Activity Based Costing_ABC

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    Activity Based Costing_ABC

    INTRODUCTION
    Activity Based Costing (ABC) is a method for developing cost estimates in which theproject is subdivided into discrete, quantifiable activities or a work unit. The activity must be definable where productivity can be measured in units (e.g., number of samples versus manhours). After the project is broken into its activities, a cost estimate is prepared for each activity.
    These individual cost estimates will contain all labor,

    materials, equipment, and subcontracting costs, including overhead, for each activity. Each complete individual estimate is added to the others to obtain an overall estimate. Contingency and escalation can be calculated for each activity or after all the activities
    have been summed.

    ABC is a powerful tool, but it is not appropriate for all cost
    estimates

    ACTIVITY BASED COSTING METHODOLOGY
    For many years, construction firms and industry trade groups have collected cost data from a multitude of different construction projects. The amount of work associated with that cost was also collected with the cost data.
    For example, collected data included the
    cost of the paint, labor, equipment, and overhead to paint a room, the amount of surface area painted, and the manpower required to paint the room. This practice allowed
    construction professionals to obtain a cost per area and manpower per area.
    These costs
    are based on an activity, such as painting, and are known as ABC

    Activity Based Costing Definition
    ABC can be defined by the following equation:

    C/A = HD + M + E + S

    where
    C/A = Estimated cost per activity
    H = Number of labor hours required to perform the activity one time
    D = Wages per labor hour
    M = Material costs required to perform the activity one time
    E = Equipment costs to perform the activity one time
    S = Subcontracting costs to perform the activity one time

    The total cost for performing the activity will be based on the number of times the activity is performed during a specific time frame. Cost estimators have assembled large databases of activity based cost information.
    The R.S. Means Company updates its published cost references on a yearly basis, and they are an excellent source of ABC information for the construction industry

    Identification of ActivitiesWhen defining an individual activity, the cost estimator must balance the need for accuracy with the amount of time available to prepare the estimate. An estimator
    may be able to develop an extremely accurate cost estimate by defining smaller and smaller activities; however, the amount of time required to prepare ABC estimates for each of these activities may not justify the increased accuracy.
    The total estimated project cost may be sufficiently accurate if 10 activities are used instead of 15. On the other hand, reliable cost information may not be accessible if the activity categories are too general. Since the activity is the basis for the estimate, it is very important that the activity be selected correctly

    ... ... ... ... ... ... ...


    Example of an Activity Based Costing Estimate

    To get a better understanding of how an ABC estimate is developed, assume that you have been asked to prepare a cost estimate for a site evaluation. To verify that there is no contamination at the site, subsurface soil samples will have to be collected.
    The area of the site is known, and the guidelines for the number of
    samples per unit area has also been given.

    1. Site: Atlases ****ls _now out of business

    2. Objective: Collect and analyze subsurface soil samples to determine if contamination exists from past usage of the 1,000 square-foot-yard area.

    3. Sampling Requirements: One sample per 100 square feet, and sample depth is 5 feet

    The following activities would be involved:

    mobilize equipment and personnel,
    drill hole for sample,
    collect sample,
    decontaminate equipment between samples,
    prepare all samples for analysis,
    demobilize equipment and personnel,
    analyze samples.

    Equipment needs are as follows:

    Hand-held auger for sample collection ($100.00/day flat rate)
    Safety equipment for site personnel (gloves, safety glasses, and protective equipment at $10.00/person/day)

    Material needs are as follows:

    Sampling containers and labels ($1.00/sample)
    Water to clean the auger between samples (5 gallons/sample at $.30/gallon)

    The auger requires two people to operate it. Site mobilization and demobilization will take a total of 1 hour. Local labor rate is $15.00/hour for all disciplines. A 2- person crew can prepare 10 samples for analysis in one hour. The laboratory charges $1,000.00/sample for analysis

    Number of hours required to perform the activity = 12 hours

    Wages per labor hour = 2 x $15.00 x 2.5 = $75.00/hour

    Labor cost per sample = (12 x 75) ÷ 10 = $90.00/sample

    Materials costs = (10 x $1.00 + 2 x (2 x $10.00) + 10 x 5 x $.30) x 1.2 = $78.00

    Materials cost per sample = $7.80/sample

    Equipment costs = (2 days x $100.00/day) x 1.2 = $240.00

    Equipment cost per sample = $24.00/sample

    Subcontractor cost per sample = ($1,000.00 x 1.15) = $1,150.00

    C/A = (HD + M + E + S)/sample

    C/A = $90.00 + $7.80 + $24.00 + $1,150.00 = $1,271.80/sample

    If the area requiring sampling increases or decreases, the number of samples can be recalculated using this ABC

    APPLICATION OF ACTIVITY BASED COSTING

    As can be seen from the example, ABC can be a useful cost estimating tool for nonconventional and construction projects. However, there are some activities that are more appropriately estimated using other cost estimating techniques. For example, site security may always be required at some facilities regardless of the number of employees at the facility or work being conducted at the facility.

    ABC estimating is especially useful in instances where the number of activities is uncertain or may change during the estimate process. Referring back to the ABC estimate example, if the number of samples changed, it would be fairly easy to recalculate the cost of the sampling

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