In one sentencePreparing the budget by estimating the volume of each activity the business needs, such as the number of orders or shipments, then multiplying it by the cost of one activity.
Simply put
Instead of increasing a department's budget by a fixed percentage over last year, you ask: how many activities will we carry out? And how much does one activity cost?
This way you know the reason for every riyal in the budget, and the budget changes automatically if the volume of work changes.
Worked example
An online store expects 1,200 shipping orders next month, and the cost of preparing one order (packaging and staff time) is 50 SAR.
Expected number of orders1,200 orders
Cost of preparing one order50 SAR
Order preparation activity budget1,200 × 50 = 60,000 SAR
Formula: Expected activity volume × cost of one activity
Don't confuse it with
Activity-based costingActivity-based costing calculates the cost of what happened; activity-based budgeting plans for what will happen.