Final answer:
Activity-based budgeting is based on activities for the planned level of production, aligning budgeting with planned operations. It differs from traditional budgeting by strategically allocating resources to activities based on expected production levels. This method is more proactive and can be applied in governmental budgeting as well. Therefore, the correct option is 1.
Explanation:
In activity-based budgeting, the budget is not simply a reflection of the past year’s spending and revenue patterns. Instead, it takes a forward-looking approach by focusing on the planned activities for an upcoming period. This approach aligns budgeting with planned operations, as opposed to historical financial data. So, when it comes to creating the budget in activity-based budgeting, the correct answer would be that it is based on activities for the planned level of production. Unlike traditional budgeting, which often extrapolates the previous year's budget to predict the next year's budget, activity-based budgeting analyzes the specific activities that incur costs. It looks at each activity separately and determines how the spending should be allocated based on the expected or planned level of production. This helps organizations to be more strategic in allocating their resources where they believe they will get the most benefit.
Specifically, for government budgets, while they project how much revenue is expected and how it will be spent, these budgets can be subject to shifts due to policy decisions and unforeseen events. Nevertheless, these budgets are still typically created using a planned approach. The principles of activity-based budgeting can be applied to ensure more efficient use of resources by planning for specific activities and their related costs upfront.