W4.0_MV_Reliable Costing Methods


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

Traditional Costing

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:

  1. Calculate the predetermined overhead rate by dividing total overhead costs by total direct labor dollars.
  2. 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.  

6.       Conclusion

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.   

7.       Reference 

1. CliffsNotes.com. Activity-Based vs. Traditional Costing. 16 Feb 2012
<http://www.cliffsnotes.com/study_guide/topicArticleId-21248,articleId-21226.html&gt;.

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/

1 thought on “W4.0_MV_Reliable Costing Methods

  1. OUTSTANDING content…..!!!! But your formatting is still not quite there yet….. 😦

    Where is your “Step 7”? Go back to Engineering Economy, pages 12 & 13, paragraph 1.3.7. How do you intend to MONITOR your project to see if implementing Activity Based Costing was or was not a good choice? The problem in many companies is, management makes interventions, then never follow up to see if they actually solved the problem or did they create new ones. Taking the Engineering Economics or “Cost Engineering” approach, we have a responsibility to follow up to see if our decisions were in fact, good ones. And if not ,then we need to go back and start again.

    Also, your references were dodgy at best. Citing “Cliff Notes” (or Wikepedia) is NOT something I recommend as a professional. There are no shortage of very good papers on Activity Base Costing out there….
    http://www.offtech.com.au/abc/

    Click to access ABC_Whitepaper.PDF


    http://www.sas.com/solutions/abm/

    Click to access Increasing_Clinical_Trial_Efficiencies_with_Activity-based_Costing.pdf


    http://finance.toolbox.com/wiki/index.php/Activity-based_costing

    Click to access Practical_Applications_of_ABC_Whi_Eng_004236.pdf

    Compare the references above (which took me less than 5 minutes to locate) against the references you provided. Need I say more………?????

    Lastly, you need to cite your references properly. For books, this is what you need to do-
    (See http://owl.english.purdue.edu/owl/resource/560/08/)
    Author, A. A. (Year of publication). Title of work: Capital letter also for subtitle. Location: Publisher.

    For electronic sources, this is what they need to look like-
    (See http://owl.english.purdue.edu/owl/resource/560/10/
    Author, A. A., & Author, B. B. (Date of publication). Title of article. Title of Online Periodical, volume number(issue number if available). Retrieved from
    http://www.someaddress.com/full/url/

    Mohan, while you are definitely improving, you need to slow down a little bit and focus on producing a better quality product, not only in terms of content, but also in terms of format. Why? Because when you submit your paper to AACE, they are going to be grading you not only on content, but also on formatting.

    BTW, the early date for your blog posting is Sunday/Monday, and leaving this (or any activity!!) to the Thursday/Friday late dates is a very risky practice. (And as Program Manager, don’t you have the obligation of leading by example?) If you can get away with it, then why can’t your subordinates and team? Something to think about…..

    Looking forward to seeing a 5 star posting for W5, posted early in the week. 🙂 🙂 🙂

    BR,
    Dr. PDG, Jakarta

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