Activity-based budgeting: process and example

Activity based budgeting starts with expected work, then calculates the resources and spending required to deliver it. The useful result is a budget that explains why costs should change when orders, setups, inspections, or service requests change.

Keep the original approved plan. At the period close, compare actual costs with both that plan and a second calculation using actual workload at approved rates.

Start with activities that explain spending

Choose an activity because it consumes resources, not because its count is easy to export. Order handling may follow completed orders; inspection work may follow inspection hours. OpenStax describes these links between activities, cost pools, and drivers in its activity-based costing guidance.

Budgeting uses those relationships to ask what the business will need next period. The existing activity-based costing example covers allocation mechanics; the forward-looking task here is to approve workload, resource requirements, and spending assumptions.

Start with a budget workbook, the general-ledger expense export, and operating counts for the same period. Keep activity ID, department, period, volume, unit of measure, approved rate, and cost account. Give each activity an operational owner who confirms its workload and a finance owner who confirms its cost scope.

Rates must describe the costs included. A purchased service price per completed order is different from a fully allocated cost containing salaries and rent. The driver-based budget definition provides the broader planning context.

Build the plan from the exported rows

Consider a US manufacturer budgeting outsourced support work for October 2026. These activities are billed by usage; regular payroll, rent, materials, and other manufacturing costs sit outside this example. All amounts are illustrative USD inputs.

The planning calculation is:

Activity budget = planned activity volume × approved resource cost per activity unit.

For resources that do not vary with activity, add the approved committed amount separately. If workload exceeds available capacity, ask the owner whether overtime, another contract, or another shift is required before approving the plan. A smooth rate calculation cannot represent a capacity step unless you explicitly include it.

Put the table in Excel with activity in column A, planned volume in B, approved rate in C, actual volume in D, and actual spending in E. In F2, calculate the original budget:

=B2*C2

Copy down through row 4. The resulting budget is $30,000: $12,000 for orders, $10,800 for setups, and $7,200 for inspections. Each amount is its row's planned volume multiplied by its approved rate.

Bring actual costs into the same view

Aggregate expense rows by the same activity IDs and period. Suppose an Actuals worksheet has period in A, activity ID in B, and expense amount in C. Put the selected period in M1, using the same period value and data type as the export. E2 can then pull the activity's expense:

=SUMIFS(Actuals!$C$2:$C$1000,Actuals!$B$2:$B$1000,$A2,Actuals!$A$2:$A$1000,$M$1)

Microsoft documents that SUMIFS adds values meeting multiple criteria. Extend the ranges to cover the complete export, and reconcile the included expense rows to the ledger before interpreting any variance. Covirage is not affiliated with Microsoft.

Actual activity counts need the same cutoff. Do not combine orders created during October with costs for orders completed during October unless that is the approved driver definition.

Separate workload from spending differences

A flexible comparison values actual workload at the original approved rates. This follows the distinction in OpenStax's flexible-budget guidance: comparing costs at the same activity level gives a clearer performance comparison.

In G2, calculate the budget at actual activity:

=D2*C2

In H2, calculate the volume effect:

=G2-F2

In I2, calculate the spending difference after allowing for activity:

=E2-G2

In J2, calculate total actual-minus-plan variance:

=E2-F2

Copy each formula down through row 4. Positive cost differences are unfavorable here.

The proof is $30,535 actual spending minus $30,000 original budget = $535, which also equals $0 net volume effect plus $535 spending difference. The percentage overrun is $535 ÷ $30,000 = 1.8%, rounded to one decimal place.

Total workload effects cancel, but individual activities move substantially. Investigate order handling's $660 spending difference and the setup difference of $200. Inspection spending is $325 below its activity allowance; confirm that required inspections were completed before calling that an improvement.

Decide whether the detail is worth maintaining

The advantage is a budget connected to operating choices. Managers can see the cost consequences of more orders or a different production mix. The tradeoff is maintaining driver definitions, reliable counts, rates, and capacity assumptions.

Use a few material activities first. Stable departments with largely committed spending may need simpler departmental controls. The functional and activity-based budgeting comparison explains how the two views can share the same expense total. For the reusable column layout, see the activity-based budget template.

Where it goes wrong

• Treating allocated costs as avoidable costs. Lower workload can reduce an allocation without changing payroll or a lease payment.
• Using the wrong driver. A setup count will misstate demand if setup complexity varies sharply and requires different labor hours.
• Changing rates after the fact. Replacing approved rates with actual rates erases the comparison needed to explain spending performance.
• Counting expenses twice. Reconcile activity pools to the included ledger accounts and keep any shared committed costs separate.

Check your activity budget in Covirage

Bring your budget workbook and a sample of your own activity and expense export to Covirage. Covirage maps the columns, its tools compute and check the volume and spending comparisons, and the external AI model explains the results with every figure traced to its rows. Create a free Covirage account, set up your business, and bring a sample of your own data.

See cost variance analysis for the supporting workflow.