Activity Based Costing Benefits Accounting Essay

In recent old ages the economic downswing has created a globalisation frisson. The universe was hit by information engineering and unfastened economic systems. This has lead to competition in of all time sector being increasable high nevertheless the building industry is progressively competitory. Cost accounting has been widely discussed in ground old ages, to seek and minimise cost and to better competitory advantage. Traditional costing is seen as the manner path and minimizes cost of development.

“ Cost direction is the procedure of planning and commanding the budget of a concern. Cost direction is a signifier of direction accounting that allows a concern to foretell impending outgos to assist cut down the opportunity of traveling over budget ” hypertext transfer protocol: //

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Improvements to be direction have taken topographic point since the early 1960ss there are many different theories. ( Skoyles 1965 ) discussed a extremist alteration in traditional cost gauging methods that had been proposed in the UK. His theory was non successful due to the clip consuming and besides due to miss of cognition of production methods by Quantity Surveyors at the early phase of the procedure. ( Barnes 1977 ) proposed a less extremist attack to operational cost estimating for building undertakings, proposing the usage of different cost drivers for gauging the cost of resources, which were classified into fixed, measure based, time-based, and monetary value based.

( Glad and Becker 1996 ) provinces effectual cost direction should integrate the followers

Cross a multi-dimensional of costs, labour and works.

Focus less on path and coverage and more on cost planning and control.

Support every key concern determination, including sourcing, pricing, investing, efficiency and productiveness steps, merchandise riddance and new merchandise debut. Therefore, the proposed solution was aimed at extinguishing the root jobs and thereby al the unfavourable phenomena that stemmed from them can be resolve.

Surveies have merely reported on the disadvantages of Traditional Cost Management. The bulk of surveies were taken on the fabrication industry where cost of stuff, labour and selling are the cardinal constituents. The building Industry nevertheless has many constituents were it is hard to cipher cost e.g. clip holds.

New methods of Cost Management have been introduced nevertheless the building industry is slow to implementing these new methods. These methods require strategic set of direction accounting accomplishments.


City Corp is the renovation and update of a 1980 ‘s office edifice located in Perth CBD Western Australia. To run into the client ‘s demands as the new renter. The edifice is 10 narratives high and comprises 20000 M2 of useable floor infinite. The basic public-service corporations substructure and chief works is provided centrally, no work is required within this range of work to the chief mechanical and electrical works. The range of work requires the destruction and remotion of the bing adjustments, coatings and internal dividers, along with amendments and reclamations to the mechanical and electrical installings to suit the new layout. The plants include the building of interior dividers, new ceilings and wall and floor coatings, along with associated MEP plants, IT installings and new furniture.

Pull offing costs is high on the docket for City Corp. There are a figure of steps that can be implemented to see cost is reduced. It is the procedure of gauging, budgeting and commanding cost so the undertaking can be cost effectual.

Estimate Costss: Is a estimate of the resources required to finish the development.

Control Costs: Monitoring sub-contractor, and pull offing alterations to the undertaking.

Determine Budget: Is the pattern of aggregating the estimated costs of a peculiar activity.

Cost direction is the procedure by which building companies control and program the costs of the undertaking. Cost Management is non a good defined term it combines both cost accounting and direction accounting. When decently implemented cost direction will interpret into decreased costs, increased value and over all profitable organisation. There is no legal duty for a company to finish a cost direction program nevertheless it has proven success. Furthermore there is no standard signifier for finishing a building direction program a company can take to make every bit much or every bit small as required.

Activity Based Cost Management

Activity Based Costing is the interrupting up of the undertaking into manageable work battalions where cost and budgeting can be manageable on a little BASIC. This system is a interruption off of Traditional Cost Management

Activity Based Cost Management does non entirely cover with money, its purpose is to near the public presentation of the organisation to supply a more effectual manner of sing its efficiency. Activity Based Cost Management is follows the undermentioned rules:

Figure 2: Activity based cost direction

Activity Based Costing Benefits

Activity based cost direction has legion benefits. As a undertaking progresses throughout the undertaking life rhythm its precedences most critical alterations.

Identifying cost activity centres, helps travel supports directors to work out how to maximise stockholder value and better public presentation. Activity based cost direction besides helps in placing the most and least profitable sectors e.g. inefficient sub-contractors. Activity based cost direction helps developments with cost intelligence to cut down cost.

