Activity-based budgeting

In this lesson

1. 0:00 Activity-Based Costing recap
2. 1:44 How Activity-Based Budgeting works
3. 3:20 Benefits of moving to ABB
4. 7:09 Limitations and challenges
5. 8:42 CRC case study setup
6. 10:15 Evaluating budgeting system change
7. 14:52 Recommendation and implementation approach

About this lesson

You'll discover how to identify activities and cost drivers, then use them to build budgets from the ground up rather than simply adjusting last year's figures. This technique is particularly valuable for organisations with high overhead costs or complex operations, and it directly supports your Performance Management and Strategic Business Leader papers. The lesson begins with a recap of Activity-Based Costing principles—how to group costs into activity pools and assign cost drivers like number of setups or inspections. You'll then see how this methodology transforms budgeting: instead of treating overheads as fixed and unchangeable, activity-based budgeting recognises that overheads are driven by specific activities. The key insight is reversing the traditional approach—rather than letting a fixed budget constrain your activities, you identify what activities you need to perform, then let those activities determine your budget. This shift encourages you to eliminate non-value-adding activities and make more informed decisions about resource allocation. The lesson includes a practical worked example based on a real exam question (June 2019) involving a clothing retailer considering a shift to activity-based budgeting. You'll learn how to evaluate the pros and cons of this change—including benefits like improved cost control and better understanding of cost drivers, alongside challenges such as implementation costs and the need for upgraded IT systems. The worked answer demonstrates how to structure an evaluation question with a clear recommendation, showing you exactly how this concept gets tested in your exam. By the end, you'll be confident identifying when activity-based budgeting is appropriate, understanding its limitations, and applying it to real business scenarios you'll encounter in your qualification.

Duration: 16m