Feasibility of Activity Based Budgeting Implementation - Neon Tech

This report assesses the feasibility of implementing Activity Based Budgeting (ABB) at Neon Innovative Tech Private Limited. Commissioned by the company's CEO after a seminar on ABB, the report, prepared by ABC Managements consultants, analyzes the current budgeting process and potential improvements through ABB. It details Neon Innovative Tech's operations, including its service offerings and associated activities and costs. The report defines ABB, outlines its features, and differentiates it from traditional budgeting systems. Key aspects covered include identifying cost drivers, linking organizational strategy to activities, and determining capacity management. The report also contrasts ABB with traditional budgeting, highlighting the limitations of the latter and the benefits of ABB in managing overheads and aligning with organizational goals. The ultimate aim is to provide Neon Innovative Tech with a clear understanding of the suitability and potential impact of transitioning to an ABB system.

55 Falcon Street, Crows Nest, N.S.W 2065
Phone : [phone], Fax : [phone]
A FEASIBILITY REPORT
ON THE IMPLEMENTATION OF THE
ACTIVITY BASED BUDGETING
PREPARED FOR
NEON INNOVATIVE TECH PRIVATE LIMITED
PREPARED BY
STUDENT
STUDENT ID
STUDENT
STUDENT ID
STUDENT
STUDENT ID
CLIENT’S CONTACT: NAME
DESIGNATION: CHIEF EXECUTIVE OFFICER
PHONE ; 022-2286523,FAX : [phone]
ADDRESS : 24/2, 2ND FLOOR, CORPORATE CENTRE
XXXXX, XXXXX- 400071
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TABLE OF CONTENTS
Background and Abstract.................................................................................................................................................... 3
Introduction.............................................................................................................................................................................. 3
Key Points.................................................................................................................................................................................. 3
A brief description of the Client Company............................................................................................................... 3
Description of ABB and its features............................................................................................................................ 4
Features of ABB................................................................................................................................................................... 6
Difference between ABB and Traditional Budgeting system............................................................................6
Discussion on the Suitability of ABB........................................................................................................................ 11
Conclusion............................................................................................................................................................................... 12
References............................................................................................................................................................................... 13
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BACKGROUND AND ABSTRACT
Neon Innovations Private Limited has engaged a team of management consultants from the
leadership ABC Managements consultants to assist with the feasibility of the implementation of
Activity Based Budgeting for which an in-depth analysis of the existing organizational
environment along with the prospective challenges and opportunities associated with its
implementation has been carried out by an expert team (Arnott, et al., 2017).
Based on the recommendations and guidelines provided in this report, the next step for the Neon
Innovative Tech Private Limited is to develop and implement the ABB.
INTRODUCTION
Neon Innovative Tech Private Limited is presently under the process for evaluation of the
feasibility of the current budgeting process along with prospect of the further scope of
improvement. During this process the CEO of the company has attended a seminar on Activity
Based Budgeting subsequent to which finding it a better option to adopt the same, it has asked
the ABC Managements consultants to submit a brief report on the feasibility of transition to
ABB for the company in the current scenario (Belton, 2017).
KEY POINTS
A BRIEF DESCRIPTION OF THE CLIENT COMPANY
Neon Innovative Tech Private Limited is a multinational IT company engaged as a service
provider providing services in terms of Consulting, Business process outsourcing, IT
Infrastructure services, Engineering and Industrial services, Application development and
maintenance, asset leverage solution and assurance services etc., which are preformed through
the help of a number of value added activities like Recruitment and training, document creation,
Communication, Rent, travelling and Conveyance, functional requirement analysis, marketing
support, supervision and administration, services of equipment’s and programmers etc. with the
associated cost drivers like programming hours, percentage increase in sales, number of visits
and facilities, requirements, number of units, number of calls and space provided etc. (Bromwich
& Scapens, 2016) . A number of Non- value added activities related drivers of rework and idle
time can also be found because of the client delays, resource unavailability, and lack of skills,
scope creep or Non conformances to proceed further or any other reason. Our client has mainly
incurred cost in terms of resource investment for enhanced employee remuneration and
functional requirement analysis together with operational support. During the past few years
company could earn only the marginal profits due to the resources allocated for the
aforementioned activities. But in last few years it has also been noticed that due to the delay in
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making decisions has significantly affected the growth of profit for the company. The other
major constituents of the resource allocation for the company are licensing, software, hardware
and network connectivity.
