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Finance for Managers by Harvard Business School Press

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APPENDIX

Activity-Based Budgeting

Activity-based budgeting (ABB) is a new way of approaching the budgeting process. To understand ABB, we must first understand activity-based costing (ABC), which we touched on briefly in chapter 3.You can’t do ABB unless your company has an ABC system.1

ABC is a new way to allocate the cost of resources consumed to the cost of objects such as products, customers, and distribution channels. Under traditional cost allocation, overhead costs are allocated to products using cost drivers such as direct labor hours and machine hours.These are referred to as volume drivers because these drivers vary proportionately with the total volume of output. The problem with traditional cost-allocation mechanisms is that they ...

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