Key Points

After viewing the current market trends and increasing competition in the industry, DHL Express (India) Private Limited has become keen on introducing better reforms in the organization for proper administration and cost management. The chief executive officer of the company has stressed on replacing the current budgeting practices with a better and sound budgeting practice. For this the chief executive officer of the company has been attending various seminars in this regard and has recently come across activity based budgeting model (Andiola, et al., 2018). He is considering the introduction of the activity based budgeting into the organization. But before the adoption of this system of budgeting he wants analyze the system more deeply. The chief executive officer of DHL Express (India) Private Limited approached ABC Management Consultants for a proper evaluation of the system of activity based budgeting. The chief executive officer need ABC Management Consultants to provide the CEO with a feasibility report in this regard to analyze the viability of adopting activity based budgeting, the current circumstances of the company (Bumgarner & Vasarhelyi, 2018).

a). A brief description of the Client Company

DHL Express (India) Private Limited is a wing of a German logistics company, being Deutsche Post DHL, in India. It is one of the most renowned transportation and logistics company involved in the courier services and logistics services to all types of customers being residential, industrial, commercial and business customers. The various activities which are involved in the business of DHL Express (India) Private Limited include repair and return, direct express inventory and strategic inventory management. It is also engaged in the business of transportation and has a fleet of vehicles (Charles H, et al., 2015). Apart from the above mentioned activities the other value added activities in this business are services planning, vehicles set up, customers order processing, manual loading, mechanical loading, fuel supply, road journey, manual unloading, mechanical unloading, maintenance, technical support, etc, all these activities have related activity drivers or cost drivers such as number of vehicles, site orders, issuing fuel orders, number of liters, team working hours, loaded tons, distance kilometers, unloaded tons, maintenance shop hours, etc. There were several non value added activities as well like unnecessary transportation, waiting, non value added processing, excess inventory, defects, unnecessary motion, etc. the company has spent a lot of amount on the operational activities due to which the profit of the company in past few years were below expectation. These costs were incurred in order to increase the quality of service provided by the company to its customers. This has resulted in lower profits for the company.

a) A brief description of the Client Company

There is cut throat competition in the market, which is ever increasing. Same has been the case in the transportation and logistics sector (Garon, 2018). To face the competition the company has been transitioning from the older strategy to the newer strategy, that is, from strategy 2015 to strategy 2020.

b). Description of ABB and its features

There are various types of budgeting of which, one is Activity based budgeting. The activity based budgeting is a system of budgeting which involves researching, recording and analyzing the various activities of an organization which leads to costs for a business. Activity based budgeting is different from traditional budgeting in a way that it involves identification of different cost drivers or cost activities. Which goes to say that it is closely related to activity based costing (Kangarluie & Aalizadeh, 2017).

The concept of activity based budgeting is very much like that of the activity based budgeting. In order to understand this system of budgeting we have taken an example, which is presented below

Activity-based budget:

Research:

Salaries $ 24000

Internet connection 1,860 $ 25,860

Shipping:

Salaries $ 26,800

Telephone 2,300

Ship sleepeze 634,000

Ship plushette 550,000

Ship ultima 274,000 1,487,100

Jobbers:

Salaries $ 15,900

Telephone 1,680

Commissions 280,000 297,580

Basic ads:

Salaries $ 12,000

Advertising 17,000 29,000

Digital ads:

Salaries $ 10,890

Advertising 680,000 690,890

Office management:

Salaries $ 15,000

Depreciation 10,000

Supplies and Internet 11,500 36,000

Total $2,566,430

1. The data given above provides the activity based budget, which shows the various activities and its related costs. It is clear from the budget that which activity is consuming what portion of the company’s money. For example, we can say from looking at the budget that the most cost intensive activity is advertising, where the highest amount of cost is involved and jobbers is second costly activity in the budget. With the help of this budget, the management of the organization can take measures to reduce the cost related to advertising and jobbers. However, reducing the cost of advertising becomes quite problematic in case of first year of operation of the company. Hence the management is required to look into this matter with other possible measures(Mock, et al., 2018).

