Ayachit et al, International Journal of Advanced Engineering Research and Studies

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Research Paper

ACTIVITY BASED COSTING IN CONSTRUCTION

PROJECTS
1

Abhishek C Ayachit, 2P.M. Attarde, 3Swapnil Kulkarni

Address for Correspondence

1

Civil, M.E appeared (CT &M) Department, S.S.G.B.C.O.E.T Bhusawal MH, India
2
Associate Prof Civil, M.E Structure, S.S.G.B.C.O.E.T Bhusawal MH, India
3
Director, Ethika Engineering Solutions (I) Pvt.Ltd, Pune, MH, India

ABSTRACT
There are so many approaches have been used for repetitive construction projects towards optimizing time and cost. In this
project we have implemented a proposed theoretical model for effective utilization of Activity Based Costing to get optimum
duration and cost. Generally critical path method is used for repetitive type of construction but in this project we use activity
based costing grant chart to find the duration of project. The goal of any construction project is to complete the project
within the estimated time and with minimum cost. The delay in a construction projects affects both owner and contractor.
The main goal of this study is to find out the optimum duration for the completion of project. In this project the data is
collected from the housing construction project. The expected time for the completion of project is finding out by using the
grant chart and by software. The collected data is analyzed and find out the optimum duration and cost. The outcomes of the
project will be shown that there still have rooms for construction process improvements with the application of Activity
Based Costing.
KEYWORDS Activity based costing, Grant chart, cost, duration.

1.1 INTRODUCTION
Activity Based Costing is a costing approach that
assigns resource costs to cost objects such as
products, services, or customers based on activities
performed for the cost objects. The premise of this
costing approach is that a firms products or services
are the results of activities and activities use
resources which incur costs. Costs of resources are
assigned to activities based on the activities that use
or consume resources (resource consumption
drivers), and costs of activities are assigned to cost
objects based on activities performed for the cost
objects (activity consumption drivers). ABC
recognizes the causal or direct relationships between
resource costs, cost drivers, activities, and cost
objects in assigning costs to activities and then to cost
objects. ABC assigns factory overhead costs to cost
objects such as products or services by identifying
the resources and activities as well as their costs and
amounts needed to produce output. Using resource
consumption cost drivers, a firm determines the
resource costs consumed by activities or activity
centres (activity cost pools) and calculates the cost of
a unit of activity. The firm then assigns the cost of an
activity to products or services by multiplying the
cost of each activity by the amount of the activity
consumed by each of the cost objects.
1.2 Objective of Study
The goal of any construction industry is to achieve
higher productivity with optimum duration and
optimum cost. The present study aims to evaluate the
effective management of activities to achieve the
optimum duration for project.
The objectives of the project are
To study the concept of activity based
costing in construction projects.
To involve the study regarding unnecessary
activity & losses occurring during the
project.
Identifying the sources of activities using
software base & compare with actual project
on site.
Analysis the above collected data.
To give the discussion and suggestion for
effective activity based costing management
for construction project
Int. J. Adv. Engg. Res. Studies/IV/I/Oct.-Dec,2014/09-14

1.3 Methodology
At initial stage the project will be studied from
Details drawings obtained from construction site.
Planning of all the activities will be done and
scheduling will be done depending upon the number
of activities in Software.
The data is collected from the housing construction
project. The data is based on the residential buildings
consisting of various types of blocks. The following
data is collected from the construction site for various
types of blocks i.e. expected Completion time of
project, Quantity of work for each activity,
optimistic, pessimistic and most likely time for each
activity, expected skilled and unskilled labor required
for completion project etc.
Analyze the above collected information and prepare
a result. In the analysis to minimize the overall
project duration in the construction projects by
activity based and spread sheet are used to prepare
optimum scheduling for the effective utilization of
the project on the basis of data collected from
housing project.
To outcome of this will be feasibility of the project
before execution, during execution and after
execution can be analyzed.
2 PREVIOUS RESEARCHES
2.1 Cost object
Traditional costing methods normally utilize a single
cost object a product or service. However, an
effective and accurate costing system has to
incorporate multiple cost objects. The activities are
classified as
1. Unit level activities, which are performed each
time a unit of a product or service is produced.
2. Batch level activities, which are performed each
time a batch of goods is produced(1)
Reciprocal allocation method allocates costs by
recognizing that the support departments provide
services to each other as well as to the production
departments jobs, or project. (2) The stage of the
ABC system attributes activity costs to the cost
objects, through cost drivers which correlate the
activities with those products and services. Cost
drivers are used to identify the way activities are
consumed by products/services.(3) Seven behavioral
and organizational variables are important to cost

