Activity Based Budgeting ACCA PM | ABB Guide

Activity based budgeting (ABB) is one of the most frequently tested budgeting methods in the ACCA PM (Performance Management) exam. This guide covers everything you need to know — from the definition and step-by-step process, to worked examples, advantages, disadvantages, and how ABB compares to traditional and zero-based budgeting. Whether you are preparing for September 2025 or March 2026, this article will help you approach ABB questions with confidence.

What is activity based budgeting (ABB)?

Activity based budgeting (ABB) is a budgeting method that identifies, analyses, and costs the activities that drive overhead expenditure within an organisation. Unlike traditional budgeting, which adjusts the previous period's figures for inflation or expected growth, ABB builds the budget from scratch based on the actual activities required to deliver products or services.

The CIMA Official Terminology defines ABB as a method of budgeting based on an activity framework, using cost driver data in the budget-setting and variance feedback processes. In the context of ACCA PM, ABB falls under Section D: Budgetary Systems of the syllabus.

The core principle is straightforward: if you understand what activities consume resources, you can budget more accurately by forecasting the volume of those activities rather than simply inflating last year's numbers.

How does activity based budgeting work?

Activity based budgeting follows a systematic three-step process. Understanding these steps is essential for both written discussion and calculation questions in your ACCA PM exam.

Step 1: Identify activities and their cost drivers

The first step involves breaking down operations into specific activities that consume resources. For each activity, you identify the cost driver — the factor that causes the cost to be incurred. Examples include machine setups, purchase orders, quality inspections, and delivery runs.

Step 2: Estimate the number of units for each activity

Next, production and sales forecasts are prepared. Using these forecasts, the required number of each activity is calculated for the budget period. For instance, if you expect to produce 10,000 units in batches of 500, you will need 20 production setups.

Step 3: Calculate the cost per activity and set the budget

Finally, a cost per driver (or cost per activity) is determined through analysis of resource consumption. The budgeted cost is then calculated by multiplying the estimated number of activities by the cost per activity.

This three-step process ensures that every budgeted cost is linked directly to a measurable activity, making the budget more transparent and easier to control.

Activity based budgeting example (ACCA PM style)

The following worked example demonstrates how ABB is applied in an exam-style scenario. This type of calculation is commonly tested alongside a discussion requirement.

ABB vs traditional budgeting

One of the most common discussion requirements in ACCA PM is to compare activity based budgeting with the traditional incremental approach. The table below highlights the key differences.

In exam discussions, always relate your comparison back to the specific scenario given. If the company has growing overheads or complex production processes, argue in favour of ABB. If it is a small, stable operation, acknowledge that the cost of implementing ABB may not be justified.

ABB vs zero-based budgeting (ZBB)

Both ABB and zero-based budgeting reject the use of historical figures as a starting point, but they approach cost justification differently.

In the ACCA PM exam, you may be asked to recommend which budgeting method is most suitable for a given scenario. ABB is typically recommended when overhead costs are significant and the organisation has complex, multi-product operations. ZBB is more appropriate for discretionary cost centres such as marketing or R&D departments.

Advantages of activity based budgeting

Understanding the advantages of ABB is essential for earning discussion marks in your ACCA PM exam. The following points can be adapted to any scenario.

1. More accurate overhead allocation — ABB uses multiple cost drivers rather than a single overhead absorption rate, leading to budgets that better reflect how resources are actually consumed by different products and departments.
2. Identifies non-value adding activities — The ABB process forces management to examine every activity, making it possible to spot and eliminate activities that add cost but do not increase the perceived value of the product to customers.
3. Better cost control — Because costs are traced to specific activities and their drivers, managers can control costs at the activity level rather than dealing with large, opaque overhead pools.
4. Aligns budgets with strategic objectives — ABB encourages the organisation to focus resources on activities that support its strategic goals, improving resource allocation decisions.
5. Improves performance measurement — By linking budgets to activities, ABB enables more meaningful variance analysis. Managers can investigate why the number of activities differed from budget, not just total cost variances.
6. Supports process improvement — The detailed activity analysis provides insights into operational efficiency, helping management identify opportunities for automation or process redesign.