While the development of the activity based budgeting, there are several things that is needed to be identified. Some such things have been mentioned below:

1. The association of the activity level volume driver with the source of an activity level volume driver within the organization.
2. Ways in which the main source of the activity level volume driver can affect the requirements of resources in respect of an activity and how it can be changed.

• The activities being performed by the organization should be performed with efficacy and should meet the levels of standard as laid down for this purpose(Lessambo, 2018)

While executing the process of activity based budgeting there are various other things which requires attention. Some of these activities includes recognition of the resources which are used in the production process along with the recognition of outputs that are being produced by the organization. Just like activity based costing, the activity based budgeting is about allocation of the costs to the respective activity on the basis of activity driver in respect of every products and services. Such allocations are based on the characteristics of those products and services in relation which they are being allocated.

 We have already mentioned above the connection of the activity based budgeting with the activity based costing. This connection is very important for the implementation of the aqctivity based budgeting in an organization, since the implementation of the activity based budgeting requires the organization to follow activity based costing as the system of cost account of the organization or else the activity based budgeting will not work (Mock, et al., 2018).

b) Description of ABB and its features

There are several fundamental principles in relation to the activity based budgeting which the organization is required to take under consideration. These fundamental principles are as follows:

1. Proper and sufficient connection should be formed between the organization’s activities and its strategies.
2. Gap analysis should be conducted in order to form the connection between the activities and organizational strategy.

• It is necessary to ascertain the management of the capacity and a sound prediction of the company’s revenue.

1. There must exist, a proper connection between the business of the organization and its business processes.

The activity based budgeting is considered to be more effective in case of those organization where the indirect costs consumes considerable portion of the total operational costs. As we know that activity based budgeting involves allocation of costs based on cost drivers to their respective activities, it is very famous in such kind of organizations where indirect cost is too high and the organization is engaged in performing various kinds of activities (Mubako & O’Donnell, 2018).

Features of Activity Based Budgeting

The key features of Activity Based Budgeting are being mentioned below:

1. Activity based budgeting is being considered as a participative process in order to control and sustain continuous improvement(Eddy, et al., 2004)
2. Activity based budgeting integrates the activity planning with accounting to provide effective control within the organization

• Activity based budgeting enables the establishment of performance targets in the organization for the purpose of control

1. Activity based budgeting enables the management in the identification of various opportunities for the improvement of the entity’s costs
2. Activity based budgeting assists in analyzing the various discretionary spending options and prepares a priority ranking
3. It is being considered as a process which links the organization’s strategic goals and objectives to the planning process

• Activity based budgeting uses those activity analysis techniques which are well proven, which is the source of all activity based system
• Activity based budgeting involves lots of complexity as it requires a thorough research and assessment on the different activities and resources which are crucial for the entity

1. The orientation of the activity based budgeting is toward short term goals and objectives of the organization instead of long term goals(Abdullah & Said, 2017)
2. This has been considered the best method of budgeting since it helps in the identification of the value added and non value added activities in the organization
3. Activity based budgeting is a process of planning which is connected to the strategic objectives of the organization

c). Difference between ABB and Traditional Budgeting system 

Traditional system of Budgeting

Traditional budgeting is method of budgeting which has become quite outdated in today’s time. It is process of preparation of budget by taking the budget of the previous year as base. The projection of the business revenue and business expenses of the current year is done on the basis of those of last year. It is an accounting tool which helps in the prediction and analysis of the earnings of the business along with its expenses. The budget of the last year is being considered as a template for the preparation of budget of the current year. The business tries to stick to it last year’s budget as closely as it can (Webster, 2017).

The various features of Traditional Budgeting is given below:

1. The basis of the preparation of a traditional budget is the budget prepared in previous year. The previous year’s budget is the base budget.
2. The traditional budget justifies only those items in the current year which are over and above the last year’s budget.

• The traditional budget focuses on the long term goals and objectives of the organization.

1. The traditional budgets are not totally revised but are only updated on the basis of changes in the market.
2. The traditional budget does not stress on the various issues prevailing amongst the departments of an organization.

