Activity Based Budgeting: A Report for Logic Agricultural Consultants

This report examines Activity Based Budgeting (ABB) as a managerial accounting technique, contrasting it with traditional budgeting methods. It begins with an introduction to ABB, highlighting its application in organizations and its focus on allocating costs based on activities. The report then describes the chosen company, Logic Agricultural Consultants, a relatively new firm in the agricultural sector, and explains why ABB is suitable for its operations. It details the features of ABB, including its use of activity-based costing and its advantages in cost control and transparency. Furthermore, the report outlines the differences between ABB and traditional budgeting, focusing on aspects such as cost allocation, pricing, and the handling of indirect costs. It also provides a comprehensive analysis of the benefits of adopting ABB, such as improved decision-making and resource allocation. The report concludes by emphasizing the suitability of ABB for the firm and its potential to enhance efficiency and profitability. The report includes an analysis of the benefits of ABB and why it is suitable for the firm.

Running head: ACTIVITY BASED BUDGETING 1
Activity Based Budgeting
Student’s Name
Institution Affiliate
Date

ACTIVITY BASED BUDGETING 2
Managerial Accounting
Introduction
There are a variety of budgeting techniques which are often applied by different
organizations to help in the allocation of costs and resources based on the different activities.
Some key budgeting technique is the activity-based budgeting which is mostly used in new
companies which have not yet been established. Activity-based budgeting entails the various
activities which give costs to a particular are recorded and evaluated. It typically involves the
adjustment of the previous budgets, and this is usually done to consider certain aspects such as
the business development and inflation. There is also a variety for reasons why it is suitable for a
certain organization to adopt the technique of budgeting, for example, those organizations which
variety of levels of management whose performance must be measured and estimated based on
the efforts they have put in place for the attainment of the set objectives. This report aims at
highlighting the key features of activity-based budgeting, and this will also include the various
differences between the technique and the traditional budgeting method. It has also illustrated
some of the reasons why the firm should adopt the activity-based budgeting
Description of the Firm’s Client
Logic Agricultural Consultants
The firm was established in 2013 that is five years ago, and it, therefore, means that it is
still new. It is not yet fully established. It has grown over the few years to become a large
organization. It has about 30 employees, and this includes the directors of the company. It has
two directors who are in charge of running and administration of the firm. The company
primarily deals in agricultural products and because of that it performs waste and non-value
added activities. The Logic Limited Agricultural Company provides consultancy services

ACTIVITY BASED BUDGETING 3
relating to agriculture. The target market for the company is the local farmers even though it
intends to expand into the other nations across the globe. The mission statement of the company
is to become a leading consultancy firm providing solutions to farmers across the world. The
goals and objectives of the company is to expand into its market base to other market segments
across the continent in the years to come.
Over the past few years, there has been a constant rise in the profits made by the
company which has been attributed to the use of budgets for control and planning purposes. It
has been using the traditional method of budgeting, and this has prevented from fully allocating
the specific costs of different activities within the company. There has been a growing concern
on the type of budgeting technique the company should adopt besides the traditional method
which does not take into account certain essential aspects, and this has made decision making
based on the allocation of various resources very difficult.
Activity Based Budgeting
The activity-based budgeting is a technique used by various organizations to help bring
transparency and accountability in the process of budgeting. Under the activity-based budgeting
process, the research activities and revenues generated by a particular company are directly
allocated to the specific unit which has contributed to the particular activity. Further, it is a
system of budgeting in which the various activities which give costs to a particular are recorded
and evaluated (Kelly & Rivenbark, 2014). It typically involves the adjustment of the previous
budgets, and this is usually done to consider certain aspects such as the business development
and inflation. The primary role of the activity based budgeting is to identify the different

ACTIVITY BASED BUDGETING 4
efficiencies in the operations of a business and thereafter establishes a particular budget which is
based on such activities.
A fundamental feature of the activity based budgeting is that it is mostly applied by new
organizations which do not have certain historical information of budgeting which can depend
while preparing the proceeding budgets for the new fiscal year. The companies which are
making changes to their material such as the business locations, products, vital customers and
new subsidiaries mostly prefer to use the activity based budgeting for preparing their budgets
(Bruhn & Nafe, 2018). It is expected that the already established companies may not have the
ability to use this particular budgeting system and this is because the already developed
organization have just a few cases of changes in their material.
Activity Based Budgeting enables accountability and planning in an organization and this
it attains by creating incentives for different units by efficiently managing resources and
expenses in a particular organization (Prowle, 2016). There are three steps involved in the
activity based budgeting and this include, the identification of certain relevant activities in the
firm. The cost drivers are also identified which are the elements in the organization whose role is
to incur expenses and revenue for the particular company. The procedures therefore entail;
Determination of amount of units which relates to particular activities. Such an amount of units
forms the baseline for estimations of the costs associated with different activities of an
organization.
Separation of the cost per unit of different activities and the results are then multiplied by the
level of activity.
There are also a variety of benefits which are associated with the activity based budgeting
and such include, and it takes into account the overhead cost by assigning the specific costs of

