Table of Contents

Executive Summary................................................................................................2
Introduction.............................................................................................................3
Description of Company – Caltex Australia Limited...............................................3
Activity Based Budgeting........................................................................................3
 Salient Features of Activity Based Budgeting..............................................4
 Advantages & Disadvantages of Activity Based Budgeting.........................4
Difference between Activity Based Budgeting & Traditional Budgeting System....5
Caltex Australia Limited & Activity Based Budgeting.............................................6
Suitability of Activity Based Budgeting for Caltex Australia Limited.......................7
Conclusion..............................................................................................................8
References:.............................................................................................................9
 Executive Summary

Caltex is one of the largest Australian company that purchase, refine, sale and
market fuel products. Traditional budgeting approach is oldest and simplest tool
of budgeting where data from last period is taken and some additions are made
like inflation and growth to reflect in next period budget. Activity based budgeting
is a tool for making costing budgets based on activities to be performed.
Efficiency and integrity is main feature of activity based budgeting as it is
rigorous budgeting approach where actual budgeting calculation is done for
every relevant activity rather than tradition budget based on past patterns.
Overhead costs are very important to know for Caltex because its operations are
diversified in various products that needs actual activity based costing technique
to get true picture of cost in every activity.

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Introduction
Activity based budgeting technique is relatively new and somehow different from
traditional budgeting techniques. Through this technique more technical and
sophisticated information is available for management for budgeting decision
making (Faraji, 2013). This report is based on analysis of activity based
budgeting in brief and its application in Caltex Australia Limited which is one of
the largest Australian company that purchase, refine, sale and market fuel
products (Byrne, 2019). Comparison of activity based budgeting is done with
traditional budgeting approach. Also suitability of this approach to Caltex is
highlighted.

Description of Company – Caltex Australia Limited

Caltex is worldwide brand for petroleum products which has its presence in Asia,
Middle East and Africa. Caltex started its operations in Australia way back in
1936. Caltex make merger with Ampol in late 90’s and jointly operates with the
name of Caltex Australia Limited (Streb, 2018). Caltex hold largest network of
retails in last decade however organization went through various up’s and down’s
in last few years. It closed one of its refineries in 2014. Big development came in
2015 when Caltex owner group sold 50% of its share, worth $9.24 billion.
Recently Caltex group owner announced to withdraw its full stake from its
operations in Australia (Streb, 2018).

Major petroleum products of the company are petrol (Regular, Bio E10, Vortex),
diesel (New Generation, Vortex, Bio), LPG and CNG. Lubricants and motor oil
are also offered by products of Caltex. Caltex imports the fuel and other
petroleum products, refine them with their own refineries and sell to individual
customers through its stations as well as sell to large scale businesses (Nazama,
2018). Caltex has agreement with various convenience stores that operates in its
stations throughout Australia. These stores include Star Mart, Star Shop, The
Foodary and Woolworths Metro. Caltex Australia Limited has around 6,600
employees. Julian Segal is current Chief Executive Officer of the company
(Byrne, 2019).

Activity Based Budgeting

Activity based budgeting is a tool for making costing budgets based on activities
to be performed. In activity based budgeting, first task is to find the expected
activity level for the coming budget period. Once expected activity level is known,
budget is developed according to the expected activities. This technique is
different from traditional budgeting approach where budget is developed as per

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historical levels with added inflation and growth (Faraji, 2013). It is more detailed,
in-depth and technical tool which required high level of efficiency and attention to
detail. Activity based budgeting is relatively new technique as compare to
traditional budgeting approach that is related to management accounting and
applied by manufacturing or trading companies, mostly by manufacturing
companies (Goode, 2011). It is helpful for management to decide which activities
are generating more profits as compare to cost and which activities are more
costly for the companies. It is important to mention that activities mean items
which incurred the cost in manufacturing, assembling or trading.

 Salient Features of Activity Based Budgeting

Activity based budgeting technique is relatively new and somehow different from
traditional budgeting techniques. Major feature of this technique is cost is spread
through fixed cost and variable cost in costing for the budget. Through this way
more technical and sophisticated information is available for management for
budgeting decision making (Adioti, 2013). Efficiency and integrity is other main
feature of this approach as it is rigorous budgeting approach where actual
budgeting calculation is done for every relevant activity rather than tradition
budget based on past patterns. By applying activity based budgeting technique,
efficient managers control cost of manufacturing and assembling through focus
on activities with proportionally more profiteer (Goode, 2011).

Business management and management accounting’s crucial task is to control

cost and for this they need accurate and reliable information on cost patterns of
various activities. One important feature of activity based budgeting is to reduce
the activities which are incurring higher cost and replace them with lower cost
activities to increase the profit margin. By correctly implementing this technique,
management accountants can get detailed analysis of activity cost per unit and
total cost per unit. Process of this technique includes identification of relevant
activities that are responsible for revenue and expenses of company. Calculation
is made for number of units for each activity. Thus at the end budget is
developed by keeping in mind the expected level of activities and their cost in
coming period (Cohrs, 2015).