Ayachit et al, International Journal of Advanced Engineering Research and Studies

management practices identified they are: Top

management support; linkage to
competitive
strategies,
performance
evaluation
and
compensation, non-accounting ownership, sufficient
resources, training in designing, implementing and
using cost management system and consensus about
the clarity of the objectives of the cost management
system, indicators as behavioral and organizational
variables reviewed.(4)Despite the many advantages
to be derive from the adoption of ABC and activitybased management (ABM), the adoption of these
techniques has been low in practice. Although there
has been a growing awareness of ABC and ABM
over the past decade,
the overall rate of
implementation has been low.(5)
Continuous
improvement of ABC can give a better solution of the
problem. The implementation of ABC can make the
employees various cost involved. This will then
enable them to analyze the cost, and to identify the
activities that add value and those that do not add
value. Finally, based on this, improvements can be
implemented and the benefit s can be realized. This is
a continuous improvement process in terms of
analyzing the costs, to reduce or eliminate the nonvalue added activities and to achieve an overall
activity. (6)
The allocation of cost to each activity center depends
on activities that are performed. Any activities that
are not related to the specific cost elements are
eliminated, as those activities do not add values to the
ultimate goal of the division.(7)
Critics of ABC generally fell into two camps. Some
argued that ABC was inconsistent with the principles
of continuous improvement and total quality
management. They wrote that ABC lacked customer
focus, was not process-oriented, did not enhance
organizational learning, and was top down in
approach (i.e., did not involve employees). Other
argued that ABC was inconsistent with the theory of
constraints. A common argument was that ABC
could not reliably measure the short-term impact of
decisions on operating costs, inventory and
throughput.
These
criticisms
reflected
a
misunderstanding of the purpose and nature of ABC.
Early versions of ABC were designed to reveal
strategic insight into sources of profitability. The
intention of ABC was neither to provide day-to-day
guidance on process quality nor to measure shortterm variable costs.(8)
Table 2.1 shows the basis of Activity Based Costing
is the assumption that cost objects (products, projects,
customers, divisions etc.) consume activities and
activities consume resources. First resources are
allocated to the activities (through so called resource
cost drivers) and then to the cost objects, through so
called activity cost drivers.(9)

Fig 2.1 Activity Based Costing Method

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Activity-based costing (ABC) is defined as a

methodology that measures the cost and performance
of activities, resources, and cost objects. Specifically,
resources are assigned to activities, then activities are
assigned to cost objects based on their use. ABC
recognizes the causal relationships of cost drivers to
activities. ABC begins with the companies products,
determines the activities used in the production and
delivery of those products, and computes the costs of
various activities. The costs of the activities used in
the production of a product are then assigned to that
product in a manner that approximates a causal
relationship.(10)
Table 2.1 give any idea of how Operational ABM
works to enhance efficiency, lower costs and asset
utilization. It can increase the capacity of resources
by reducing machine downtime, improving or
eliminating entirely faulty activities and processes
and increasing the efficiency of the organizations
resources. The benefits from operational ABM can be
measured by reduced costs, higher revenues through
better resource utilization and cost avoidance.

