Activity-Based Costing in Project Management
1.0?????? Introduction and Background of the Case The opportunity is to develop an integrated management system utilizing ABC concepts to plan, measure, and control costs that allow managers to focus on process performance and to make informed decisions along the product/service/project life cycle.
It is assumed that the reader is familiarized with common terms used in project management. Figure 01: Wideman Comparative Glossary of Common Project Management Terms v3.1 is available in the appendix.
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Figure 01: Wideman Comparative Glossary
During economic recession, organizations face many challenges. Organizations are often quick to shut down, secure the turf, or start cutting staff positions. Organizations that are dysfunctional tend to look backwards and hire managers who make snap decisions without enough data. This can often lead to organizational collapse. Forward-looking organizations that look for opportunities in times of economic recession tends to focus on process improvements such as business-process analysis, activity based costing, and life cycle compression metrics.
This case study adopts a forward-looking perspective. Next, we will discuss activity-based costing. This is followed by a discussion of concepts and methods that were discovered during research on several other case studies. Next, an introduction and description will be given to some basic project management processes. Then, a simple case is followed by the conclusion.
2.1?????? Activity Based Costing (ABC), IntroductionABC was created as an improvement initiative for the accounting information system. ABC was originally used to cost products. However, ABC is now being used in cost management for many business functions (Awasthi 1994, p 8). There are two main differences between ABC and traditional cost systems: 1) costs are traced back to cost objects by identifying cost drivers, and 2) costs can be traced back to the structural or hierarchical level at the cost of incurred. ABC provides more accurate estimates of the cost of the product or service as well as the activities associated with it than traditional costing (Kee 1995, p 49).
2.2?????? Activity Based Costing (ABC), Discussion
It is important to remember that traditional costing assumes that products consume resources. ABC differs from traditional costing in that it assumes that products consume activities and resources consume activities. Once the product and service activities have been identified, costs are assigned to the product or services based on the amount incurred by those actions. This method of allocating cost provides an advantage for project accounting and profitability decisions (Awasthi 1994, pp 9-10).
Two costs are associated with accuracy of ABC cost information: 1) cost of measurement and 2) the cost of decision error. The cost of decision errors rises as accuracy in measurement decreases. The success of an ABC system is dependent on the quality of detail. However, the detail must add value. It is important to control environmental changes (competition volatility, profit margins etc ) while still allowing for diversity through the product’s life cycle (Awasthi 1994, p 11). How can one ensure that measurements are accurate for better decision-making? The key to accuracy in measurements is to be ide