# Five Types Of Business Budgeting Methods

The activity-based method (ABB) is a top-down approach that thoroughly analyzes activities to predict operating budgets and future costs. In this context, “activity” refers to anything that incurs a cost and that accountants can examine for different ways to create efficiencies.

The current year’s budget is formed based on this information.

There are three main steps to determining the new budget under the ABB approach:

1. Identify cost drivers and relevant activities, which are the items responsible for revenue and expenses for the company.
2. Determine the projected total units for these activities, which is the baseline for calculating the following year’s budget.
3. Estimate the cost per unit of activity, which gets multiplied by the activity level.

In other words, under ABB, a new budget is determined by a simple formula:

Who it’s for…
Large companies generally use this type of budgeting method. It’s popular in major industries, such as manufacturing, construction, and healthcare. ABB is ideal for companies with large budgets and considerable revenue that are undergoing material changes as well as new companies looking to start on the right foot.

An example of activity-based budgeting
ABB requires plenty of research. Management must determine which activities the company needs to take to meet specific goals and then evaluate the costs of carrying out those activities.

Say that Company A anticipates receiving 80,000 sales orders (X) in the upcoming fiscal year, with each order costing \$3.00 to process (Y). The ABB for these expenses (Z) is then determined by multiplying those two numbers:

80,000 * \$3.00 = \$240,000

If this budget calls for \$240,000 of sales order processing expenses and sales are expected to grow 10%, \$264,000 is budgeted. Here’s the formula for determining how much money to allocate depending on expectant growth:

\$240,000 + (\$240,000 * 10%) = \$264,000