Limitations and Advantages of ABC for Budgeting

Activity Based Costing
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Activity Based Costing > Best Practices > Limitations and Advantages of ABC for Budgeting

Limitations and Advantages of ABC for Budgeting
XY
What are the limitations and advantages of ABC in the context of preparing plans and budgets?
 

 
ABC limitations and benefits
KTK
This is a very good query. When we look at ABC for the estimation of plans/budgets, the major limitation is not having a proper estimation of the costs for some critical activities such as R&D. The second limitation in using ABC for plans/budgets is a result of the first, i.e. when we miss out proper estimation of the costs for one activity that results in breakdown in the whole chain of activities. Though there are many advantages, by which we can always overcome the limitations, I would like to mention the following two: Adv 1: When we carry out planning/budgeting based on ABC we can always have more accurate estimations being done. Adv 2: We can always figure-out where our estimations went wrong, since we know what each activity contributed in our planning/budgeting. ABC is the basis for Zero Based Budgeting(ZBB) and ZBB has yielded good results in many big organizations.
 

 
ABC Limitations
Rajendra
KTK,XY the use of ABC for planning and budgeting is supposed to be for the activities that are related to the volume of the products sold. For other parts the planning and the budgeting should be based on the projects that are to be taken in that function. Like in R&D function.
 

 
Abc and Abp&b
Romeo G. Manalo, Management Consultant, Philippines, Member
Abc information is ideal for activity-based planning and budgeting. All you need to do is to quantify the forecasted customer demands into activities and activity drivers. Since the activity unit costs are already available either through the previous year's ABC information or standard activity measures and costs, simply convert the demands to activities and multiply the activity demands by the costs, then the budget can be generated which is linked to the demands (plan).
The only limitation of this method is that if the ABC information which include the activity drivers and activity unit costs are questionable to those who are preparing the budgets and plans.
 

     
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