Disadvantages of activity based budgeting

ABB is not without its limitations. In exam discussions, presenting a balanced view by acknowledging these disadvantages will earn you higher marks.

1. Complex and time-consuming to implement — Setting up ABB requires a thorough analysis of all activities, cost drivers, and cost pools across the organisation. This demands significant time and management effort, particularly in the initial implementation phase.
2. Costly to maintain — Once implemented, ABB systems require ongoing data collection and monitoring of activity levels, which adds to administrative costs. Staff may also need training on the new system.
3. May not be cost-effective for all organisations — If overhead costs are a small proportion of total costs, or if the product range is narrow, the benefits of ABB may not justify the implementation costs. A simpler budgeting approach may suffice.
4. Difficulty in identifying cost drivers — Selecting appropriate cost drivers for every activity can be subjective. Choosing incorrect drivers leads to inaccurate budgets, undermining the very purpose of ABB.
5. Resistance to change — Employees and managers accustomed to traditional budgeting may resist the shift to ABB, especially when it requires them to justify activities in detail and accept new performance measures.
6. Data requirements — ABB relies on accurate and detailed activity data, which may not be readily available in organisations that lack mature costing systems or adequate IT infrastructure.

How ABB links to activity based costing (ABC)

Activity based budgeting and activity based costing are closely connected. Understanding this relationship is frequently tested in ACCA PM, often appearing as a discussion requirement within a calculation question.

ABC is a costing method that assigns overhead costs to products based on the activities involved in their production. It works by identifying activities, establishing cost pools for each activity, determining a cost driver for each pool, and then calculating a cost driver rate to allocate overheads to products.

ABB reverses this process. Instead of using activity analysis to determine what products cost (ABC), ABB uses the same activity and cost driver data to forecast what products will cost in the budget period. The steps are:

1. Estimate production and sales volumes for the budget period
2. Use the ABC framework to calculate how many of each activity will be required
3. Multiply the expected activity volumes by the cost per driver to produce the overhead budget

This means an organisation must already have an ABC system in place (or be prepared to implement one) before it can use ABB effectively. This is both a strength, as it provides the detailed data needed for accurate budgeting, and a limitation, because establishing ABC is itself a complex and costly exercise.

Activity based budgeting in ACCA PM exams

ABB falls within Section D: Budgetary Systems of the ACCA PM syllabus. It can be tested as a standalone topic or alongside other budgeting methods such as incremental, zero-based, and rolling budgets.

How ABB questions typically appear

ABB questions in the ACCA PM exam tend to follow one of these formats:

• Calculation + discussion: You are given operational data (production volumes, batch sizes, cost drivers) and asked to prepare an activity based budget, followed by a discussion of the advantages and limitations of ABB for the specific company.
• Comparison question: You are asked to compare ABB with the company's current budgeting method (usually incremental) and recommend whether a switch is appropriate.
• Capacity analysis: You calculate the required activities and compare them to available capacity, identifying spare capacity or bottlenecks (similar to the ACCA Global Toy Co example).

Past paper references

The Tread Co question (March/June 2022 exam) is a well-known past paper question that tests ABB concepts alongside incremental budgeting. Practising this question is highly recommended as it covers both calculation and discussion requirements that are typical of Section D questions.

Key exam tips for ABB questions

1. Always calculate the number of activities (e.g., batches, orders, inspections) before applying cost driver rates
2. Present your workings clearly in a table format — examiners award marks for layout and clarity
3. In discussion parts, relate every point back to the company in the question rather than giving generic advantages or disadvantages
4. If comparing ABB to traditional budgeting, explain the specific weaknesses of the current approach that ABB would address
5. Remember that ABB requires ABC data — if the company does not have ABC in place, acknowledge this as an implementation barrier

Exam-style ABB practice question

Frequently asked questions

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