What is Activity-Based Budgeting (ABB)?

Activity-based budgeting (ABB) is a system that records, researches, and analyzes activities that lead to costs for a company. Every activity in an organization that incurs a cost is scrutinized for potential ways to create efficiencies. Budgets are then developed based on these results.

Activity-based budgeting (ABB) is more rigorous than traditional budgeting processes, which tend to merely adjust previous budgets to account for inflation or business development.

How Activity-Based Budgeting (ABB) Works

Keeping costs to a minimum is a crucial part of business management. When done effectively and not too excessively, companies should be able to maintain and keep growing their revenues, while squeezing out higher profits from them.

Using activity-based budgeting (ABB) can help companies to reduce the activity levels required to generate sales. Eliminating unnecessary costs should boost profitability.

The activity-based budgeting (ABB) process is broken down into three steps.

1. Identify relevant activities. These cost drivers are the items responsible for incurring revenue or expenses for the company.
2. Determine the number of units related to each activity. This number is the baseline for calculations.
3. Delineate the cost per unit of activity and multiply that result by the activity level.

Activity-Based Budgeting (ABB) Vs. Traditional Budgeting Processes

Activity-based budgeting (ABB) is an alternative budgeting practice. Traditional methods are more simplistic, adjusting prior period budgets to account for inflation or revenue growth. Rather than using past budgets to calculate how much a firm will spend in the current year, activity-based budgeting (ABB) digs deeper.

Activity-based budgeting (ABB) is not necessary for all companies. For example, established firms that experience minimal change typically find that applying a flat rate to data from the previous year to reflect business growth and inflation is sufficient.

In contrast, newer companies without access to historical budgeting information cannot consider this an option. Activity-based budgeting (ABB) is also likely to be implemented by firms undergoing material changes, such as those with new subsidiaries, significant customers, business locations, or products. In these types of cases, historical information may no longer be a useful basis for future budgeting.

Example of Activity-Based Budgeting

Company A anticipates receiving 50,000 sales orders in the upcoming year, with each single order costing $2 to process. Therefore, the activity-based budget (ABB) for the expenses relating to processing sales orders for the upcoming year is $100,000 ($50,000 * $2). 

This figure may be compared to a traditional approach to budgeting. If last year’s budget called for $80,000 of sales order processing expenses and sales were expected to grow 10%, only $88,000 ($80,000 + ($80,000 * 10%)) is budgeted.

Advantages and Disadvantages of Activity-Based Budgeting

Activity-based budgeting (ABB) systems allow for more control over the budgeting process. Revenue and expense planning occurs at a precise level that provides useful details regarding projections. ABB allows for management to have increased control over the budgeting process and to align the budget with overall company goals.

Unfortunately, these benefits come at a cost. Activity-based budgeting (ABB) is more expensive to implement and maintain than traditional budgeting techniques and more time consuming as well. Moreover, ABB systems need additional assumptions and insight from management, which can, on occasion, result in potential budgeting inaccuracies. 

What Is a 10-Year Treasury Note?

The 10-year Treasury note is a debt obligation issued by the United States government with a maturity of 10 years upon initial issuance. A 10-year Treasury note pays interest at a fixed rate once every six months and pays the face value to the holder at maturity. The U.S. government partially funds itself by issuing 10-year Treasury notes.

Understanding 10-Year Treasury Notes

The U.S. government issues three different types of debt securities to fund its obligations: Treasury bills, Treasury notes, and Treasury bonds. Bills, bonds, and notes are distinguished by their length of maturity.

Treasury bills (T-bills) have the shortest maturities, with durations only up to a year. The Treasury offers T-bills with maturities of four, eight, 13, 26, and 52 weeks. Treasury notes have maturities ranging from a year to 10 years, while bonds are Treasury securities with maturities longer than 10 years.

Treasury notes and bonds pay interest at a fixed rate every six months to maturity, and are then redeemed at par value, meaning the Treasury repays the principal it borrowed.

In contrast, T-bills are issued at discounts to par and pay no coupon payments. The interest earned on T-bills is the difference between the face value repaid at maturity and the purchase price paid.

The 10-Year Note Yield as a Benchmark

The 10-year T-note is the most widely tracked government debt instrument in finance. Its yield is often used as a benchmark for other interest rates, like those on mortgages and corporate debt, though commercial interest rates do not track the 10-year yield exactly.

Below is a chart of the 10-year Treasury yield from March 2019 to March 2020. Over that span, the yield steadily declined with expectations that the Federal Reserve would maintain low interest rates or cut them further. In late February 2020, the decline in yield accelerated amid growing concerns about the economic effects of the COVID-19 pandemic. As the Fed ordered an emergency rate cut of 50 basis points in early March, the decline of the 10-year yield accelerated even further, with the yield dropping to 0.32%, a record low, before rebounding.

The Advantages of Investing in Treasury Notes

Fixed-income securities offer important portfolio diversification benefits, because their returns are not correlated with the performance of stocks.

Government debt and the 10-year Treasury note in particular is considered a relatively safe investment, so its price often (but not always) moves inversely to the trend of the major stock-market indices. In a recession, central banks tend to lower interest rates, which lowers the coupon rate on new Treasuries and, subsequently, makes older Treasury securities with higher coupon rates more desirable.

Another advantage of investing in 10-year Treasury notes and other federal government securities is that the coupon payments are exempt from state and local income taxes. However, they are still taxable at the federal level. The U.S. Treasury sells 10-year notes and those with shorter maturities, as well as T-bills and bonds, directly through the TreasuryDirect website via competitive or noncompetitive bidding, with a minimum purchase of $100 and in $100 increments. Treasury securities can also be purchased through a bank or broker.

Investors can choose to hold Treasury notes until maturity or sell them early in the secondary market. There is no minimum holding term. Although the Treasury issues new T-notes of shorter maturities every month, new 10-year notes are issued only in February, May, August, and November. In other months, the Treasury sells additional 10-year notes from the most recent issue in what is known as a re-opening. Re-opened notes have the same maturity date and coupon interest rate as the original issue, but a different issue date and a purchase price reflecting subsequent change in market interest rates.

All T-notes are issued electronically, meaning investors cannot obtain paper certificates. Series I Savings Bonds are the only Treasury securities currently issued in paper form, and they can only be bought in paper form with the proceeds of a tax refund.