Fig 2.2 Operational Activity Based Costing

3. STUDY OF ACTIVITY BASED COSTING IN

CONSTRUCTION PROJECTS
Manufacturing cost involves the conversion of raw
materials into finished products through the efforts of
workers and the usage of production equipment. The
cost of a manufactured product consists of three basic
elements: direct material, direct labor and
manufacturing overheads.
Direct materials are those materials that become an
integral part of a companys finished product and that
can be conveniently traced to the finished product.
Direct labour is reserved for those labor costs that can
be physically traced to the creation of products in a
hands-on sense, and can then be easily traced
without undue cost or inconvenience. Manufacturing
overheads can be simply defined as all costs of
manufacturing except direct materials and direct
labour. Included in this classification are such costs
as indirect materials, indirect labor, heat and light
(utilities), property taxes, insurance, depreciation on
factory facilities, repairs, maintenance and all other
costs of operating the manufacturing divisions of a
company. ABC which states true cost accounting
operations were established to capture and distribute
costs to the output goods or services. These cost
accounting operations use the classic model of cost
distribution which was designed around the major
factors of production: direct labour, direct materials
and overheads.
Product costs consist of the costs involved in the
manufacturing of goods such as direct labour, direct
material and manufacturing overheads. To cost the

Ayachit et al, International Journal of Advanced Engineering Research and Studies

product using the cost structure base illustrated

above, direct labour, direct materials and
manufacturing overheads are attributed or allocated
to the single unit of product.
Traditional methods trace the direct labour and direct
material into the certain single product unit by the
product volume. That is:

Fig 3.1 shows traditional cost systems that

misallocate the overhead costs, ABC traces costs by
using resource and activity drivers that reveal
activities and objects consumption patterns on the
basis of the cause and effect relationship. In activity
costing systems, there are three building blocks: the
resources, the activities and the cost objects.

Fig 3.1: Building blocks in activity based costing

Table 3.1 Allocation bases for traditional method and
ABC
Sr.
Activity-based
Indirect Cost
Traditional
No.
costing
Production
No. of process
Direct labour hours
1
control
operations
2
Inspection
No. of inspections Direct labour hours
Warehousing
Receipts and issues Direct labour hours
3
stores
4
Purchasing
Purchase orders Direct labour hours

The change is calculated by using the following

formula:

Table 3.1 shows the allocation of traditional method

and ABC. The distortion by traditional cost is very
dangerous as compared to ABC and also the direct
labor hour by traditional method is much more as
compared to ABC analysis.
The activity in the construction project should be
properly organized for smooth performance of work.
As depicted in Figure 3.2, direct labour, materials,
machine costs and energy are classified as unit-level
costs, whereas the setups and purchase orders
activities belong to the batch-level class. Maintaining
engineering change notices or process engineering
are product-sustaining activities. Plant management,
buildings and grounds maintenance, heating and
lighting are activities that sustain the factory.

and as per the activity the planning will be

done and executed on site.
2. The site contains Six Shops and Twelve
Flats the total area of project is 15,091sqft
and total cost of project is 1,89,96,293.24 by
traditional method..
3. The data is taken from site and planning is
done in software and Grant Chart is
prepared showing activities and their
resources.
4. Initially the data collected from site the
activities are allocated and cost of each
activity allocated as per data given by site
engineer shown in Table 4.1
5. The activities are placed in software
(Microsoft
Project
Planning)
and
accordingly the duration is allotted along
with the resources shown in Table 4.2.
6. From the activities placed in software the
entire cost of project is calculated as per
planning.
7. The duration difference by actual planning
& by traditional method is calculated and
with that difference the cost is also worked
out.
8. From Microsoft Project Planning initially
WBS (Work Break Down) structure is made
and for each activity tentative days are
allocated by knowing experience of the
contractor shown in Table 4.2
9. The estimate is prepared for each items that
is included in construction work.
10. The cost is allotted for each activity
depending upon the quantity of work.
11. The total quantity of work is calculated and
then planning and scheduling is done for
entire project.
The allocation of materials is done on site
for each activity and accordingly planning is done.
Table 4.1 Activity Distribution by Planning
Method
WBS

Task Name

Resi. Appartment
Part "A" :- CIVIL
WORK
PLINTH LEVEL
STRUCTURE
RCC WORK
MASONARY
WORKS
WATERPROOFING
WORKS
PLASTER WORKS
COLOURING
WORKS
FLOORING &
DADO WORKS

