UK Accounting Glossary
Activity-based budgeting is a budgeting method that evaluates business processes in terms of the results they achieve. In activity-based budgeting, companies analyze the full range of activities they perform, assess the impact of those activities on cost and revenue, and adjust their spending decisions to favour those that are the most beneficial. Activity-based budgeting differs from cost-based budgeting in that the latter only tries to adjust a prior period’s budget for revenue growth and inflation. Many companies now prefer activity-based budgeting because it streamlines operations, aligns spending with strategic goals, and thereby improves efficiency. For instance, managers using activity-based budgeting can determine whether or not different areas of their company are duplicating another activity, and consolidate or reassign that function if required. Activity-based budgeting might also help a company identify which of its products or services are delivering value and which are not.
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This glossary post was last updated: 4th February 2020.