Other benefits of activity based bing include accurately foretelling costs, net incomes and resource demands associated with alterations in the organisation.

Activity Based Costing Disadvantages

Activity Based costing is non suited for building development as a clear methodological analysis is required. The building industry is prone to clip hold and fluctuations doing it hard to hold a clear methodological analysis.

Activity Based Costing is non suited when utilizing appraisals. It is following to impossible to hold a proper appraisal of the costs for some critical activities such as R & A ; D. When there is a disagreement in one activity in the development it affects the whole undertaking.

Thin Cost Management

Thin Cost Management is a procedure for mensurating, apprehension, and bettering the flow and interactions of all related undertakings in order to maintain the cost and undertaking every bit competitory as possible ( J, Ross, 2011 ) .

Thin Cost direction is a procedure that allows the organisation to track the concern costs.

Provide accurate, seasonably, and understand information to actuate thin transmutation throughout the organisation, and for determination doing taking to increased client value, growing, profitableness, and hard currency flow.

Use thin tools to extinguish waste from the accounting procedures while keeping thorough fiscal control.

Fully follow with GAAP, external coverage ordinances, and internal coverage demands

Support the thin civilization by actuating investing in people, supplying information that is relevant and actionable and that empowers uninterrupted betterments at every degree of the organisation. ( Maskell and kennedy 2007 )


The consequences of practising a thin operation sets a criterion of consistent and flat sums of truth where it is needed to keep a successful development.

The 2nd advantages consequences from the execution of one- piece flow through production. One-piece flow in cellular fabrication line drive removes immense measures of WIP between procedure flows, equipment and machines. Most constituents utilizing the techniques normally cut down their measures of WIP by 50-60 % .

If operations are bring forthing to demand and flux through the valve watercourse in a one-by one productive methodological analysis the consequence in the valve watercourse is drastically reduced stock list shops.


The lone disadvantage for Lean cost direction is that it is excessively effectual. The organisation can bring forth better green goodss, nevertheless the copiousness and fluctuations of new merchandises the consumer loses the overview. The merchandises become antique in a short period of clip. Apple is a illustration of this, as they produce new version of merchandises on a regular BASIC.

Thin cost direction does non impact the building sector due to the consent varies of different undertaking sites.

Traditional Cost Management

Defects or drawbacks of traditional cost direction

Traditional direction has been criticized in sound old ages due to the inaccurate estimations. It has been shown that there was a defect in the methodological analysis.

The chief statements are:

Costing systems in occupation order production require inordinate tracing of costs to single occupations.

Overhead allotment rates are excessively wide, covering broad sets of the operating cost spectrum.

Costss that are driven by variables other than production volume are apportioned to merchandises by volume-based rates.

The numerator of the allotment rate is about ever direct labour hours or direct labour cost, even though direct labour is the driver of few operating expense costs

Allotment rates by and large reflect the premise that all productive resources are expected to run at the same degree of strength ( per centum of extremum runing capacity )

Costss of product-related activities outside the chief fabrication or service-providing centres – chiefly R & A ; D, selling, merchandising, distribution, and guarantee costs – are non identified with the merchandises they support. ( Kaplan 1984 )

It was established that the relationship between cost and clip in the building sector has a big influence on cost direction. ( Navon 1995 ) implied for cost direction to run efficaciously in the building industry it must be dynamic, proactive and able to accommodate to different scenarios. Their chief purpose should be to endorse up any determination made, it helps to concentrate direction on betterments, it is reported that the mean accountant spends up to 75 % of his or her clip on clerking activities and less than10 % on analysis and procedure betterment.

Companies can sometimes cut down preparation and investing to seek and make marks, nevertheless in the long tally this has an larger consequence in the hereafter.

Cost Management Process

In many building companies cost direction considerations are an after though. In other companies cost is a more of import factor but this accent is non acted upon tardily until the development rhythm. Projects costs of production are estimated based on pulling and accumulated from quotation marks and fabricating estimates.A cost direction program is developed during the planning phase of the development. All labour and stuff cost incurred in the undertaking planning stage is tracked in the CMP.

There are three cost direction processes.

Estimating costs involves developing an estimating for the over all undertaking. The chief end products of the cost estimating procedure are activity cost estimating, and undertaking paperss updates, a cost direction program is crated as portion of integrating direction when making the undertaking direction program. It should include information related to the degree of truth for estimation assorted thresholds for supervising cost public presentation study formats, and other related information.