The following points are required to be kept in mind while preparing the traditional budget:

1. The management is required to consult each and every department for the inputs needed in the preparation of the budget during the initial stages in order for the even application of this budget.
2. The management, for the purpose of evaluation of the target required to be set, should compare with its associate organizations the targets being set.

• The budget being prepared should be subject to the managers’ observations and feedbacks. Any important point noted by the managers after the preparation of the budget should be taken under consideration and appropriate changes should be made(Giacomo, et al., 2013).

The key limitations of the traditional budgeting system are as follows:

1. The preparation of traditional budget is based on the budget being prepared in the previous year. The standards remain the same, only the figures are updated. The approach is outdated and also it lacks accuracy.
2. The traditional budgets are administered by the management, which is subject to many wielding and as a result the budget is unsuccessful in reflecting the primary objectives and goals of the organization.

We have taken help of the following example in order to understand the concept of traditional budget with more ease:

Classification	Last Fiscal Year	Current Budget	Next Fiscal Year
Personnel Services
1110 Salaries	$428,656	$600,500	$775,625
1120 Wages	$45,000	$55,000	$68,000
1130 Overtime Payments	$24,600	$40,555	$58,400
Subtotal: Personnel Services	$498,256	$624,050	$902,025
Contractual Services
1210 General Repairs	$360	$420	$615
1220 Utility Services	$505	$1,020	$3,020
1230 Motor Vehicle Repairs	$1,250	$4,540	$5,805
1240 Travel	$1,000	$2,800	$4,100
1250 Professional Services	$3,400	$5,800	$7,220
1260 Communications	$625	$880	$1,010
1270 Printing	$1,000	$2,100	$3,990
1280 Computing Services	$3,525	$5,650	$8,000
1290 Other Contractual Services	$3,000	$4,010	$6,040
Subtotal: Contractual Services	$14,665	$27,220	$39,800
Supplies and Materials
1310 Office Supplies	$3,504	$5,200	$7,040
1320 Fuel Supplies	$5,450	$7,890	$8,905
1330 Operating Supplies	$2,160	$4,150	$5,980
1340 Maintenance Supplies	$1,780	$3,070	$4,620
1350 Drugs & Chemicals	$6,880	$8,625	$10,075
1360 Food Supplies	$2,465	$4,700	$6,010
1370 Clothing & Linens	$7,256	$9,650	$11,850
1380 Education & Recreation Supplies	$3,026	$5,420	$6,500
1390 Other Supplies	$2,000	$4,050	$5,750
Subtotal: Supplies & Materials	$34,521	$52,755	$66,730
1410 Office Equipment	$34,750	$41,500	$68,000
1420 Electrical Equipment	$10,400	$24,500	$34,480
1430 Motor Vehicles	$150,000	$255,000	$454,000
1440 Highway Equipment	0	0	0
1450 Medical & Lab Equipment	0	$100	$300
1480 Data Processing Equipment	0	$1,000	$3,500
1490 Other Equipment	0	0	0
Subtotal: Equipment	$195,150	$322,100	$560,280
Current Obligations
1530 Rental Charges	0	0	0
1540 Insurance	$4,200	$5,800	$6,900
1550 Dues & Subscriptions	$40	$65	$105
1560 Electrostatic Reproduction	$200	$430	$650
1590 Other Obligations	$50	$70	$110
Subtotal: Current Obligations	$4,490	$6,365	$7,765
Employee Benefits
1610 Retirement & Pension Benefits	$63,300	$78,300	$90,450
1620 Social Security Contributions	$40,000	$55,005	$67,500
1640 Group Insurance	$14,580	$26,000	$38,400
1650 Medical/Hospital Insurance	$100,500	$214,550	$317,290
Subtotal: Employee Benefits	$367,990	$373,855	$513,640
TOTALS	$965,462	$1,406,345	$2,090,240

The traditional budgeting enjoys several advantages, some of the advantages are being mentioned below:

1. The traditional budget plays a great role in coordinating the financial activities of an organization; it also creates a point of reference to some extent. It helps in controlling which leads to proper management of activities.
2. There are so many organizations which prefer decentralization. Traditional budgeting is quite helpful in such kind of organizations as it makes use of the budget cost centers.

