It is a method of budgeting in which the actions that incur costs in every functional area of a company are recorded and their relationships are defined and evaluated. Activities are then combined with strategic goals, following which the costs of the activities required are used to develop the budget.
Activity based budgeting stands contrary to traditional, cost-based budgeting practices in which a previous period's budget is merely adjusted to account for inflation or revenue growth. As such, ABB gives opportunities to align actions with objectives, streamline costs and enhance business practices.
By viewing at the cost structure of an organization through the processes that are really being performed, managers can more efficiently evaluate the profit potential of a company's products and services. Cost efficiencies can be created by comparing activities done in different areas of the organization and consolidating or rerouting some functions. At its essence, activity-based budgeting starts by looking at outcomes and the activities that produced them, as opposite to cost-based budgeting, which generally begins with raw input and material and works external. ABB can assist firms to create more precise financial forecasts as well.