ACTIVITY BASED BUDGETING 5
the activities. It also allows for the control of activity cost and this is especially when the activity
volume can be controlled (Parker, 2016). Unlike the traditional based budgeting which takes into
account the input costs, the activity based budgeting considers the output based technique where
the driver costs are identified in a particular company. Additionally, the activity based costing
considers a business enterprise as a collection of various activities and hence it can be used as a
better strategy by an organization. The activity based budgeting can be used to measure the
amount of efforts put in place by every particular employee of an organization towards the
attainment of the set objectives. Each of the efforts of various individuals in a company is
allocated depending on the activities performed by each.
Further, the activity based budgeting can be used for safeguarding, stabilizing and thus to
strengthen the operations of a particular organization. Another fundamental characteristic of the
activity based budgeting is that it integrates the initiatives of the management with the budgets
and this is because it focuses on the horizontal orientation instead of the vertical orientation
(Sorenson & Goldsmith, 2017). The activity based budgeting also increases the level of
transparency and traceability in a particular organization by allowing for the balancing of the
capacity by using a variety of tools. The other feature of activity based budgeting is that it
enables better decision making and hence better allocation of resources.
Differences Between Traditional Budgeting and Activity Based Budgeting
The activity based budgeting has numerous differences relating to the period of
budgeting. Some of the fundamental differences between the traditional budgeting and the
activity based budgeting include;

ACTIVITY BASED BUDGETING 6
Pricing of Merchandise
In the traditional budgeting, there is usually an overestimation of expenses of giving up
merchandise. The net incomes, however, on the other hand, are typically undervalued (Niskanen,
2017). The activity based budgeting, the monetary value of high giving up merchandise could be
cut down and this, in essence, will result in an increase in the market portion and high net
incomes. When the monetary is raised, the profitable merchandise will decline.
Allotment on Indirect Cost
In the traditional budgeting, there is usually an allocation of bring forthing cost and this
done by labor hour. The companies using the method will typically not take into account to the
history of cost drivers relating to the measure of cost, and this is because the bring forthing cost
is usually as a result of the alteration of various factors of costs (Wildavsky, 2017). For the
activity based budgeting, the cost drivers must be considered since it will be used during the
apportionment of indirect cost. The difference in the activity based budgeting performs two
critical functions that is increasing the allocation criterion and reducing the range of allotment of
indirect costs.
Stationarity
In the traditional budgeting technique, the cost is separated into either fixed or variable.
An accent is usually set typically on the variable cost, and this is done to determine if the fixed
cost is implacable or not (Bogsnes, 2016).

ACTIVITY BASED BUDGETING 7
Assessment of the Fiscal index
The fiscal index is usually evaluated in the traditional budgeting method by use of an
organization construction. In the activity based budgeting on the hand, the fiscal index is
analyzed by taking into account all the individual activities, and this entails considering the
characters of each activity (Barr & McClellan, 2018). Such a process is done to help in the
apportionment of the scarce resources in a more expeditious manner.
Construction of Organization
Dudin, Kucuri, Fedorova, Dzusova & Namitulina (2015), argues that the activity based
budgeting, the organization construction is found in the ores, and this results in the breakage of
the division between the various sections of a particular company. The location of the
organization construction is typically fundamental to aid in the optimization of the concatenation
value. In the traditional budgeting, on the other hand, it is usually found on the perpendicular
side of organization construction.
Budgeting Balancing Tools
The companies that use the traditional budgeting typically use the old information, and
this also includes the financial statement of the activity program. The reference to the old
information helps to increase and reduce the harmonizing cost of prediction. Further, the
organizations attain the budget balance under the traditional budgeting through the setting of an
estimation of product and service supply (Fitzgerald & Stol, 2017). In the activity based
budgeting, on the other hand, a balanced budget could be attained prior to the fiscal budget

ACTIVITY BASED BUDGETING 8
through the setting of various items such as the activity driver, resource driver, capability of
various resources and the quantity of budgeting of one year product and service supply.
Resource Ingestion Reactions
According to Russell et al., (2015), the cost for particular activities is considered as a
gross construct in the traditional budgeting method. The cost of budgeting is considered as a
separation between items such as mill overhead, direct overhead, direct labor and the period of
the overhead. However such a cost of budgeting is not a reflection of the point of resource
ingestion. In the activity based budgeting, the point of resource ingestion of each of the activity
is clear and hence can be estimated easily. The allotment of the resources and the ingestion of
different activities is considered as crystalline and therefore can be used for the acquisition of the
allotment of resources.
Reasons Why the Company is Suitable for Adoption of ABB
According to Krumwiede & Charles (2014), the activity based budgeting is primarily
used in new companies which have not yet established for a long period of time and therefore the
activity based budgeting would be suitable for the firm. There are a variety of reasons and
benefits which can be derived from the adoption of the activity based budgeting by the company.
For example, the techniques of budgeting will result in a more accurate costing of various
products including the distribution channel and the various customers. Additionally, the method
of budgeting is simple compared to the traditional budgeting method, and thus it will be easy for
every particular employee to comprehend and participate in the preparation of budgets.
Another reason why it would be suitable for the firm to adopt the activity based
budgeting is that it utilizes the unit cost instead of the total cost and this, therefore, makes it easy
to assign specific costs of different activities which have occurred in the company. It will now be

