What is Activity-Based Budgeting?

ABB is a budgeting method where:

Activities that consume resources are identified and budgeted first, and the cost of these activities is then assigned to products, services, or departments based on usage.

Instead of simply increasing last year’s numbers, ABB answers:

• What activities are needed?

• How much will they cost?

• How can they be done more efficiently?

✅ Benefits of ABB for Halfpenny

1. Greater Accuracy in Cost Allocation

• Halfpenny’s bread production involves clear and measurable activities: mixing, kneading, baking, cooling, packaging, and distribution.

• ABB would allocate overheads based on actual activity consumption (e.g. machine hours, labour time) rather than simple averages or volume.

2. Improved Visibility and Cost Control

• Helps identify high-cost processes (e.g. cooling is 2 hours per batch – a long process with high overheads).

• Enables clearer cost comparison between product types—e.g. basic white vs. rustic loaves—using their true cost drivers.

3. Supports Strategic Decision-Making

• Assists in product mix optimisation. Rustic rolls have a 49% margin vs. 13% for wholemeal loaves—ABB can clarify where profits are being made.

• Helps justify investments in automation by revealing cost per activity before and after automation.

4. Facilitates D2C Expansion

• The planned move into Direct-to-Consumer (D2C) will add new activities: app management, order fulfilment, customer service. ABB allows these to be budgeted as discrete cost centres, aiding ROI evaluation.

❌ Disadvantages and Challenges for Halfpenny

1. Data Intensity

• Requires detailed data on time, cost, and resource consumption per activity.

• Currently, Halfpenny uses a standard cost system and has limited budgetary involvement from managers—this would need to change.

2. Cultural Resistance

• Departments may resist transparency into the true cost of their operations.

• Training and change management are essential, especially for non-finance managers.

3. System and Time Demands

• More time-consuming than incremental budgeting.

• Requires strong IT systems and finance capacity to track and allocate activity costs continuously.

🔧 Implementation at Halfpenny: Step-by-Step

Step	Action	Example at Halfpenny
1	Identify core activities	Mixing, Kneading, Baking, Cooling, Packaging, Distribution
2	Determine cost drivers	Machine hours, batch counts, delivery miles, setup times
3	Assign costs to activities	E.g. cooling machine electricity and depreciation allocated to "Cooling"
4	Link activity cost to products	Rustic loaves consume more proving and baking time than white rolls
5	Use to build flexible budgets	Adjust for volume changes, new SKUs, or D2C overheads
6	Monitor and analyse variances	Compare expected vs. actual cost per activity to drive process improvements

🎯 Example: Applying ABB to Rustic Loaves

• Activities: Mixing, shaping, baking, cooling, packaging

• Drivers: Longer baking time, denser dough, different packaging

• Insight: While rustic loaves have higher raw material and baking costs, ABB would confirm whether these are offset by better margins and higher pricing.

Summary: Should Halfpenny Adopt ABB?

Factor	Assessment
Breadth of operations	✅ High – batch-based, multi-product
Management involvement	⚠️ Low – needs training and change
Need for product-level insight	✅ High – margins vary significantly
Systems and data capacity	⚠️ Adequate but needs improvement
Strategic value	✅ High – supports D2C, innovation, cost control

✅ Recommendation:

Introduce ABB gradually, starting with the production departments and the Distribution Centre, where activities and cost drivers are most transparent. Over time, extend it to sales support, IT, and logistics as D2C grows.