Capital budgeting decision is the process where the management of an organization is using to determine whether the company can get benefits from long-term investments and thus provide funding for the investment (Negulescu & Doval, 2014). Since managers have to allocate funds for such long-term investments, cost allocation comes in handy. The use of Activity-based costing helps departments to identify the products and services being sold so that the upper management can assess and examine their profitability (Al-Halabi, 2018). Through the knowledge, the exact relationship of “cause-and-effect” the manager can identify the products and services and assess their real costs. Furthermore, the manager can determine whether carrying some products or services is helping the company make profits based on the demand and price. Consequently, all these are made possible through the use of Activity-based costing.
Thus the relationship between this costing technique and financial resources allocation when making budgeting decision is that it must be used to assess the product or services in an organization to identify profitability so the funds are allocated appropriately (Rozotocki, 2010). This role is significant because when the technique is used to determine financial allocation it helps in making operational decisions. Furthermore, they relate in the sense that they rely on each other so that at the end of the day funds are allocated only to those services or products that can help the company achieve its long-term profitability.
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Activity-based costing through the roles it plays as aforementioned also extends further and reduces wasteful spending, and through this, it encourages the use of resources efficiently. Thus the technique connects to capital budgeting decision since it helps in needs evaluation which then directs budgeting decision accordingly. Consequently, the use of the method in capital budgeting decision guides managers in planning (Negulescu & Doval, 2014). Thus the managers can be evaluated on their effectiveness in financial planning.
References
Al-Halabi, N. B. (2018). The Effect of Activity-Based Costing (ABC) on Managing the Efficiency of Performance in Jordanian Manufacturing Corporations – An Analytical Study. Accounting and Finance Research, 7(1), 262. doi:10.5430/afr.v7n1p262
Negulescu, O., & Doval E. (2014). The quality of decision making process related to organizations effectiveness. (Procedia Economics and Finance). https://doi.org/10.1016/S2212-5671(14)00548-6
Rozotocki, N. (2010). Activity-Based Management for Electronic Commerce: A Structured Implementation Procedure. Journal of Theoretical and Applied Electronic Commerce Research, ISSN 0718-1876 Electronic Version, 5(1), pp. 1-10. [Online] Available: http://www.scielo.cl/ .
