1. Problem Recognition and Definition.
Command method used to calculate overhead costing and execution scope contracting is assumptions and industrial best practice method. Most often these methods are hit and miss as cost estimation does not give an actual exposure or relativity to the scope of work being executed.
2. Feasible Alternatives
These are some of the methods commonly used in costing
ABC- Activity Based Costing
Is a method of coating based on actual worked executed calculated with time , labor and material cost within a given parameter
Also known as previously known cost, where by cost is estimated form a similar job executed/ done previously
3. Tools & Techniques
WBS – Work Breakdown Structure
Figure 1: Sample Work Breakdown Structure
WBS provides a structured / steps it will take a task or an activity to be completed where cost can be related to each of these steps to come up with an accurate costing .
4. Results and Explanation
Below is a comparison between ABC and Traditional costing .
Assume the Busy Ball Company makes two types of bouncing balls; one has a hollow center and the other has a solid center. During the year, Busy Ball expects to make 1,000,000 hollow center balls and 2,000,000 solid center balls. The overhead costs incurred have been allocated to activity pools as follows:
By analyzing the activity pools, the accountants and production managers have identified the cost drivers, estimated the total expected units for each product, and calculated the unit cost for each cost driver.
The activity by product is shown in the following table.
To calculate the per unit overhead costs under ABC, the costs assigned to each product are divided by the number of units produced. In this case, the unit cost for a hollow center ball is $0.52 and the unit cost for a solid center ball is $0.44.
Under the traditional method of allocating overhead based on direct labor dollars, the total costs for all balls would be divided by total direct labor dollars for all balls to determine the per unit cost. Estimated direct labor costs for the year are $1,512,000, of which $378,000 is for hollow center balls and $1,134,000 is for solid center balls. The per unit direct labor costs are $0.38 for hollow center balls ($378,000 ÷ 1,000,000) and $0.57 for solid center balls ($1,134,000 ÷ 2,000,000). The per unit cost to produce balls is calculated in two steps:
- Calculate the predetermined overhead rate by dividing total overhead costs by total direct labor dollars.
- Allocate overhead to each type of product by multiplying the overhead cost per direct labor dollar by the per unit direct labor dollars for hollow center balls and for solid center balls.
5. Selection Criteria
Based on the sample costing above and the results shown below it is obvious that The ABC method provides an accurate and quantifiable costing.
By using the ABC method we will remove the guessing out of the process in costing activity . The ABC method provide as close to true pictures on cost involved in various stages and also provides an accurate monitoring process throughout the project or process lifecycle.
1. CliffsNotes.com. Activity-Based vs. Traditional Costing. 16 Feb 2012
2 . expertprogrammanagement.com WBS (Work Breakdown Structures):Everything you need to know. March 2010. http://www.expertprogrammanagement.com/2010/03/wbs-work-breakdown-structures-everything-you-need-to-know/
3. Anderson T.K. Activity Based Costing in Project Management. Retrieved from http://pmstudent.com/activity-based-costing-in-project-management/