ACCA Performance Management (F5) Certification Practice Exam

What is the primary purpose of an activity-based budget?

1. To allocate resources based on historical data

2. To create a budget without regard to activities

3. To improve financial forecasting

4. To base budgeting on an activity framework

The correct answer is: To base budgeting on an activity framework

The primary purpose of an activity-based budget is to base budgeting on an activity framework. This approach focuses on the costs associated with specific activities that drive the organization's operations and is designed to align resources with those activities. By identifying and analyzing activities, organizations can effectively allocate resources where they will be most impactful, ensuring that budgeting reflects the real drivers of costs and revenues. In an activity-based budget, managers assess the necessary activities to achieve strategic objectives and estimate the costs related to those activities. This method enhances clarity and efficiency by ensuring that budget allocations are directly linked to the activities that create value. Consequently, it provides better insights into cost behavior and helps organizations manage financial performance more effectively. Activity-based budgeting also allows for more precise forecasting, as it takes into account the direct relationship between activities and resource consumption. Thus, it is more tailored to the specific needs of the organization compared to traditional budgeting methods that might simply look at historical data without focusing on the underlying activities driving costs and revenues.