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What is Activity-Based Budgeting?

Activity-based budgeting (ABB) is a budgeting approach that links the budgeting process to the activities that drive costs within an organization. ABB emphasizes understanding the activities and processes that consume resources. With this information, a more accurate and strategic budget is developed.

Why is it important or used in Accounting?

Activity-based budgeting is used in accounting for several reasons:

Advantages of Activity-Based Budgeting:

Disadvantages of Activity-Based Budgeting:

Example of Activity-Based Budgeting for a Wholesaler or Retailer Business:

For example, the retailer, selling in physical stores and an online platform, identifies key activities that drive costs:

  1. In-Store Sales Activity:
  1. Online Sales Activity:
  1. Inventory Management Activity:

The retailer develops a budget that aligns with these activities, allowing for more accurate forecasting and resource allocation. For instance, if the retailer plans to expand its online presence, the budget for online sales and related activities can be adjusted accordingly. This dynamic and activity-driven approach enables the retailer to strategically allocate resources based on its business priorities and goals.

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