Nowadays many manufacturing firms perform more indirect functions supporting production and marketing activities and thereby consuming more resources. In this situation managing overhead costs can lead to a significant cost reduction. Thus Korean comp...
Nowadays many manufacturing firms perform more indirect functions supporting production and marketing activities and thereby consuming more resources. In this situation managing overhead costs can lead to a significant cost reduction. Thus Korean companies considering cost management a must for surviving the domestic and global competitions should pay attention to the management of their overhead costs.
This paper reviewed key features and the process of activity-based budgeting in order to help Korean firms, that do not properly manage their overhead costs still using conventional cost system in formulating their operational budgets, better manage their future overhead costs by using activity-based cost information for their operational budgets.
An activity-based budget has several advantages over a conventional budget, but the comparisons of resource consumption and actual activity volume are the most important. An activity-based approach integrated into a company's budgetary system provides more detailed information about indirect costs and could reveal inaccuracies in spending for specific overhead resources. Such an approach provides the means for improving the usage of these resources without harming competitiveness. The activity-based budgetary information also reveals the under-utilization of resources, which means that managers must take actions to realize any benefits. The freed-up resources must either be eliminated or redeployed for other value-adding activities.
The process of activity-based budgeting covered in this paper is an iterative process that guarantees the achievement of operational balance, which means the quantity of resources needed equals or approximates the quantity of resources currently available, and financial balance, which means the firm's financial targets have been met or exceeded. Even though the approach demonstrated in this paper is a simple one, it may be useful for understanding the features of activity-based budgeting. It is hoped that efforts to build more sophisticated models of this type may continue in academe and business circles.