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ACCA Applied Skills · Performance Management · Budgetary systems and types of budget

Which of the following is the main reason an organisation might adopt activity-based budgeting (ABB) instead of incremental budgeting?

Activity-based budgeting is adopted mainly because it ties budgeted overhead costs to the cost drivers of the activities that create them. This gives managers a basis for controlling costs by managing activities, unlike incremental budgeting, which just adjusts past spending.

  1. AIt links budgeted overhead costs to the cost drivers of the activities that cause themCorrect
  2. BIt removes the need to forecast sales volumes
  3. CIt guarantees that all managers will participate in setting the budget
  4. DIt ensures that the budget is revised every quarter

Explanation

ABB budgets costs by activity and the volume of the cost drivers, so it focuses on what causes overhead and supports cost control and process improvement. It still needs sales forecasts, does not by itself ensure participation, and revision frequency is a feature of rolling budgets.

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