What's Happened to ABB?

by Tom Pryor

Activity Based Budgeting (ABB) holds great promise as a common sense solution to the faults and frustrations of traditional budget methods:

1. Traditional budgets don’t identify waste. ABB exposes non-value costs.
2. Traditional budgets focus on workers. ABB focuses on workload.
3. Traditional budgets focus on departmental cost. ABB also focuses on process cost.
4. Traditional budgets focus on fixed versus variable costs. ABB also focuses on used versus unused capacity.
5. Traditional budgets measure "effect". ABB measures root "cause".

"Sense" is not the primary reason ABB is not "common". Instead, I believe that there are three reasons why Activity Based Budgeting is not more widely embraced and used by manufacturing, service and governmental organizations:

1. Senior Management doesn’t know about ABB. For various and sundry reasons, very few CEO’s attend ABC conferences, read ABM books or attend ABB workshops. As a result, ABB is one of best-kept secrets of this decade. To open your CEO’s eyes to the common sense benefits of ABB, give them a book or a brief presentation. Three recommended books are Peter Drucker’s Managing in a Time of Great Change (chapters 11-12), Using ABM for Continuous Improvement (pages 149-157) or Pryor Convictions:31 Insights into ABM. For an onsite ABB presentation to your management team, call ICMS at 817-475-2945 or E-Mail me at TomPryor@ICMS.net.
   
2. Budget managers are waiting for an ABB system. If you have Excel or Lotus 1-2-3 spreadsheets, that’s all you really need to do Activity Based Budgeting. If you’re holding out for a "system solution", the good news is that many ABC software systems today have ABB capability. But more important than the ABB system itself is proper training of non-financial managers "how to" do ABB. ICMS offers a onsite "How to Do ABB" workshop. The agenda and pricing is posted on our web site.
   
3. There is a clash between ABC and ABM methods. Many organizations have found ABC is not conducive for budgeting. Most ABC models use multiple stage cost drivers to allocate costs to products, services or customers. These ABC systems use the CAM-I or Cooper/Kaplan methodology of first and second stage cost drivers. While effective for ABC cost allocation, these models are often confusing to the non-financial managers involved in cost reduction and budgeting. In contrast, a growing number of organizations are using the Activity Based Management (ABM) methodology. ABM models measure activity "output" and "workload", e.g. number of orders. ABM systems are typically more understandable to non-financial managers and easier for them to use for ABC product costing, ABM cost improvement and ABB planning. Therefore, choose your ABC or ABM methodology carefully before launching ABB.

Take steps to eliminate the faults and frustrations of your budget process in the next few months. Educate yourself, your CEO and your management team on the common sense principles, procedures and benefits of Activity Based Budgeting.

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