Because of its huge demand for its outsourcing services, it made the fresh recruitment of around
70000 software professional in its home country alone and is currently in the process to raise the
target of new recruitment next year for its offices located in other countries (Cheatham &
Cheatham, 1996).
DESCRIPTION OF ABB AND ITS FEATURES
Activity based budgeting is an innovative approach for designing the system of budgeting in a
way by allocation of resources amongst the various activities performed by an organization for
which various costs are incurred by it. The establishment of relationship between the costs and
the various activities are to be established first to initiate the process of ABB (Calvasina &
Calvasina, 2017).
The Concept of the ABB is those similar to the Activity based costing. It can be understood with
the help of following example:
Activity-based budget:
Research:
Salaries $ 30,000
Internet connection 1,920 $ 31,920
Shipping:
Salaries $ 24,500
Telephone 2,500
Ship sleepeze 750,000
Ship plushette 600,000
Ship ultima 375,000 1,752,000
Jobbers:
Salaries $ 18,750
Telephone 2,500
Commissions 360,000 381,250
Basic ads:
Salaries $ 16,000
Advertising 20,000 36,000
Ultima ads:
Salaries $ 20,750
Advertising 750,000 770,750
Office management:
Salaries $ 20,000
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Depreciation 20,000
Supplies and Internet 14,080 54,080
Total $3,026,000
2. Clearly, shipping is the most costly activity, followed by ultima advertising and
commissions to jobbers. It would be worthwhile to investigate shipping costs to see if those
could be reduced, for example, by getting bids from several shippers. It is unlikely that
ultima advertising can be reduced the first year (Mock, et al., 2018). It is a very different
and expensive model, and consumers may need to be educated as to its benefits. Another
method of selling to retail stores might be worth investigating; for example, the use of a
salaried sales staff.
While developing the system of ABB one needs to identify the following:
i) The relationship between the root cause of an activity level volume driver and the
activity level volume driver itself
ii) How the root cause of an activity level volume driver is changed and can affect the
resource requirement for the activity?
iii) Whether the activities performed by the organizations are efficiently carried out
meeting the required level of quality standards?
The process of ABB first identify the output of the organization then go for deciding about the
various activities necessary for the creation of that output and finally the resource requirement
for carrying out those activities. It aims at assignment of the cost to any specific product or
service that is based on the specific feature of that product or service as it is the feature of these
products that determined the volume of activities to be performed by that specific organization.
It should also be kept in mind that ABB doesn’t prove its worth unless the organization is
following the approach of Activity based costing. It is an effective tool for the adoption of Total
quality management within an organization (Baker, 1989).
The following fundamental principles are required is kept in mind before implementing the
concept of ABB:
i) Establishing the linkage between the organizational strategy and its activities
ii) Conducting the gap analysis for the same
iii) Determination of the capacity management and making forecast of the entity’s
revenue
iv) The linkage between the organizational business process and its strategy.
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Activity based Budgeting attempts to explain the importance of budgeting through the activities
not by the elements of cost. It is especially suitable for those organizations having huge amount
of overheads representing the operational cost. As the main objective of the organization is the
creation of value for which proper understanding of the organizational costs is necessary
(Deegan & Shelly, 2014).
FEATURES OF ABB
The key features of ABB are explained hereunder in brief:
i) It recognizes the interdependencies of the departments within the organization
ii) It primarily aims to focus on the business processes
iii) It ensures better control over the process of budgeting.
iv) It is aligned with the objectives of the goal congruence.
v) It assists the process of being aware about the resources consumed by the specific
activities and how the activity driver calls for the change in the resource costs along
with providing the insight about managing the both i.e. activity and costs.
vi) It ensures a participatory approach with more realistic assumption for the preparation
of the budget (Lavassani & Movahedi, 2017).
vii) It acts as an incentive for the business units to manage the resources and costs more
efficiently and effectively.
viii) It is basically very complex procedure that highly demands a deep-rooted research
and analysis of various activities, resources critical to the survival of the organization.
ix) Activity Based budgeting is short-term goal oriented making it fatal to adopt.
x) It is the best approach to identify the value added and non value added activities of
the organization.
DIFFERENCE BETWEEN ABB AND TRADITIONAL BUDGETING SYSTEM
Traditional system of Budgeting
It is the approach of budget preparation for the estimation of the operational revenue and cost
for the future in which historical data of the previous period is used as a basis for the
development of the budget for the forthcoming year. It can be suitable for the small or
medium sized organization. Under this method the Top-down approach is being followed for
the development of the budget (Mun, 2018).
