Activity-based Budgeting (ABB) Explained (Pros, Cons + Generator)

Activity-based budgeting is a budgeting method that closely examines every cost associated with an activity. Unlike traditional approaches, it’s more granular and does not rely on data from prior years.

While not as widely used as methods like traditional budgeting or zero-based budgeting, activity-based budgeting can be a valuable exercise for many organizations.

It involves breaking out the costs tied to every activity the business carries out, making it a more thorough and rigorous approach.

This level of detail helps companies understand which activities drive profitability, how to better manage resources, and where cost reductions are possible. It’s especially useful for organizations going through significant changes and needing to re-evaluate the impact of each activity.

In this article, we'll tell you everything you need to know about activity-based budgeting, and let you generate your own activity-based budget.

Activity-Based Budgeting vs. Traditional Budgeting

How does activity-based budgeting differ from traditional budgeting?

When developing a traditional budget, companies will often look at values (such as revenue and expenses) from prior years and then use those values as a baseline when projecting future values. For example, a company might have revenues of $100 million in the prior year and project a 10% growth for a forecasted total of $110 million in revenue for the upcoming year.

In contrast, activity-based budgeting ignores historical values.

Instead, activity-based budgets look at all the activities expected to be carried out by a business in the upcoming year and then outlines the cost associated with each activity in detail.

Activity-Based Budgeting

Activity-based budgeting looks at all costs and resources associated with an activity such as:

• Raw materials
• Wages
• Number of expected labor hours
• Returns

Traditional Budgeting

Traditional budgeting involves:

• Reviewing historical costs
• Projecting future costs by increasing or decreasing historical costs

Examples of Activity-Based Budgeting

Company Y expects to receive 10,000 orders for one of their products in their next fiscal. To process each order, it costs Company Y a total of $5.

In an activity-based budget, the costs for processing these 10,000 sales orders would be $50,000.

Now, let’s look at this example from a traditional budgeting perspective, which we know looks at historical costs while activity-based budgeting does not. So let’s say that in the prior year budget, Company Y spent $40,000 on processing sales orders. And in the budget for the upcoming year, Company Y is expecting a 10% growth in sales. In this case, only $44,000 would be budgeted for.

Advantages of ABB

Here are a few advantages of activity-based budgeting (ABB):

• Helps cut costs
• Improves resource allocation
• Increase cross-departmental budget collaboration
• More control over the budget

Disadvantages of ABB

Here are a few disadvantages of activity-based budgeting (ABB):

• More expensive to implement
• More time-consuming to perform

How To Make an Activity-Based Budget

So how do you create your own activity-based budget? There are three main steps involved in creating an activity-based budget.

The process starts by identifying your business activities and ends with calculating the total cost based on expected activity levels.

1. Identify Your Activities and Their Costs

Start by listing out all the key activities your business performs—especially those that support revenue generation or operations. For each activity, list the resources and costs required to complete it.
Examples:

• Processing customer orders

• Managing payroll

• Running marketing campaigns

• Performing quality checks

Each associated expense—like wages, raw materials, equipment use, or software—is counted as part of that activity’s total cost.

2. Estimate the Activity Levels

Next, estimate how often each activity will occur during the budgeting period. These estimates are based on expected business volume, not past performance.
Examples:

• 10,000 orders expected

• 3,000 labor hours needed

• 500 customer support requests projected

These estimates become the baseline for cost calculations.

3. Calculate the Total Cost for Each Activity

Now, calculate the cost per unit of activity, then multiply it by the number of expected units. This gives you the total projected cost for each activity.
Example:
If it costs $5 to process one order and you expect 10,000 orders, the total cost would be:
10,000 × $5 = $50,000

Repeat this step for each activity to complete your budget (or better yet, use our calculator below).

If you’re looking for templates for your budgeting needs, head on over to our library of free Excel templates.

Activity-Based Budget Generator

Activity-Based Budget Calculator

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