activity-based budgeting can be a powerful method of costing that helps in building a
customer-focused, accountable and a team-oriented organisation. To make a customer-
focused organisation, a company has to make accountable to everyone for their products.

MANAGEMENT ACCOUNTING: 8
Sensible resource governance processes also affect association of cost with the products or
services. Direct cost is easily assigned to products and services (Tse, and Gong, 2009).
Whereas, indirect cost in each particular product line is amortised from unique services,
which must have made value addition to the product. The cost of internal product is
transferred to the internal customers and is allocated to the group of product. Further, the cost
flows from the internal network of support relationships to the ultimate external product,
which is ultimately consumed by the customer (Accounting tools, 2018).
This method is suitable for the company operations. The companies has no longer following
the traditional method because of its association with basic concepts such as cost variability,
flexibility budget, responsibility accounting, and cost hierarchy. The business processes of
modern businesses are moving away from the vertical integration and focus more on
customer satisfaction. Business processes that generate value to the customers deserves more
attention. Activity-based budgeting is the tangible explicit expression of associating the short-
term plans to strategic objectives because it is based on core processes that work for customer
satisfaction. On the basis of cost statements, the company could only decide whether the
business is profitable. If the cost structure of the organisation has high weightage of indirect
cost in the total cost incurred. Proper allocation of cost for specific cost and customers may
have significant difference in assessing profitability and ultimately lead to changes in
management decision (Mahal, and Hossain, 2015).
Companies use ABB (activity-based budgeting) to assign overhead cost to all individual
departments. It starts with planning and forecasting the sales volume of each product line.
Historical data is derived from traditional budgeting system such as direct material cost and
direct labour cost. Activity-based budgeting is used to estimate the required activities to

MANAGEMENT ACCOUNTING: 9
produce the decided sales volume. These activities require certain resources that support to
execute the planning process (Angelakis, Theriou, and Floropoulos, 2010).
Activity-based budgeting is regulated to bring out efficiency in the activities of the business.
Budgets are approved after justifying the cost drivers because it is the main factor that has
cause and effect relationship with the total cost of the business. It strives to evaluate every
cost driver that would result in low and competitive cost to the organisation (Oseifuah, 2018).
This method is suitable only for those companies that have implemented and are already
using ABC (activity-based costing) in their operations. It provides useful information in total
quality management (TQM) environment by relating the cost of the activity to the service
level provided. A TQM is a management philosophy that focuses on increasing profitability
by improving the quality of the goods and satisfaction of the customers. A company who uses
only Activity-based budgeting to manage its overheads cannot get success in the minds of the
customers. It has to combine TQM (Total quality management) with the Activity-based
budgeting and Activity-based costing to provide high quality with low cost (Capusneanu et
al., 2013).
For example- the seatjoy, inc., the company who produces high quality leather desk chairs.
Earlier, the company use to follow traditional approach to manage its manufacturing
overhead to products based on direct labour hours. Further, the company realised that it
would be more profitable if they start using Activity-based budgeting instead of traditional
method. It adopted new method because it realised inefficient reengineer process,
management procedure, and the information system. In order to improve the situation, it
managed to follow product line activity to manufacture the huge airplanes.

MANAGEMENT ACCOUNTING: 10
(Source: Getty Images, 2003)
The above diagram describes that how seatjoy, inc. managed to drop the traditional method of
budgeting. Further strived to apply Activity-based budgeting and activity-based costing for its
cost structure sheets to manage its overheads.
Conclusion
From the above discussion on Activity-based budgeting and its implication on organisations,
it can be concluded that activity-based budgeting requires the determination of cost of
planned activities in a business. The usage of this method depends on the expected size of
organisation`s operation and consumption of resources. It is used by the organisation that
operate in repetitive activities. Activity- based budgeting is more detailed than the traditional
method of budgeting. Activity-based budgeting helps the organisation to eliminate the
wasteful expenses.
Activity-based budgeting method has brought radical changes in the cost management
systems. It has been noticed that activity-based budgeting is more adopted by forward

MANAGEMENT ACCOUNTING: 11
looking companies because they implement TQM (Total quality management) to maintain
and manage the overhead cost with the quality of the product. The report has been more
elaborate and tried to be clearer through the example of seatjoy, inc. The company highlights
the difference and benefit, which it start experiencing in its cost structure by adopting
Activity-based budgeting method.