It has the following features:
i) It is based on the corporate functional approach rather than the divisional approach
ii) Budget represents the aggressive mindset of the organization.
iii) This results into the fast development of the budget as interdepartmental issues are
completely ignored under this process.
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While applying this methodology for the development of budget following thins are
to be kept in mind:
i) Management should take an input from the managers during the early stages
of the development of the budget in order to ensure its smooth implementation
(Sirois, et al., 2018).
ii) Management should also make some sorts of comparison with their peer
organizations to justify the targets to be set through their budget.
iii) Post finalization of the budget should again be placed before the managers to
have their valuable feedback so that necessary modification can be made if
required.
The major limitations of the traditional budgeting are as follows:
i) It does not accurately represent the organizational goals as it involves huge
manipulations done by the managers in the projections made by them.
ii) It demands huge analysis of past year’s figure to justify the projections to be
made for the future years.
The concept of the traditional budget can be well understood with the help of
the following example:
Classification Last Fiscal
Year
Current
Budget
Next Fiscal
Year
Personnel Services
1110 Salaries $737,223 $802,975 $945,140
1120 Wages 0 0 0
1130 Overtime Payments $36,861 $40,150 $47,260
Subtotal: Personnel Services $774,084 $843,125 $992,400
Contractual Services
1210 General Repairs $398 $440 $505
1220 Utility Services $996 $1,100 $1,265
1230 Motor Vehicle Repairs $2,520 $2,750 $3,165
1240 Travel $1,000 $1,100 $1,210
1250 Professional Services $4,408 $6,600 $7,920
1260 Communications $795 $880 $1,010
1270 Printing 1,000 $1,100 $1,210
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1280 Computing Services $3,523 $3,900 $4,540
1290 Other Contractual Services 0 0 0
Subtotal: Contractual Services $14,640 $17,870 $20,825
Supplies and Materials
1310 Office Supplies $4,806 $5,290 $5,820
1320 Fuel Supplies $6,540 $7,195 $7,915
1330 Operating Supplies $2,667 $2,935 $3,230
1340 Maintenance Supplies $1,988 $2,190 $2,410
1350 Drugs & Chemicals $7,896 $8,685 $9,555
1360 Food Supplies 0 0 0
1370 Clothing & Linens $8,012 $8,815 $9,700
1380 Education & Recreation
Supplies 0 0 0
1390 Other Supplies 0 0 0
Subtotal: Supplies & Materials $31,909 $35,110 $36,630
1410 Office Equipment $0 $1,500 $3,000
1420 Electrical Equipment 0 0 0
1430 Motor Vehicles $30,000 $45,000 $40,000
1440 Highway Equipment 0 0 0
1450 Medical & Lab Equipment 0 $400 $800
1480 Data Processing Equipment 0 $5,000 $8,500
1490 Other Equipment 0 0 0
Subtotal: Equipment $30,000 $51,900 $52,300
Current Obligations
1530 Rental Charges 0 0 0
1540 Insurance $3,700 $4,000 $4,500
1550 Dues & Subscriptions $30 $40 $50
1560 Electrostatic Reproduction $500 $1,000 $1,150
1590 Other Obligations 0 0 0
Subtotal: Current Obligations $4,230 $5,040 $5,700
Employee Benefits
1610 Retirement & Pension
Benefits $73,722 $88,325 $118,140
1620 Social Security
Contributions $50,500 $55,005 $67,575
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1640 Group Insurance $14,744 $16,060 $18,905
1650 Medical/Hospital Insurance $103,211 $114,825 $137,990
Subtotal: Employee Benefits $242,178 $274,215 $342,610
TOTALS $1,097,040 $1,227,260 $1,452,465
The corresponding benefits of the traditional budget are as follows:
i) It encourages the decentralization within the organization because of the visibility of
the preceding years’ figure by everyone on the basis of which future projections are
going to be made.
ii) The organization can easily adopt it without much thinking about its implementation
strategy.
iii) It becomes easy to control and execute the traditional budget prepared by the
organization (Werner, 2017).
At the same time the following disadvantages cannot be ignored too.
i) The probability of errors in the projections becomes much higher in this case
ii) It has been often noticed that lack of alignment is found between the spending
of the organization and its strategy
iii) It does not provide a sort of incentives to its employees to boost up their
behavioral skill.
iv) It is basically a quantitative statement nothing more than that.
v) In most of the cases its implementation in real sense becomes quite
unrealistic.
vi) It focuses on cost reduction but not on value creation
vii) These types of budget cannot call for a creative thinking but completely based
on conventional thinking (Erik & Jan, 2017).
viii) In this case basically guesswork is done.
