Page 38 - MA - May 2017

COVER ST OR Y

A that each year, is prepared as if last targeting the same output and

year’s financials did not exist. It was outcomes.
Broadly, ABBwould involve the
no more benchmarking last year’s
following:
financial resources to be good for
the current year. All assumptions
 Activity Identification
 Activity Analysis
have to rethought from scratch and
need to be justified to factor in for
 Calculate Activity rates
n outgrowth the current year. Several question
of activity framework, linking of how the activity be performed,  Assignment of costs
 Assign costs to cost objects
workload and costs leads to Activity should the activity be undertaken,  Prepare and distribute ABB
based budgeting (ABB). With a how well the task has to be Leveraging the knowledge
comprehensive activity based performed, should it be in-house of ABB, the applications have
budgets, executives are able to create or outsourced etc have helped to been phenomenon and has been
clear nexus to exercise control. identify inappropriate activities directional to business growth.
Appropriation battles are common thereby costs are assigned only to
among functions during budgeting, value added activities. Application in Railways:
challenging the methodology to Criticism of ZBB focusses on its Business Standard in June 2015,
benefit their respective functional difficulties of implementation and publishedthat Indian railways
cost is not new. Contrasting the being a time consuming process. despite overall operating ratio of
budget methodologies will help to It was not spared to be susceptible 91% yet it is running many of its
make a right choice and to align to to political influences and premium trains at a loss. An adhoc
the objectives and business goals. pressures within and outside of the cost allocation made by the officials
Traditionally, incremental organizations. had a shocking result-major trains
budgets have been in the public Quite often ZBB has been synonym are not even recovering their
corporations until, US President with activity based budgeting. operating expenses, for example the
Jimmy Carter introduced Zero-based While there are conceptual Calcutta metro system is spending
budgeting in the state of Georgia in differences,focus is task based cost Rs 300 for every Rs.100 it earns.
1970. Conventional budgets provide allocations than it being trend Indian Railways is the best case to
accurate figures for variable costs as based budgets.ABB is more urbane emphasize for the need of activity
these are clearly linked to volumes version of traditional absorption based costing and budgeting and
of sales and production. Support costing. In simple terms, it uses cost what could happen if companies
costs were not aligned to the drivers to help derive budgets. It is try to overlook its importance.Cost
incremental process, as it failed to recommended to implement ABB dynamics play an important role in
take into account the evaluation of by those organizations aligned to pricing decisions. Debroy committee
existing activities. After World War using of activity based costing. This has pointed out that in the present
II, money was tighter and required envisage ABC framework, as pre- costing system, all annual expenses
the objectives, outputs and expected requisite for ABB. The foundation are allocated to different services
resulted be part of the budgeting of activity framework postulates and thus arrives at a unit cost for
exercise. Detailed costs were to be that activities consume resources trains. However, since one does not
given for every activity or program to produce an output. Activities know how much a specific train
to manage and control. This has are considered to be basic cost costs, one does not know how much
eroded the scope of adjustments for objects. Two-staged procedure of profits a specific train brings in.
inflation, price changes and costs. It includes assignment of cost: from In the railway budget of 2015-
also helped both the organizations resources to activities and then from 16, the Hon’ble Railway Minister,
where quantification has to be activities to output-related objects. articulated a larger vision and
justified like sales targets, labor Traditionally, the focus has been on strategy for accounting and cost
workload, production etc and also the output-related objects like sales reforms in Indian Railways. The
for qualitative services in hospitals and production targets. With ABB, focus envisaged is to ensure that
and food courts. planning and budgeting commonly all the public expenditure results in
A basic requirement of ZBB is revolves around activities and optimal outcome. Outlining, three

38 The Management Accountant l May 2017 www.icmai.in