1
1.1
1.2
1.3
1.4
1.5
1.6
1.7

366 days

17,120,368.11

327 days

1,583,597.40

40 days

6,051,327.97

161 days

750,903.19

128 days

1,144,323.13

24 days

1,625,100.47

79 days

743,787.98

55 days

2,135,670.19

82 days

1,270,480.64

50 days

1.8

DOORS &
WINDOW WORKS

1,717,958.00

90 days

1.8.1

single leaf flush door

497,600.00

30 days

1.9

S.S. Railing
MS Grill work @ 25
kg/sqm.
M.S. PERGOLA
Kitchen / Pantry
Platform
TRIMIX AT STILT
1.14Electrification
Plumbing

202,219.68

20 days

368,138.76

25 days

57,683.34

10 days

378,840.00

30 days

360,818.00
300,000.00
260,000.00

10 days
176 days
160 days

1.12

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Duration

Vitrified tiles flooring

1.11

4. Activity Based Costing By Software

1. From the data collected from Purna
Construction site, the activities are allocated

Summarized
Cost
17,680,368.11

1.7.1

1.10

Fig 3.2: The Construction operating expenses

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1.13
1.14
1.15

Ayachit et al, International Journal of Advanced Engineering Research and Studies

Table 4.2 Activity Distribution by Traditional Method
WBS

Task Name

Resi. Appartment
Part"A":-CIVIL
WORK
RCC WORK
MASONARY
WORKS
0.15m thick CLC
Block Wall
WATERPROOFING
WORKS
PLASTER WORKS
COLOURING
WORKS
FLOORING &
DADO WORKS
DOORS & WINDOW
WORKS
S.S. Railing
MS Grill work @ 25
kg/sqm.
M.S. PERGOLA
Kitchen / Pantry
Platform
TRIMIX AT STILT
Electrification
Plumbing

1
1.2
1.3
1.3.1
1.4
1.5
1.6
1.7
1.8
1.9
1.10
1.11
1.12
1.13
1.14
1.15

Summarized
Cost
18,996,293.24

Duration
401 days

18,441,293.24

401 days

6,641,327.97

185 days

770,903.19

145 days

584,002.48

145 days

1,157,323.14

38 days

1,785,100.45

120 days

743,787.98

61 days

2,138,670.19

111 days

1,889,883.00

119 days

282,219.68

20 days

509,138.90

48 days

77,683.34

10 days

468,840.00

30 days

360,818.00
300,000.00
255,000.00

10 days
170 days
170 days

4.2 Analysis of Collected Data from Collected

from Residential Project
1. From the chart it can be seen that by
traditional method the cost is very high as
compared to activity based costing.
2. From the chart it is been observed that the
duration difference is 35 days and due to the
duration cost is also increased by 7.5%.
3. The Project started on 27th March 2013 and
should be completed by 25th April 2014 by
instead of that it completed on 2nd June
2014.
4. By planning the project it could have
completed by 366 Days but due to delay it
completed by 401 days.
5. The activity can be properly arranged and by
effectively used on site as compared to
traditional cost system.
6. From the above chart it can be seen that the
number of days by placing proper activities
can be saved and the project can be
complete within time.
7. With the help of calendar the activity start
day and finish date is known due to this
proper fund allocation is done.
8. With the help of grant chart daily activity to
be carried out on site can be known and to
weekly activities can also be planned and
the project can be run smoothly.
9. The critical path method is more useful than
by using software, but the grant chart only
shows the planning of the project, it does not
shows the actual work carried out on site or
the delay on site.
10. Grant chart gives the idea of total duration
of project, but the project extended should
be daily updated on grant chart so that the
difference can be calculated.
11. To complete the project smoothly and
within schedule various parameters such as
labour, material, machineries should be
available on site as per requirement but in
actual practice many problem arises such as
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scarcity of labour, material etc which results

in increase in cost.
12. Each and every activity cannot be performed
on site due to inexperienced Engineers,
faulty workmanship, technical problems
arising during work.
13. Each activity is dependent on other activity
hence if the activity order is changed the
project duration cannot be known.
14. Rescheduling of each activity is not possible
always as it will affect the cost of project
also and the cost of project cannot be
calculated.
15. The rates of the entire project are been taken
from DSR (District Schedule Rate) and
accordingly
depending
upon
the
specification of work the rate are quoted.
The graph below is plotted for cost and
cumulative cost and the expenses occurred
Quarterly for entire project. From this Fig 4.1 the
cost allocation can be seen and accordingly the
planning can be done.