• The preparation of traditional budget does not involves complexity. Hence, it is easy to understand and use.

1. The traditional budgeting is being used by many organizations for a quite long time now. They have become comfortable with this system of budgeting and do not consider replacing it as it would be quite risky.

Apart from the advantages being enjoyed by the traditional budgeting as mentioned above, it does have many disadvantages too, these are stated below:

1. The traditional budget lacks strategic focus and is often contradictory.
2. The traditional budget focuses only on reduction of cost rather than creation of value for the organization.

• The traditional budget is being prepared on the basis of last year’s budget, this as a result acts as a barrier to change and constrain flexibility and responsiveness(Andiola, et al., 2018).

1. This type of budgets tends to be bureaucratic and does not add much value to the business. It does not encourage creative thinking.
2. Analysis of the previous year’s budget is required for the preparation of the current year’s budget, this makes it time consuming and costly.
3. The traditional budget is rarely updated and revised, since only appropriation is done to the values appearing in the budget.

As we can observe from the information being provided above, there are many disadvantages of traditional budgeting as compared to its advantages, this paved way for the introduction of two approaches. These approaches are, firstly beyond budgeting which focuses on the measurement of problems relating to performance and secondly better budgeting which focuses on solving various other problems.

Difference between traditional budget and Activity based budgeting

c) In what ways ABB is different from traditional budgeting systems

The major differences between the activity based budgeting and traditional budgeting are being presented in the table given below:

Sl No.	Basis	Activity Based Budgeting	Traditional Budgeting System
1.	Orientation	The activity based budgeting is being towards activity and process	The traditional budgeting is oriented towards outcome.
2	Nature	The nature of activity based budgeting is dynamic	The nature of traditional budgeting is static
3	Goal	The primary objective of activity based budgeting is short term goals	The primary objective of traditional budgeting is long term goals
4	Approach	The activity based budgeting adopts the participative approach.	The traditional budgeting does not follow participative approach.
5	Control	The activity based budgeting enable more control over the system	Under traditional budgeting the level of control over the system is less
6	Complexity	The complexity involved in the activity based budgeting is more	The traditional budgeting is very simple
7	Accuracy	The result provided by the activity based budgeting is more accurate	The result provided by the traditional budgeting is less accurate
8	Support	In case of activity based budgeting the support of the lower management is more	In case of traditional budgeting the support of the higher management is more
9	Implementation	It is quite difficult to implement activity based budgeting (Bumgarner & Vasarhelyi, 2018)	There are no such difficulties in case of traditional budgeting
10	Wasteful Expenditure	The identification of the wasteful expenditures are easy in case of activity based budgeting	No such ease is provided in case of traditional budgeting
11	Time	The time required for the preparation of activity based budgeting is more	Traditional budgeting is less time consuming
12	Volume of overhead	Activity based budgeting is preferred in those organization where overhead cost is high	Traditional budgeting is followed by those entities where overhead cost is low

 d). Discussion on the Suitability of ABB

We have done a detailed discussion on the activity based budgeting, but before deciding on its suitability to DHL Express (India) Private Limited, following points needs to be considered:

1. What impacts will the activity based budgeting have on the all over performance of the business of DHL Express (India) Private Limited?
2. Does the introduction of this system of budgeting improvise the system of cost allocation within the organization?

• Are there plenty resources available with the organization for the implementation of ABB?

1. The initial implementation of ABB is cost intensive; will the company be able to bear it?

DHL Express (India) Private Limited is engaged in the business of transportation and logistics, there are various kinds of activities involved in such business and moreover the overhead cost is also high. The introduction of ABB would bring about various improvements in the operational system of the company. We would suggest DHL Express (India) Private Limited to adopt ABB as their budgeting system. However, before its implementation the management should consider the above-mentioned points.

Conclusion

We have done the in-depth study on ABB and on the basis of so many advantages attached to it, we have suggested DHL Express (India) Private Limited for the adoption of the same. This will help the management of the company in more than one way.

References

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