i) Differentiation between Activity-Based Budgeting and Incremental Budgeting:

• Activity-Based Budgeting (ABB): ABB is a method of budgeting that is based on identifying activities that incur costs within an organization and then determining the cost drivers of those activities. Budgets are prepared based on the expected activity levels, making the budgeting process more accurate and aligned with operational realities.
• Incremental Budgeting (IB): IB is a traditional approach where the previous period’s budget is used as a base, and adjustments (usually increments) are made to create the current period’s budget. This method is less detailed and relies heavily on historical data without necessarily considering the actual activities or changes in the organization.

ii) The Process in ABB:

1. Identify Activities: The organization must identify the key activities that incur costs within its operations.
2. Accumulate Costs into Cost Pools: Similar activities are grouped into cost pools to better track and manage expenses.
3. Determine Cost Drivers: The organization then identifies the factors that drive the costs of each activity, known as cost drivers.
4. Assign Costs Based on Activities: Costs are then assigned to each activity based on the identified cost drivers, leading to a more accurate and activity-focused budget.
5. Prepare the Budget: The budget is prepared using the costs and activities identified, ensuring that it reflects the operational needs and cost drivers.

iii) Arguments in Favour of and Against ABB:

Arguments in Favour:

1. Improved Cost Control: ABB allows for more accurate budgeting and cost control by focusing on the activities that drive costs, enabling organizations to allocate resources more efficiently.
2. Aligns Budget with Operational Activities: ABB ensures that budgets are closely tied to the actual activities of the organization, making the budgeting process more realistic and aligned with business needs.

Arguments Against:

1. Complexity and Cost: ABB is more complex and time-consuming to implement than Incremental Budgeting, requiring detailed analysis and identification of activities and cost drivers.
2. Resource Intensive: The implementation of ABB requires significant resources, both in terms of time and personnel, to identify, measure, and manage activities and their associated costs, which can be burdensome for some organizations.