# Activity-Based Budgeting (ABB)
Activity-Based Budgeting builds the budget by first identifying the activities an organisation must perform, and then estimating the resources (and therefore costs) each activity will consume at the planned level of output. Instead of simply inflating last year's figures, ABB asks what work has to be done and what that work will cost.
## The Three Key Elements
Every activity in an ABB framework is described by three building blocks:
| Element | What it answers |
|---|---|
| Type of Work | Which specific activities are required? |
| Quantity of Work | How much of that activity (the volume) is needed? |
| Cost of Work | What will the resources for each activity cost? |
The logic flows in that order: identify the activity → quantify it → cost it. Multiply the cost driver rate by the planned activity volume and you arrive at the activity's budgeted cost.
## Why Organisations Use ABB — Benefits
- Enhanced Financial Accuracy — Because budgets are tied to the actual drivers of cost, forecasts are more accurate and management gains a clearer understanding of why costs arise.
- Automated & Efficient Planning — When the model is automated, ABB can rapidly regenerate financial plans under different volume assumptions (e.g. "what if demand rises 20%?"), making scenario planning fast.
- Eliminates Rework — By planning around activities from the outset, ABB cuts the unnecessary rework that often plagues traditional incremental budgeting.
## Key Takeaway
ABB is essentially budgeting through the lens of activities and cost drivers rather than through line-item history. Its strength is that it links the budget directly to operational reality, which improves both accuracy and the ability to flex the plan as volumes change.