In order to eliminate the limitations of the traditional based budgeting the two important
approaches are constantly being suggested as better budgeting and beyond budgeting. While
the better budgeting focuses on problem solving, beyond budgeting talks about performance
measurement problems.
Difference between traditional budget and Activity based budgeting
The Following table summarizes the differences between ABB and Traditional Budgeting
system.
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Sl No. Basis ABB Traditional Budgeting
System
1. Orientation It is activity and
process oriented
It is result oriented
2 Nature It is dynamic It is static in nature
3 Goal It focuses attention
towards short term
goals
It focuses attention
towards long term goal
4 Approach It adopts the
participatory
approach for the
process of budgeting.
It doesn’t follow the
participatory approach.
5 Control It has more control
over the system of
budgeting
It has less control over
the system of budgeting
6 Complexity This is much more a
complex process
It is based on a very
simplistic approach
7 Accuracy The budget prepared
under this approach
provides a broader
picture with much
accuracy
It gives a conservative
approach with less
accuracy
8 Support It receives higher
support from Lower
management level
It receives higher
support from higher
level of management.
9 Implementation It is difficult to
implement
It is easier to
implement
10 Wasteful
Expenditure
The areas of wasteful
expenditure can
easily be identified
under ABB
It fails to identify the
wasteful expenditure
associated with the
product
11 Time It is rather a time
consuming process
It is not a time
consuming process
12 Volume of overhead This is suggested
when the volume of
overhead is very
high
This is suggested when
the volume of overhead
is very low
DISCUSSION ON THE SUITABILITY OF ABB
Our detailed study tried to address the following issues:
i) How does the implementation of ABB affect the overall performance of the Neon
Innovative Tech private Limited?
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ii) Whether improvement in the allocation of institutional resources can be achieved
through the correct estimation of costs associated with the company?
iii) What is the procedure to be applied for the effective implementation of ABB in case
of our client company?
iv) Whether in case of our client company as the sufficient information about its costs
were not collected due to which it failed to make appropriate decision in appropriate
cases?
v) Does the company have sufficient time and resources available to implement the
system of ABB?
vi) Whether the organization has the sufficient resources to meet the cost requirement for
the implementation of the ABB?
As it is clear that our Client, being an IT company for whom ascertainment of the accurate
figures for the costs associated with its services are difficult to figure as the services provided are
mostly intangible ones, that is the first step towards implementation of the Activity based
budgeting (Delone & Mclean, 2004).
In our case the major challenges faced by us during conducting the detailed survey on the
feasibility of implementing the Activity based budgeting for Neon Innovative Tech private
limited was because of the frequent technological changes in the IT environment of the Company
the collection of the relevant information became a limitation for us. Still based on our study we
can recommend the following for the evaluation of the suitability for the implementation of the
ABB within the Company.
1. In order to ensure the ABB in the current scenario, the support and acceptance of the
senior management is demanded first along with the creation of awareness amongst the
employee about its impact on overall organizational goals. For which a detailed
discussion on this issue is being suggested as employees of the Neon Innovative Tech
private limited have been found not adequately equipped with the implementation of the
ABB (Das, 2017).
2. ABB can be of great help to our company while conducting a comparative analysis of the
various IT services provided by it through which the return on investment from its
various projects can be more accurately calculated.
3. As the company has incurred huge expenditure in terms of salary and remuneration to its
workforce because of which it failed to make required investments in other relevant area
like network connectivity, software and hardware, hence ABB can assist it to achieve this
objective.
4. In case of our company, the determination of the correct size of the cost driver has found
to be highly time consuming, hence it seems that its implementation can take long period
(Grenier, 2017).
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5. We have conducted an interview of around 51% of the employees at different level
associated with the company out of which 61% employees have expressed that senior
management’s approach towards implementation of ABB is democratic in nature,
whereas rest of the 39% termed it as autocratic in nature.
CONCLUSION
Based on the overall analysis of the current IT environment of the Neon Innovative Tech Private
Limited, it is being suggested to implement the ABB system in order to capitalize its tentative
benefits associated with the IT Company. It is a new cost technique which will help the company
in the long run in minimizing the overall costs and increasing the efficiency. Furthermore, since
the company being discussed here is a big company by volume, so Activity Based Budgeting
would fit into the schemes as the cost benefit analysis is in favor of the organization.
REFERENCES
Arnott, D., Lizama, F. & Song, Y., 2017. Patterns of business intelligence systems use in
organizations. Decision Support Systems, Volume 97, pp. 58-68.
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