Description of the Firm’s Client
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
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 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 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 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.
Differences Between Traditional Budgeting and Activity Based Budgeting
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;
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.
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.
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).
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.
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.
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 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 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 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 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.
References
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Russell, D. J., McClintock, B. T., Matthiopoulos, J., Thompson, P. M., Thompson, D., Hammond, P. S., … & McConnell, B. J. (2015). Intrinsic and extrinsic drivers of activity budgets in sympatric grey and harbour seals. Oikos,124(11), 1462-1472.
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