Activity-Based Budgeting (ABB) is a budgeting method that links the budget to the specific activities undertaken by an organization. Unlike traditional budgeting approaches that may allocate funds based on historical spending or across departments without a clear link to activities, ABB focuses on the costs associated with the various activities that contribute to the organization’s goals. This approach is particularly useful in organizations where the cost structure is heavily driven by specific activities.

Key features and principles of Activity-Based Budgeting include:

1. **Activity-Based Costing (ABC):** ABB often goes hand-in-hand with Activity-Based Costing. ABC is a method that assigns costs to specific activities based on their consumption of resources. ABB builds on ABC by incorporating budgeting aspects, allowing organizations to allocate resources more efficiently.

2. **Identification of Key Activities:** ABB involves identifying the key activities that contribute to the organization’s objectives. These activities could be related to production, service delivery, customer support, or any other critical functions.

3. **Resource Allocation:** Once key activities are identified, resources (both financial and non-financial) are allocated based on the expected level of activity. This can help organizations prioritize and allocate resources to areas that contribute the most value.

4. **Flexible Budgeting:** ABB is often more flexible than traditional budgeting methods. It allows for adjustments in resource allocation based on changes in activity levels or unexpected events.

5. **Performance Measurement:** ABB provides a framework for performance measurement that is tied to specific activities. This allows for a more accurate assessment of how well resources are being utilized to achieve organizational goals.

6. **Continuous Improvement:** The identification of activities and the associated costs provides a basis for continuous improvement. By understanding the cost drivers of various activities, organizations can identify areas for efficiency gains and cost reduction.

Implementing Activity-Based Budgeting typically involves collaboration among different departments or units within an organization. It requires a thorough understanding of the organization’s processes and a commitment to ongoing analysis and improvement.

While ABB can provide more accurate and insightful budgeting, it may also require a more detailed understanding of the organization’s operations, which can be resource-intensive. As with any budgeting method, the effectiveness of ABB depends on the organization’s specific needs, structure, and the commitment to actively manage and improve the budgeting process.