 Advantages & Disadvantages of Activity Based Budgeting

Main advantage of activity based budgeting is that every cost driver is evaluated
which give a detailed and through picture of overall cost structure. It helps
managers to realize the unnecessary and irrelevant activities so that they can
reduce them. Implementing of activity based budgeting technique help
companies to get a competitive advantage by effectively reducing cost to
increase profit margin and (or) sales margin. Another important advantage of this

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tool is that all operations of the business are considered as one unit and not
divided into departments. So effective implementation of the technique is not
made for a single department rather it is equally beneficial for the company as
whole (Pietrzak, 2013). Bottlenecks in cost process are removed by using this
technique and process become smooth and more relevant.

Apart from its advantages, activity based budgeting has some disadvantages too
like other techniques. It is lengthy procedure and even smaller mistakes can lead
to inaccurate results. It is complex in nature and required highly technical skills to
analyze activity based costing. Technically skillfully personnel required to do the
activity based costing and budgeting based on it that means it will require money
to pay them. Another disadvantage is its short term approach as activity based
budgeting technique focus on short term goals of budgeting (Faraji, 2013).

Difference between Activity Based Budgeting & Traditional

Budgeting System
Budgeting plays a crucial role in management accountant as it is used for
planning of activities, coordination of activities and evaluation of activities so that
operational decisions are made. There are various techniques of budgeting that
are related to cost of production, assembling or trading. Traditional budgeting
approach is oldest and simplest tool of budgeting where data from last period is
taken and some additions are made like inflation and growth to reflect in next
period budget (Pietrzak, 2013). Activity based budgeting, as discussed above, is
a tool for making costing budgets based on activities to be performed. In activity
based budgeting, first task is to find the expected activity level for the coming
budget period. Once expected activity level is known, budget is developed
according to the expected activities (Faraji, 2013).

There is another approach that is called Zero based budgeting where activities or
jobs to be done should give justification to continue the process. In this
technique, budget is not directly allocated rather activities should prove their
effectiveness and give logical reasoning to continue. However this section
focuses only on activity based budgeting and traditional budgeting system. ABB
technique is different from traditional budgeting approach where budget is
developed as per historical levels with added inflation and growth. ABB is more
detailed, in-depth and technical tool which required high level of efficiency and
attention to detail (Adioti, 2013). Some points are compared in below table to get
reflections of each budgeting technique:

Compariso Activity Based Budget Traditional Budgeting System

n

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 Allocation Budget is allocated on Budget is allocated as per last
Basis effectiveness and usefulness of period figures and adds inflation
activities & growth
Preparation Complex preparation as it Simple preparation as it takes
involves in depth analysis of last period figures and add some
cost and cost associated to other factors based on
activities assumption
Cost- Activity based budgeting main Traditional budgeting do not
Effectivenes aim is to control overall cost by encourage cost effecting
s reducing inefficient activities techniques and reduce cost
who adds more cost with no
profit
Clarity & High clarity and integrity among There is no clarity among cost
Integrity various cost activities and factor as cost is not accurately
overall cost known
Profitability Activity based budgeting is Traditional budgeting techniques
helpful in determining of profit do not show accurate profit as
as well as increase in well as method is not helpful to
profitability due to cost effective increase profitability.
techniques
Orientation Data and figures based by Its data and figures revolves
technical management around management
supported by management accountants
accountants

Above comparison clearly shows that traditional budgeting approach is obsolete

now and it is era of activity based budgeting to enhance the performance of
companies in terms of making budgetary decisions. There are more chances of
unusual budget deficit/surplus in traditional budgeting as it is based on historical
data. Activity based budgeting, on the other hand, is effective and detailed
technique for budgeting decision making and is far superior approach than
traditional budgeting (Pietrzak, 2013).

Caltex Australia Limited & Activity Based Budgeting

Caltex major operations are refinery and supply of petroleum products which are
natural reserves and need utmost care, safety and efficiency. In this scenario
activity based budgeting plays crucial role for safety and saving of natural
reserve in the manner that it do not have wastage as well as there is no damage
done to human lives and infrastructure (Cohrs, 2015). Overhead costs are very
important to know for Caltex because its operations are diversified in various
products that needs actual activity based costing technique to get true picture of

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cost in every activity. Refinery of converting raw fuel to usable fuel in different
qualities could be calculated by activity based budgeting (Nazama, 2018).

While Caltex cannot exactly figure out what bit of these costs explicitly have a
place with the assembling of a specific undertaking, it can utilize discrete
manufacturing answer for record these. Also, fortunately arrangements like
Industrial Equipment Manufacturing on the Dynamics 365 Business Central stage
are fit for following precise action based costing. The first and sensible advance
is dole out rates for assets like the work focuses, engineers, the laborers, and so
forth (Streb, 2018). The subsequent stage is break this further into the Job Cost
types with the goal that Caltex can get a rundown of the costs at the particular
employment level.

