To investigate some of the activities within a company’s department, we chose a department that we are interested in within GLY Construction Company, assess some of its activities, and provide a definition for each activity. Further, we create our cost driver table for each activity. Once activity-based costing system is employed, we determine how a construction contractor develops it and the expected benefits when it is employed.
However, we need to provide few definitions of activity-based costing system costs associated in order to give readers a deep insight of what this report is about. Further, explaining the purpose of activity-based costing is essential before presenting a cost drivers table.
This …show more content…
This indicates that by applying ABC, we can report the activities and its processes unlike the traditional costing method.
Pretko (2010) supports Kim and Ballard by saying “activity-based costing (ABC) can accurately determine the true cost of products and services by assigning costs based on services performed by distributor resources. It 's a valuable tool for managing costs and improving performance.” To put it another way, ABC helps not only on determining the true cost but on tracking the cost for each activity.
From above, we can say that activity-based costing system is effective to determine how many resources needed for each activity and the costs associated with each activity. When employing ABC, we are eliminating the cost distortion that is typical in traditional costing. Moreover, all activities become relevant to costs since processes are …show more content…
Activities with their cost drivers and a unit cost for each
4 Benefits of Activity-Based Costing System
From this project, we learned that ABC is useful in the construction industry since it obtains the accurate cost for an activity that can be used for future uses once it is obtained. However, from our interview with Sr. estimator Mark Humphreys, he explains:
I don’t see many benefits to GLY as we have an open book with almost all of our clients and they do not want to pay for any costs that are not directly associated with their project. I don’t see it working very well on a public lump sum bid project either as you most likely won’t get the job since your costs will be higher than the other bidders.
In other words, they do not use neither activity-based costing system nor cost driver on each activity. They tend to be honest with their clients especially in public lump sum where they don’t want to add more costs to the bid in which it may cause them to lose the