What Are the Disadvantages of Activity Based Budgeting?

Activity based budgeting is a type of budgeting that is commonly used by large companies that want to get a better understanding of where their money goes. This type of budgeting attempts to look at the individual costs of every activity that an organization undertakes. It looks at each costs and attempts to look at the relationships of how these activities intertwine. While this method can be beneficial in certain situations, there are a few disadvantages that can come into play. Here are some of the disadvantages of activity-based budgeting.

Could Require Software

Activity-based budgeting is a process that could be considered to be complicated by most people. Because of this, most companies will want to purchase some type of activity-based budgeting software when implementing this technique. With other types of budgeting, you do not need to purchase expensive software and pay for licenses. With this process, you will have to pay for the software and you will potentially have to pay for training so that someone in your company can learn how to use it.

Manager Training

Another potential problem with activity based budgeting is that it typically requires you to train many people in your company. No one will inherently understand how to do this activity unless they are thoroughly trained in its methods. In order for activity based budgeting to work, every manager of every department has to be able to understand this process. This means that you will have to have seminars or training classes in order to teach everyone the basics of the process. Otherwise, your activity-based budget will fail and it will not give you the information that you need to make it successful.

Requires Deep Understanding

With activity based budgeting, you also have to have people that truly understand what drives their budget. Every manager will be in charge of looking at their own budget and evaluating it. If they do not understand where all their money goes and how it is used, the activity based budgeting process will not be effective.

Losing Focus

At the heart of every successful business, there are successful managers in charge of every department. These managers got to where they are because they are exceptional at a particular aspect of your business. They did not get into a management role because they understand accounting or enjoy it. With this process, you will have to rely on these managers to engage in the activity-based budgeting process for you.

This can sometimes make them lose focus on what is actually important. They will be so focused on coming up with the budget that they will not spend enough time engaging in activities that are actually profitable for your business. In some cases, this can lead to lost revenue and unproductive work sessions for these respective departments. In most cases, it is better to allow the individuals that are in charge of the company to handle budgeting and not department managers.

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