What is an activity -based budget?

Activities based on activities is an approach to the budgeting process that focuses on identifying the costs of activities that take place in each area of ​​business or organization, and determining how these activities relate to each other. The data concerning these activities and how they relate to each other are used to set goals that allow the organization to proceed. By understanding the relationship between all activities of the organization, it is often possible to create realistic budgets for each department that, in the long run, are fairer and in the best interest of society.

The concept of budget -based budget differs from the process known as cost -based budgeting. The cost -based approach often relies on the evaluation of actual expenditures associated with the previous budget period, and simply regulates these amounts on the basis of the current inflation level or to take into account changes in the income generated. Opposite the tomurozingHe is more interested in what is done within the organization, how these events or activities work together, and then by allocating the funds of any activity based on how much it will stand will become successful completion of these activities.

budget -based budgets consider this approach more realistic because it involves searching inside for activities and costs rather than establishing the budget on external influences. From this point of view, this strategy is understood to create financial predictions that are more accurate, and thus make the organization to use its resources most effective. Analysis of any activity and its contribution to the continued success of the organization as a bonus means that any activities that do not seem to relate to other activities in the organizational structure can actually be unnecessary and can be removed without hating an unfavorable effect on the overall operation.

those who prefer an approach based on the cost of using budget -based budgets will realize that this approach does not necessarily allow events such as increasing the cost of raw materials or the need to replace an outdated device. According to this line of thinking, the internal focus of the method based on the activities is only part of the data needed to create a feasible budget. Only if this internal analysis is associated with regard to external factors that could have a certain degree of influence during the upcoming budget period, the organization may hope that it will propose a budget that is truly practical and likely to meet the needs of the organization during the upcoming period.