An Introduction to Activity-based Budgeting: Key Concepts of ABC, ABB, and Cost-Based Rate Setting for Chargebacks

by N. Dean Meyer

"Last year minus a few percent!"
"Do more with less!"
"Take it out of hide!"
"It's your problem to find the resources to do all I need!"

These are symptoms.

The root cause: Traditional budgeting methods don't support rational financial decision making, and they set departments up for failure.

A traditional budget estimates the costs of compensation, travel, training, licenses, etc. Based on those numbers how can executives make fiscally sound decisions about allocating the corporations resources? How can anybody know what your budget does and does not pay for?

A budget should estimate the cost of investment opportunities, as a basis for judging returns on investments. It should clearly define what's funded, to match expectations to resources. In other words, the solution is an "activity-based budget" -- a budget for products and services, not cost factors. ABB incorporates the principles of activity-based costing, zero-based budgeting, and investment portfolio management. It also produces consistent, cost-based rates (prices for chargebacks).

This executive overview describes the concept, the benefits, the process, and practical implementation issues.

30 pages, Paperback

First published October 1, 2002