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Hello,
Could you please help with a question on Activity based budgeting?
Do I understand well that Activity based budgeting is used for budgeting of production FIXED overheads only and as for variable production overheads then they are still volume driven so ABB is not used for them?
Thank you in advance.
Hi,
Thanks for your question.
ABB budgeting determines the activity driver for any cost and revenue and uses this to create the budget for the year – rather than traditional incremental budgeting which bases figures on previous years figures.Some figures like ‘sales revenue’ have obvious drivers – eg – number of units sold x sales price = sales revenue.
Others have standard drivers such as variable overheads is often driven on labour hours or units – depending on the most appropriate.Fixed overhead are the values that really reflect the differences when using ABB budgeting – because rather than estimating these based on totals from previous year – the cost driver behind each overhead activity is identified and total cost is calculated this way.
So in conclusion – the method to budget variable overhead won’t change for ABB – its always driven by labour / volume / units. ABB will only make a significant difference to the fixed overhead values in the annual budget.
Hope this helps! 🙂
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