Planning & controlling of cost operation can be done smoothly by applying this
technique as one significant element of activity based budgeting is to lessen the
exercises which are bringing about greater expense and supplant them with
lower cost exercises to expand the overall revenue (Byrne, 2019). By effectively
executing this system, the accountants and costing managers can get itemized
investigation of activity cost per unit and all out cost per unit. Procedure of this
system incorporates recognizable proof of pertinent exercises that are liable for
income and costs of organization. Count is made for number of units for every
activity. In this way toward the end spending plan is created by remembering the
normal degree of exercises and their cost in coming period (Cohrs, 2015).

Activity based budgeting is persuading for Caltex top management to make sure
that they have enough budget to pass on to activities which are working
efficiently and providing benefits to the company in term of maximizing profit
margin. It is beneficial in terms of getting actual cost for each activity as company
pass on the budget for activity separately; it can calculate cost accurately for
labor, material and overheads (Nazama, 2018). Industrial Equipment
Manufacturing Solution is useful tool as it is providing cost to every step of the
activity to get clearer picture of the cost. System is helpful for effective costing
because it is less prone to errors and Caltex costing managers can continue to
focus on other essential tasks as well (Byrne, 2019).

Suitability of Activity Based Budgeting for Caltex Australia Limited

Caltex Australia Limited is providing fuelling needs of almost one third of
Australian population. As company has such large and diversified network of
operation which is consisting regular petrol, Bio E10 petrol, Vortex petrol, New
Generation diesel, Vortex diesel, Bio diesel, LPG and CNG; there is higher
suitability of activity based budgeting to calculate cost for every activity differently

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so that management could find out which activity is giving more profit margin to
the company. It causes Caltex manager to understand the pointless and
unimportant exercises with the goal that they can decrease them. Actualizing of
activity based budgeting procedure help Caltex to get an upper hand by viably
lessening cost to expand overall revenue and deals edge (Faraji, 2013).

Another suitability preferred position of this apparatus is that all tasks of the
business are considered as one unit and not isolated into divisions. So
compelling usage of the system isn't made for a solitary division rather it is
similarly useful for the organization as entirety. Hurdles in cost process are
evacuated by utilizing this system and procedure become smooth and
progressively pertinent for Caltex (Cohrs, 2015). Activity based costing of
lubricants, base oils, petrochemicals; liquefied petroleum gas and other bi-
products will help company to find profit generated activities and loss generated
activities that is why it is highly suitable budgeting approach for Caltex Australia
Limited (Byrne, 2019).

Conclusion
Activity based budgeting is hot trend in management accounting is it overcome
the weaknesses of traditional budgeting approaches. Traditional budgeting
approach is obsolete now and it is era of activity based budgeting to enhance the
performance of companies in terms of making budgetary decisions. There are
more chances of unusual budget deficit/surplus in traditional budgeting as it is
based on historical data. Activity based budgeting, on the other hand, is effective
and detailed technique for budgeting decision making and is far superior
approach than traditional budgeting. However it is complex in nature and
required highly technical skills to analyze activity based costing. Another shortfall
is its short term approach as activity based budgeting technique focus on short
term goals of budgeting. it is recommended for Caltex to implement Industrial
Equipment Manufacturing Solution which is useful tool as it is providing cost to
every step of the activity to get clearer picture of the cost. System is helpful for
effective costing because it is less prone to errors and Caltex costing managers
can continue to focus on other essential tasks as well.

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References:

Byrne, D. P., & De Roos, N. (2019). Learning to coordinate: A study in retail

gasoline. American Economic Review, 109(2), 591-619.

Nazama, A., & Goud, G. V. (2018). A Study on Fundamental Analysis of

Selected Oil and Gas Companies at Edelweiss Broking Ltd, Bangalore.

Faraji, F., & Reiszadeh, A. (2013). The activity based costing and target costing
as modern techniques in determination of product cost. Islamic Azad University
Iran.

Goode, M., & Malik, A. (2011). Beyond budgeting: the way forward?. Pakistan
Journal of Social Sciences (PJSS), 31(2).

Pietrzak, Ż. (2013). Traditional versus activity-based budgeting in non-

manufacturing companies. Social sciences, 82(4), 26-37.

Adioti, A. A., & Valverde, R. (2013). Time-driven activity based costing for the
improvement of IT service operations. International Journal of Business and
Management, 9(1).

Cohrs, L. (2015). Caltex charts new waters in sacking workers. Green Left

Weekly, (1062), 10.

Streb, J. (2018). An Analysis of Caltex Australia Lmtd's Management of Diversity

Policies. GRIN Verlag.

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