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Activity Based Costing in Construction Industry - Assignment Example

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The author examines the activity-based costing which is designed to overcome the problems with traditional costing by going beyond just allocating costs to products and services.   ABC improves the cost information available to management by identifying the cost drivers…
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Activity Based Costing in Construction Industry
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Download file to see previous pages Therefore, traditional costing methods in modern production and manufacturing environment do not paint an accurate picture of the actual product costs because the business processes have become more complex over time and are less labor intensive than in the past.
Traditional costing in the services industry usually allocates indirect costs based on service volumes or the number of services provided. These cost methods do not take into consideration the dynamic services that are available in the current environment. The service industry has advanced greatly, and the costs associated with those services have grown with it. The traditional allocation of general, administrative, and other costs for services provide little information about the operating activities that generate these overhead costs (Tseng & Lai, 2007). Traditional cost measures distort product and service costs and have a tendency to undercut complex processes and overcast uncomplicated processes (Tseng & Lai, 2007). In contrast, ABC is designed to overcome the problems with traditional costing by going beyond just allocating costs to products and services. ABC improves the cost information available to management by identifying the cost drivers (Tseng & Lai, 2007). The cost drivers are the factors that influence the cost of activities or the work performed within an organization (Tseng & Lai, 2007). Identification of the cost drivers allows the organization to gain a better understanding of the cost behavior of activities and determine the root causes of the overhead costs (Tseng & Lai, 2007).
ABC is defined by Barron’s Dictionary of Accounting Terms (Siegel & Shim, 2000) as “a costing system that identifies the various activities performed in a firm and uses multiple cost drivers to assign overhead costs to products” (p. 15). The principal function of an activity is to convert the organization’s resources into outputs. ...Download file to see next pagesRead More
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