Determining the budget involves apportioning the overall cost estimation to single work points to set up a baseline for mensurating public presentation. The chief end products of the cost budgeting procedure are a cost public presentation baseline undertaking support demands and undertaking paperss updates.

Controling costs involves commanding alterations to the undertaking budget. The chief end products of the cost control procedure are work public presentation measurings, budget prognosiss organisational procedure plus updates, alteration petitions, undertaking direction program updates, and undertaking paperss updates. Schewallbe, Kathy ( 2011 ) . Information Technology Project Management. 6th erectile dysfunction. Boston: Cengage. 255-259.

Figure 1: The relationship between Cost Management Process

The undertaking Cost Plan

Cash flow estimations can supply the information for Cost Management Plans. The concluding cost estimation provides a baseline for the appraisal of fiscal public presentation during the undertaking. To the extent that costs are within the elaborate cost estimation, so the undertaking is thought to be under fiscal control. ( W.H. Lucas and T.L. Morrison 1989 ) .

Due to the complex nature of the renovation a two tear cost direction procedure is used. A cost estimation will be created during planning phase and this will so be converted to a undertaking budget, this will be used as a usher. Delaies and disbursals incurred during the undertaking are recorded and the Cost Management budget is amended. This provides a recorded to compare original and concluding cost. Individual undertakings and sub-contractors can be managed and a unit rate can be calculated. In add-on monetary values for stuff, labour and quotation marks can be retained to better the cost direction procedure.

Input signals

Scope baseline: Is the merchandise description, credence standards, cardinal deliverables, undertaking boundaries, premise, and restraints about the undertaking. One of the most common restraint for many undertakings is limited undertaking budget. Examples of other restraints are required deliverable day of the months, available skilled resources, and organisational policies.

Work Breakdown Structure: The undertaking WBS provides the relationships among all the constituents of the undertaking and he undertaking deliverables.

WBS lexicon: The WBS lexicon and related elaborate statements of work provide an designation of the deliverables and a description of the work in each WBS constituent required to bring forth each deliverables.

Extra information that may be found in the range baseline that includes demands with contractual and legal deductions are wellness, safety, security, public presentation, environmental, insurance, rational belongings rights, licences, and licenses. All of this information should be considered when developing the cost estimations.

Undertaking Agenda: The type and measure of resources and the time-scale in using them in finishing the undertaking are major factors in finding the undertaking cost. Schedule activity resources every bit good as their several continuances are cardinal inputs in this procedure. To gauge activity resources it is of import to find both the handiness and measures required of staff and stuff needed to execute agenda activities. This is merely every bit of import, and rather closely coordinated with cost gauging. Activity continuance estimations will impact cost estimations on any undertaking where the undertaking budget includes an allowance for the cost of funding and where resources are applied per unit of clip for the continuance of the activity. Cost estimations with time-sensitive costs included in them, like brotherhood labour or stuffs with seasonal cost fluctuations, can besides be affected by activity continuance Environmental factors: There are enterprise environmental factors that have to be taken into history as they influence the estimation cost procedure. Amongst others, they include the followers:

Conditionss in the market: Describe the types of merchandises, services, and the consequences that are available in the market, from whom they are available and under what footings and conditions. Supply and demand conditions on both a planetary and regional degree have a big bearing on resource costs.

Published commercial information: Commercial databases that track accomplishments and human resources costs offer resource cost rate information, and supply criterion costs for stuff and equipment. Other beginnings of information include published seller monetary value lists.

Techniques used

Adept judgement: Labor rates, stuff costs, rising prices, hazard factors, and other variables all have a bearing on cost estimations. Expert judgement, guided by historical information, provides valuable penetration about the environment and information from anterior similar undertakings. Adept Judgments are besides valuable in finding whether or non to try to accommodate differences that occur as a consequence of the different agencies deployed in doing estimations.

Analogous estimating: Uses the values of parametric quantities, such as range, cost, budget and continuance or step of graduated table such as size, weight and complexness, from a old, similar undertaking as the footing for gauging the same parametric quantity or step for a current undertaking. In the appraisal of costs, the existent cost of old, similar undertakings is used as the footing for gauging the cost of the undertaking at manus. The attack taken is a gross valve gauging attack, which is sometimes adjusted for no differences in undertaking complexness.

The type of cost appraisal is often used to find a parametric quantity when there is a scarce sum of elaborate information about the undertaking for illustration, in the early stages of a undertaking. Historical information and expert judgement are valued extremely in such estimations.

