Activity Based Costing for Construction Companies

Yong-Woo Kim is Associate Professor of Construction Management in the Department of Construction Management at the University of Washington, Seattle, WA, USA. He teaches undergraduate and graduate courses in construction accounting, project delivery systems, lean construction and project cost analysis. His primary research interests are lean project delivery systems, sustainable construction and project cost management.

• Preface ix1 Introduction 11.1 What comprises costs in a construction company? 21.1.1 Construction costs (project costs) 31.1.2 Overhead costs in a construction company 31.1.3 The cost classification in use and the duality of overhead costs 51.2 Overhead costs in new business environments 61.3 Role of overhead cost management 101.3.1 Overhead costing system should provide accurate costing on cost objects 101.3.2 Overhead costing system should contribute to reducing total costs without sacrificing value 111.4 Structure of this book 11References 122 What Is Activity-Based Costing? 152.1 Traditional accounting method: resource-based costing with volume-based allocation 162.1.1 Resource-based costing 162.1.2 Overhead costs allocation 172.2 What are the problems with the current method? 182.2.1 Is the current method contributing to reducing total costs? 192.2.2 Does the current method provide accurate pricing? 192.3 What is activity-based costing? 202.3.1 Definition 202.3.2 Characteristics of ABC 212.3.3 Objectives of ABC system 252.4 Implementing activity-based costing 262.4.1 Develop an activity-based costing charter 262.4.2 Define cost objects 272.4.3 Identify activities 282.4.4 Assign resource costs to activities 292.4.5 Assign activity costs to cost objects 322.5 Chapter summary 35References 363 Managing Overhead Costs in Construction Projects 393.1 Project overhead costs as profit points 403.2 Implementing ABC to manage project overhead costs 423.3 Case study: xx Commercial Complex 423.3.1 Developing an activity-based costing charter 433.3.2 Workshop 453.3.3 Defining cost objects 463.3.4 Identifying activities 473.3.5 Assigning resource costs to activities 483.3.6 Assigning activity costs to cost objects 533.4 Using ABC data for managerial purposes 583.4.1 Evaluating management areas with activity analysis 643.4.2 Evaluating subcontractors 683.5 Chapter summary 70References 704 Managing Your General Overhead Costs 734.1 General overhead costs 744.2 Managing general overhead costs 754.2.1 Accurate general overhead allocation 754.2.2 Providing a process view for process improvements 794.3 Does current practice for managing general overhead costs work? 804.3.1 Resource-based costing 804.3.2 Volume-based assignment 804.4 How can ABC be implemented in managing general overhead costs? 824.4.1 Case study: xx Construction (general contractor) 824.5 How can ABC data be used in managing general overhead costs? 924.5.1 Cost driver analysis 934.5.2 Profitability analysis for each project 934.5.3 Profitability analysis for each market sector 974.5.4 Profitability analysis for each customer 1044.6 Chapter summary 105References 1055 Managing Overhead Costs in a Fabrication Shop 1075.1 Rebar supply system 1085.2 Case study: PQR Construction Inc. 1115.2.1 The rebar fabrication shop’s cost structure 1115.2.2 Allocation of rebar fabrication shop’s costs to projects 1135.3 Analysis using traditional rebar costs allocation 1135.3.1 Identify cost objects and direct costs 1145.3.2 Identify the overhead costs to be allocated and calculate the allocation base 1145.3.3 Calculate the overhead costs allocated to each project 1165.4 Analysis using activity-based costing 1175.4.1 Determining system objectives and defining cost objects 1185.4.2 Identifying resources and activities 1195.4.3 Assigning resource costs to activities 1205.4.4 Determining a cost driver for each activity 1225.4.5 Calculating a unit rate of activity costs (cost driver rate) and allocating activity costs to cost objects 1245.5 How can ABC data be used for managerial purposes? 1255.5.1 Accurate cost information through overhead cost allocation 1255.5.2 Cost information on processes 1275.5.3 Cost driver analysis 1295.5.4 Ways to reduce overhead costs 1305.6 Chapter summary 130References 1326 Activity-Based Costing in Your Organization 1336.1 The benefits of the ABC journey 1346.2 Implementation roadmap for ABC 1386.2.1 Concept-level roadmap 1386.2.2 Implementation roadmap for a focused application 1396.2.3 Phase 1. Planning stage: preparing for your ABC journey 1406.2.4 Phase 2. Execution stage: developing your ABC system 1446.2.5 Phase 3. Internalization stage: final tune-up 1546.3 Common mistakes in the journey 1566.3.1 Beginning your ABC journey without strong commitment from top management 1566.3.2 Beginning your journey with poorly defined objectives and scope 1576.3.3 Developing a task force that does not have the necessary authority 1576.3.4 Developing more cost objects than needed 1586.3.5 Making activities ambiguous 1586.3.6 The effect of distorted time–effort % assigned to activities 1596.3.7 Choosing cost drivers that are hard to measure 159Index 161