MANAGEMENT ACCOUNTING: 12
References
Accounting tools, (2018) Activity-based budgeting. [online] Available at:
https://www.accountingtools.com/articles/activity-based-budgeting.html [Accessed on:
17/09/18]
Angelakis, G., Theriou, N., and Floropoulos, I. (2010) Adoption and benefits of management
accounting practices: Evidence from Greece and Finland. Advances in Accounting.
Incorporating Advances in International Accounting, 26, pp. 87-96
Annual report, (2016) Pental Limited (PTL) Stable Small Industrial with Earning Upside in
Medium Term. [online] Available at: https://www.asx.com.au/documents/research/ptl-
20160107-full.pdf [Accessed on: 17/09/18]
ANNUAL REPORT, (2017) Pental: TRUSTED BY FAMILIES FOR GENERATIONS.
[online] Available at:
http://www.pental.com.au/images/site/pental/15823_Pental_AnnualReport_LR1.pdf
[Accessed on 17/09/18]
Capusneanu, S., Boca, I., Barbu, C.-M., Rof, L.-M., and Topor, D. (2013) Implementation of
Activity-Based Budgeting method in the economic entities from mining industry of Romania.
International Journal of Academic Research in Accounting, Finance and Management
Sciences, 3(1), pp. 26-34.
E-finance management, (2018) Activity Based Budgeting. [online] Available at:
https://efinancemanagement.com/budgeting/activity-based-budgeting [Accessed on:
17/09/18]

MANAGEMENT ACCOUNTING: 13
Ekholm, B., and Wallin, J. (2011) the Impact of Uncertainty and Strategy on the Perceived
Usefulness of Fixed and Flexible Budgets. Journal of Business Finance & Accounting, 38(1),
(2), pp. 145–164.
Getty Images, (2003) Activity-Based Costing and Quality Management. [online] Available at:
http://www.swlearning.com/ibc/albrecht9e/pdf/67604_c08_450-512.pdf [Accessed on:
17/09/18]
Gurcanli, G. E., Bilir, S. and Sevim, M. (2015) Activity based risk assessment and safety cost
estimation for residential building construction projects. Safety science, 80, pp.1-12.
Hansen, S.C. (2011) A Theoretical Analysis of the Impact of Adopting Rolling Budgets,
Activity-Based Budgeting and Beyond Budgeting. European Accounting Review, 20(2), pp.
289-319.
Hayden, A. (2018) Activity-Based vs. Traditional Costing. [online] Available at:
https://quickbooks.intuit.com/r/pricing-strategy/activity-based-vs-traditional-costing/
[Accessed on 17/09/10]
Mahal, I. and Hossain, A. (2015) Activity-Based Costing (ABC)–An Effective Tool for
Better Management. Research Journal of Finance and Accounting, 6(4), pp.66-74.
Noreen, E.W., Brewer, P. C. and Garrison, R. H. (2014) Managerial accounting for
managers. New York: McGraw-Hill/Irwin.
Obeidat, B.Y., Hashem, L., Alansari, I., Tarhini, A. and Al-Salti, Z. (2016) the effect of
knowledge management uses on total quality management practices: A theoretical
perspective. Journal of Management and strategy, 7(4), p. 18.
Oseifuah, E. K. (2018) Activity based costing (ABC) in the public sector: benefits and
challenges. Management, 12, pp. 4-2.

MANAGEMENT ACCOUNTING: 14
Pietrzak, Z. (2013) Traditional versus Activity-based Budgeting in Non-manufacturing
Companies. Social Sciences, 4 (82), pp. 26-37.
Shishini, E. H. M., (2017) the Use of Management Accounting Techniques at Hotels in
Bahrain. Review of Integrative Business and Economics Research, 6(2), p.78.
Talib, F. and Rahman, Z. (2015) Identification and prioritization of barriers to total quality
management implementation in service industry: an analytic hierarchy process approach. The
TQM Journal, 27(5), pp. 591-615.
Tse, M.S.C., and Gong, M.Z. (2009) Recognition of Idle Resources in Time-Driven Activity-
Based Costing and Resource Consumption Accounting Models. Journal of Applied
Management Accounting Research, 7(2), pp. 41-54
Yalcin, S. (2012) Adoption and Benefits of Management Accounting Practices: An Inter-
country Comparison. Accounting in Europe, 9, pp. 95-110