Equally good as this, correspondent cost estimating is by and large cheaper to transport out and less clip devouring when compared with other techniques. However it has besides been deemed to be less precise. Such estimations can be applied to a undertaking in its entirety, or to peculiar sections of a undertaking, deployed in concurrence with other methods of appraisal. It is most dependable when the old undertakings are similar in fact and substance, non merely in visual aspect, and the undertaking squad members fixing the estimations have the needed expertness.

Parametric Estimating: This method uses a statistical relationship between historical informations and other variables like square footage in building, to get at an estimation for activity parametric quantities, such as budget, continuance and cost. Higher degrees of truth can be attained utilizing this technique, depending upon the complexness and cardinal information built into the theoretical account. Equally good as this, parametric cost estimations can be applied to a entire undertaking or to section of a undertaking, paired with other methods of appraisal.

Bottom-up Estimating: Is a agency of gauging the work of a constituent. Highly accurate estimations can be provided as to the cost of the single work bundles or activities. A sum-up of the elaborate cost is given or ‘rolled up ‘ to higher degrees for subsequently describing and tracking intents. The cost and preciseness of bottom-up cost gauging characteristically influenced by the size and complexness of the single activity or work bundle.

Figure 3: Illustrates the method for a successful Cost Management.

Figure 3: determine Budget: Inputs, tools & A ; Techniques, and end products.

End products

Activity cost estimations: Is a quantitative appraisal of the likely costs required to finish undertaking work. Cost estimations can be presented in drumhead signifier or in item. Costss are estimated for all resources that are applied to the activity cost estimation. this include, but is non limited to, direct labour, stuffs, equipment, services, installations, information engineering, and particular classs such as an rising prices allowance or a cost eventuality modesty, Indirect costs, if they auto included in the undertaking estimation, can be included at the activity degree or at higher degrees.

Footing of Estimates: The sum and type of extra inside informations back uping the cost estimation vary by application country. Regardless of the degree of inside informations, the back uping certification should supply a clear and complete apprehension of how the cost estimation was derived.

Document associated with Activity Cost estimations.

Paperwork associate with the estimation

Paperwork associate with premises made

Paperwork of any know restraints

Indication of the assurance degree of the concluding estimation.

Tracking cost during the undertaking

Tracking cost during a undertaking is documented in every undertaking nevertheless cost direction has an extended method. The three cardinal paperss used in cost direction are:

Document Expense Forms

Approve Expense Forms

Register Expense Forms

Document disbursal signifiers provide answerability for bills, measures of ladling and history statements. It is besides used to track clip sheets and works records.

Approve disbursal signifiers are a method that insures the undertaking is run intoing local fiscal ordinances. Specific codes, blessing and reappraisals are necessary for these signifiers.

Register disbursal signifiers are an accounting tool that tracks all disbursals verses hard currency flow. Two accounting methods can be introduced hard currency or accrual method.

Method used for renovation of office block.

To forestall failure in the renovation, a cost direction procedure is implemented it ensures answerability and provides a tracking system to forestall over disbursement.

Research suggested that Lean Cost Management and Activity Based Cost Management were more suited to fabrication and commercial industries. Whilst activity based costing is non a perfect scientific discipline it does offer a sense of fiscal pragmatism to the wider direction procedure. Therefore it has been shown that Traditional Cost Management best suits this development due to the big and unsure nature of renovation. Certain elements can be estimated nevertheless these alteration due to unsure fortunes. It is good known that Traditional Cost Management use a individual, volume-based cost driver, this is suited to the development as merely one point of position is being expressed.

Traditional Cost Management is bettering every twelvemonth. New methods are being introduced nevertheless the building sector is slow to take part in turning procedure.


It is a common theory that 90 per centum of building undertakings are completed, tardily or over budget. The undertaking of cost direction is to supply a traceable record of the undertaking and to give a word picture to the ground for the holds and the cost implemented. It is difficult to interoperate undertaking histories until the development has been accomplished, and so it is excessively late to act upon project direction. A successful Cost Management process helps to cut down this hazard. Cost economy is achieved successful during planning and design for the development. Changes during building are likely to increase the undertaking budget and detain the development Cost Management tracks these alterations supplying grounds if contract have been broken by any party.


Based on the findings it can be concluded that tradition cost direction is best suited for the development, it was proven that traditional is best used in the building industrial sectors.


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