Answer to Question #272542 in Management for Zeinab

Question

The company’s controller recently attended a conference at which activity-based costing systems were discussed. He became convinced that such a system would help Future Logistics’ management to understand its product costs better. He got top management’s approval to design an activity-based costing system, and an ABC project team was performed to discuss how they can benefit from ABC in preparing the capital budget. Write a memo to the team, in no more than 500 words, commenting on the situation company’s team has been facing. In your memo explain how an activity-based capital budget differs from a conventional capital budget and describe the impact of activity based costing on capital-budgeting decisions. 

Answer 1

Budgeting based on activities (ABB) Activity-based budgeting (ABB) is a cost-prediction strategy in which activities are thoroughly evaluated. ABB does not take into account previous costs. Activity-based budgeting (ABB) is a cost-prediction strategy in which activities are thoroughly evaluated. Identifying cost drivers, predicting total units, and estimating cost per unit are the three primary phases in ABB.

Traditional budgeting methods adjust prior expenses based on inflation or changes in business activity, whereas activity-based budgeting examines costs in greater depth. Every expense incurred by a company will be scrutinized to see whether efficiency can be gained and costs decreased. It might take the shape of a decrease in activity levels or the complete elimination of unneeded activities. ABB's ultimate goal is to examine business cost drivers and help the company become more profitable. Long-term investments in which the assets involved have a useful life of several years are known as capital investments. Capital investments include things like building a new production facility and purchasing machinery and equipment. Capital budgeting is a way of predicting a capital investment's financial feasibility over its lifetime. Capital budgeting, unlike some other methods of investment analysis, focuses on cash flows rather than profits. Rather than accounting revenues and expenses flowing from the investment, capital budgeting includes tracking cash inflows and outflows. Non-expense items like as loan principal payments, for example, are accounted for in capital planning because they are cash flow transactions.

Activity-based budgeting (ABB) is a budgeting strategy that involves recording, analyzing, and researching activities that incur expenditures. Traditional budgeting systems, on the other hand, tend to simply update past budgets to allow for inflation or corporate growth. Activity-based budgeting (ABB) can help businesses save costs and squeeze more profit out of their sales. This strategy is especially effective for newer businesses and businesses that are through significant changes.