ACTIVITY BASED BUDGETING 9
simple to apportion costs for various items. The activity based budgeting is also easy to
comprehend, and therefore its adoption in the company will facilitate a better understanding of a
variety of overheads in the company (Amans, Mazars-Chapelon & Villesèque-Dubus, 2015). The
individuals concerned with the allocation and apportionment of costs will find it easy to
comprehend and thus determine the specific cost for different activities within the firm. The
other reason for the adoption of the budgeting method will be based on the fact that it will
typically promote teamwork in the organization that is among the different departments and this
will result in facilitation of effective communication.
The activity based budgeting is also suitable for the company because it will allow the
shareholders and management of the company to look at the business as a particular system
based from the beginning to the end and this is unlike when they adopt the traditional budgeting
which views a business as an individual department (Malkin, 2017). Additionally, this type of
budgeting technique is suitable for the organization because it makes strategic planning to be
easier and this can be attributed to the fact that everyone within the company will know the most
fundamental person of the company is the customers, and the main focus will be the satisfaction
of the customers. The activity based budgeting allows for the consolidation of the budgets and
the initiatives of the management.
Such a process is attained by the techniques since it does not consider the vertical
orientation but instead focuses on the horizontal orientation which cuts across the organization. It
is from the above reason why it will be suitable for the company to adopt the activity based
budgeting since it mainly aims at the integration of the initiatives of the management and
budgets (Haroun, 2015). Another reason why it would be suitable for the organization to adopt
the activity based budgeting is that it will increase the level of transparency and traceability and

ACTIVITY BASED BUDGETING 10
hence it will be easy to balance the capacity. The demands and changes in the value of resources
which have been allocated can be done easily due to the assessment of resource budgeting which
can be done by the technique.
The firm is also suitable to adopt the activity based budgeting because it will enable it to
make better decisions on the allocation of resources in the company which is aimed at supporting
the different priorities of the company. The different operational requirements will be balanced
since the technique does not estimate the financial effects which are based on the feasible
operational plans which are considered as unnecessary.
The other reason why the company is suitable for the adoption of the activity based
budgeting is because it will enable the organization benchmark with other already established
companies and this is because the technique of budgeting allows for benchmarking among the
various companies which have adopted it as the primary method of budgeting (Nazarova,
Shtiller, Selezneva, Kohut & Seytkhamzina, 2016). Further, the organization is suitable for the
adoption of the activity based budgeting because of the existence of waste and non-value added
activities which occur in the company and with this type of budgeting technique, it will be able
to make such non-value added and waste activities visible.Also, there are a variety of processes,
value streams and supply chains within the organization and this, therefore, makes the company
suitable for the adoption of the activity based budgeting since it will enable the costing of the
value streams, supply chains and processes.
The organization contains a variety of levels of management whose performance must be
measured and estimated based on the efforts they have put in place for the attainment of the set
objectives. The activity based budgeting typically provides support to the performance scorecard
and management, and hence the company becomes suitable for the adoption of the activity based

ACTIVITY BASED BUDGETING 11
budgeting since it will enable it to measure performance (Asogwa & Etim, 2017). There are also
different programs which have been set up in the organization to facilitate better performance,
and since the activity based budgeting consolidates purely with various improvement programs,
the organization stands suitable of the adoption of the technique of budgeting.

ACTIVITY BASED BUDGETING 12
References
Amans, P., Mazars-Chapelon, A., & Villesèque-Dubus, F. (2015). Budgeting in institutional
complexity: The case of performing arts organizations. Management Accounting
Research, 27, 47-66.
Asogwa, I. E., & Etim, O. E. (2017). Traditional Budgeting in Today's Business
Environment. Journal of Applied Finance and Banking, 7(3), 111.
Barr, M. J., & McClellan, G. S. (2018). Budgets and financial management in higher education.
John Wiley & Sons.
Bogsnes, B. (2016). Implementing beyond budgeting: Unlocking the performance potential. John
Wiley & Sons.
Bruhn, C. W., & Nafe, F. (2018). U.S. Patent Application No. 10/060,644.
Dudin, M., Kucuri, G., Fedorova, I., Dzusova, S., & Namitulina, A. (2015). The innovative
business model canvas in the system of effective budgeting.
Fitzgerald, B., & Stol, K. J. (2017). Continuous software engineering: A roadmap and
agenda. Journal of Systems and Software, 123, 176-189.
Haroun, A. E. (2015). Maintenance cost estimation: application of activity-based costing as a fair
estimate method. Journal of Quality in Maintenance Engineering, 21(3), 258-270.
Kelly, J. M., & Rivenbark, W. C. (2014). Performance budgeting for state and local government.
Routledge.
Krumwiede, K. R., & Charles, S. L. (2014). The use of activity-based costing with competitive
strategies: impact on firm performance. In Advances in Management Accounting(pp. 113-
148). Emerald Group Publishing Limited.