Activity-Based Budgeting is a budgeting method that prepares budgets based on the activities required to achieve business goals.

Simple Meaning:

Instead of budgeting by department, ABB calculates how much money is needed based on the work (activities) that must be done.

How It Works:

Identify business activities (production, marketing, customer service, etc.)

Estimate the number of activities needed

Calculate the cost of each activity

Prepare the budget based on total activity costs

Example:

If a company plans to produce 10,000 units, it calculates costs for activities like purchasing materials, machine setup, inspection, and packaging — and prepares the budget accordingly.

Benefit:

It gives more accurate cost control and helps reduce unnecessary expenses.

In short, Activity-Based Budgeting focuses on what work will be done and then calculates the budget based on that work.