Activity Based Costing for Construction Companies

<p>Preface ix</p>
<p>1 Introduction 1</p>
<p>1.1 What comprises costs in a construction company? 2</p>
<p>1.1.1 Construction costs (project costs) 3</p>
<p>1.1.2 Overhead costs in a construction company 3</p>
<p>1.1.3 The cost classification in use and the duality of overhead costs 5</p>
<p>1.2 Overhead costs in new business environments 6</p>
<p>1.3 Role of overhead cost management 10</p>
<p>1.3.1 Overhead costing system should provide accurate costing on cost objects 10</p>
<p>1.3.2 Overhead costing system should contribute to reducing total costs without sacrificing value 11</p>
<p>1.4 Structure of this book 11</p>
<p>References 12</p>
<p>2 What Is Activity–Based Costing? 15</p>
<p>2.1 Traditional accounting method: resource–based costing with volume–based allocation 16</p>
<p>2.1.1 Resource–based costing 16</p>
<p>2.1.2 Overhead costs allocation 17</p>
<p>2.2 What are the problems with the current method? 18</p>
<p>2.2.1 Is the current method contributing to reducing total costs? 19</p>
<p>2.2.2 Does the current method provide accurate pricing? 19</p>
<p>2.3 What is activity–based costing? 20</p>
<p>2.3.1 Definition 20</p>
<p>2.3.2 Characteristics of ABC 21</p>
<p>2.3.3 Objectives of ABC system 25</p>
<p>2.4 Implementing activity–based costing 26</p>
<p>2.4.1 Develop an activity–based costing charter 26</p>
<p>2.4.2 Define cost objects 27</p>
<p>2.4.3 Identify activities 28</p>
<p>2.4.4 Assign resource costs to activities 29</p>
<p>2.4.5 Assign activity costs to cost objects 32</p>
<p>2.5 Chapter summary 35</p>
<p>References 36</p>
<p>3 Managing Overhead Costs in Construction Projects 39</p>
<p>3.1 Project overhead costs as profit points 40</p>
<p>3.2 Implementing ABC to manage project overhead costs 42</p>
<p>3.3 Case study: xx Commercial Complex 42</p>
<p>3.3.1 Developing an activity–based costing charter 43</p>
<p>3.3.2 Workshop 45</p>
<p>3.3.3 Defining cost objects 46</p>
<p>3.3.4 Identifying activities 47</p>
<p>3.3.5 Assigning resource costs to activities 48</p>
<p>3.3.6 Assigning activity costs to cost objects 53</p>
<p>3.4 Using ABC data for managerial purposes 58</p>
<p>3.4.1 Evaluating management areas with activity analysis 64</p>
<p>3.4.2 Evaluating subcontractors 68</p>
<p>3.5 Chapter summary 70</p>
<p>References 70</p>
<p>4 Managing Your General Overhead Costs 73</p>
<p>4.1 General overhead costs 74</p>
<p>4.2 Managing general overhead costs 75</p>
<p>4.2.1 Accurate general overhead allocation 75</p>
<p>4.2.2 Providing a process view for process improvements 79</p>
<p>4.3 Does current practice for managing general overhead costs work? 80</p>
<p>4.3.1 Resource–based costing 80</p>
<p>4.3.2 Volume–based assignment 80</p>
<p>4.4 How can ABC be implemented in managing general overhead costs? 82</p>
<p>4.4.1 Case study: xx Construction (general contractor) 82</p>
<p>4.5 How can ABC data be used in managing general overhead costs? 92</p>
<p>4.5.1 Cost driver analysis 93</p>
<p>4.5.2 Profitability analysis for each project 93</p>
<p>4.5.3 Profitability analysis for each market sector 97</p>
<p>4.5.4 Profitability analysis for each customer 104</p>
<p>4.6 Chapter summary 105</p>
<p>References 105</p>
<p>5 Managing Overhead Costs in a Fabrication Shop 107</p>
<p>5.1 Rebar supply system 108</p>
<p>5.2 Case study: PQR Construction Inc. 111</p>
<p>5.2.1 The rebar fabrication shop s cost structure 111</p>
<p>5.2.2 Allocation of rebar fabrication shop s costs to projects 113</p>
<p>5.3 Analysis using traditional rebar costs allocation 113</p>
<p>5.3.1 Identify cost objects and direct costs 114</p>
<p>5.3.2 Identify the overhead costs to be allocated and calculate the allocation base 114</p>
<p>5.3.3 Calculate the overhead costs allocated to each project 116</p>
<p>5.4 Analysis using activity–based costing 117</p>
<p>5.4.1 Determining system objectives and defining cost objects 118</p>
<p>5.4.2 Identifying resources and activities 119</p>
<p>5.4.3 Assigning resource costs to activities 120</p>
<p>5.4.4 Determining a cost driver for each activity 122</p>
<p>5.4.5 Calculating a unit rate of activity costs (cost driver rate) and allocating activity costs to cost objects 124</p>
<p>5.5 How can ABC data be used for managerial purposes? 125</p>
<p>5.5.1 Accurate cost information through overhead cost allocation 125</p>
<p>5.5.2 Cost information on processes 127</p>
<p>5.5.3 Cost driver analysis 129</p>
<p>5.5.4 Ways to reduce overhead costs 130</p>
<p>5.6 Chapter summary 130</p>
<p>References 132</p>
<p>6 Activity–Based Costing in Your Organization 133</p>
<p>6.1 The benefits of the ABC journey 134</p>
<p>6.2 Implementation roadmap for ABC 138</p>
<p>6.2.1 Concept–level roadmap 138</p>
<p>6.2.2 Implementation roadmap for a focused application 139</p>
<p>6.2.3 Phase 1. Planning stage: preparing for your ABC journey 140</p>
<p>6.2.4 Phase 2. Execution stage: developing your ABC system 144</p>
<p>6.2.5 Phase 3. Internalization stage: final tune–up 154</p>
<p>6.3 Common mistakes in the journey 156</p>
<p>6.3.1 Beginning your ABC journey without strong commitment from top management 156</p>
<p>6.3.2 Beginning your journey with poorly defined objectives and scope 157</p>
<p>6.3.3 Developing a task force that does not have the necessary authority 157</p>
<p>6.3.4 Developing more cost objects than needed 158</p>
<p>6.3.5 Making activities ambiguous 158</p>
<p>6.3.6 The effect of distorted time effort % assigned to activities 159</p>
<p>6.3.7 Choosing cost drivers that are hard to measure 159</p>
<p>Index 161</p>