Activity based costing vs traditional12/1/2023 ![]() The resource consumption of each activity must be determined. The cost per unit of material must be determined, as well as a list of activities that must be performed to complete a job. The resources involved in every activity shall be identified and the cost of each resource shall be determined using the receipts of purchase. Activity-based costing is a costing technique that determines the cost of activities without distortion.Īctivity Based Costing will identify these activities. The consumption of these resources adds to the overhead costs. These activities consume a variety of resources (such as materials and labor). Since the basis for the cost estimate is the activity, it is very important that the activity is selected correctly Activity-Based Costing in Construction Project ManagementĬonstruction projects involve many activities. On the other hand, trustworthy cost information may not be accessible if the activity categories are too general. The total estimated cost of the construction project may be sufficiently accurate if 10 activities are used instead of 15. A cost estimator may be able to develop an extremely accurate cost estimate by defining smaller activities however, the amount of time required to prepare ABC estimates for each activity may not justify the increased accuracy. When you start to define a single activity, the cost estimator must balance the need for accuracy with the amount of time available to prepare the estimate. Identification of Activities in ABC Costing All costs include overheads, markups, profit, and should be encompassed in the activity cost. The estimation of work units can be achieved by performing detailed estimates, using cost estimating relationships and obtaining outside quotes for equipment, etc. All activity costs are estimated using the unit of work. After defining the activity, the unit of work is established. However, a clear definition of the activities must be set so there is no overlap between them. These activities are at the lowest function level of a construction project where costs are monitored and performance is evaluated.ĭepending on the project organization, the activity may coincide with an element of the work breakdown structure or may combine one or more items of the WBS. Use of Activity-Based Costing MethodologyĪctivity Based Costing methodology is used when a construction project can be divided into defined activities. Cost estimators, or QS engineers, have collected large databases of activity-based cost information. The activity total cost will be based on the number of times the activity is performed during a specific time frame. S = Costs of subcontracting to perform the activity once M = Costs of material required to perform the activity onceĮ = Costs of equipment to perform the activity once H = Number of hours of labor required to perform the activity once This best practice allowed construction professionals to obtain a cost per area as well as labor resources per area. For example, collected data included the cost of the material, labor, equipment, and overheads required to paint a room, whilst noting the surface area painted. The amount of work associated with this cost was also collected with the cost data. Activity Based Costing MethodologyĬonstruction firms have collected cost data from a multitude of different construction projects. You may also use traditional costing for reporting externally (e.g., to investors) and ABC costing for reporting internally (e.g., to managers). ![]() ![]() You might consider proceeding with traditional costing if you only make a few products. Traditional costing is simpler but less specific than activity based costing. As a result, traditional costing can result in an inaccurate cost of making each product. However, some production-related activities incur more overhead expenses than others. Based on a cost driver, traditional costing applies an average overhead rate to direct production costs (e.g., hours or volume). Traditional CostingĪBC is a costing method that is different from traditional costing. ABC costing is a very powerful tool, but it isn’t appropriate for all cost estimates. Contingency and Escalation can be calculated for each activity or after all the activities have been summed. These single cost estimates will contain all materials, labor, equipment, and subcontracting costs including overheads for each activity.Įach complete single estimate is added to the others to obtain a total estimate. The activity should be definable where productivity can be controlled in units.Īfter the construction project is decomposed into its activities, a cost estimate is prepared for all project activities. Activity Based Costing is a method for developing estimation for cost in which the construction project is subdivided into discrete, quantifiable activities.
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