Fig 4.1 Cash Flow Report

The Cash flow report gives an idea about the funds

allocated for every quarter. From the graph it is seen
than when the work is at completion stage the fund
required are more as compared to initial stage of
work.
The Fig 4.2 shows allocation of work and baseline
work. It indicates that actual work was less but due to
delay the total work hours increased.

Fig. 4.2 BaseLine Cost Report

Base line work gives an idea about the project status

and it work to be completed. Initially the baseline
work will be very low as the progress of work is
steady. As the project progresses the actual work and
baseline work should be same.
The Fig 4.3 shows the base line work done Quarterly
for entire project the project work is maximum
during last quarter in 2013.

Ayachit et al, International Journal of Advanced Engineering Research and Studies

Fig 4.3 Baseline Work Report

5. RESULT FROM DATA ANALYZED

1. From the Table 4.1 & Table 4.2 it can be
seen that the duration of the project can be
curtailed through activity based costing and
by proper planning.
2. On the basis of Traditional Data and
software date the various parameters such as
cost, duration is been compared and
accordingly remedial measures can be taken.
3. From table it is been also observed that for
some activities there cost difference is zero
but still it took more days as compared to
traditional method.
4. The actual project duration is 401 days and
by effective utilization of activities we get
the optimum duration of 366 days and table
shows the corresponding cost. If the project
duration get reduces both direct and indirect
cost of project get reduces.
5. The Traditional Cost of Project is
Rs.1,89,96,293.24/- and the planned cost of
project is Rs. 1,76,80,368.11/- thus the
difference in cost is Rs.13,15,925.13/6. This difference occurred due to lack of
planning on construction site and poor
workmanship for some activities incurred on
site.
7. The cost of the project increased by 7.5% as
compared to traditional method and this
increased to cost and reduced the
profitability of project.
8. Fig.4.1 shows the cost of project required
during the construction work each and
accordingly the cost allocation should be
done in the project.
9. The baseline work and actual work is
calculated and the difference between them
is shown in Table 4.2 it indicated when the
project should have been completed and
actually when it is completed.
10. As seen earlier the maximum cost is
required in fourth quarter of year 2013
similarly maximum labour and maximum
work is also carried in fourth quarter of
2013 shown in Table 4.3.
11. For every project the activities will change
and this change should be reflected on site
as well as in software.
12. Any changes may on site should be
mentioned in software so that if the project
is extended the reason will be specified.
13. The software only gives an idea of tentative
cost of project but a project progresses the
cost may change, the change in cost and its
details should be shown.
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14. Actual planning and on site planning differs

this should cannot be shown in software
hence sometimes the actual duration is
difficult to calculate.
15. For any activity of cost is changed it
indirectly affects the total cost of project for
minor activity the project cost will not get
affect but for major activity if cost changes
beyond limit then it may lead to disputes.
16. On every site though the comparison is
done, still on every site activitys planned
and executed cannot be same, the difference
in activities only can be minimised.
CONCLUSION
1. Now a days housing construction projects
are continuously increases in our country.
And it is observed that there is delay in
project duration is cause due to improper
planning on site. So to reduce this bar charts
should be utilized effectively.
2. From the study of recent scenario it is
observed that, now a days improper
planning in major projects affects delay in
the construction project scheduling. Delay in
a construction scheduling affects the cost
and time. If the schedule of project is
delayed then automatically the project
duration is increases and if project duration
increases the total cost of the project
increases and therefore the productivity of
the project get reduced. And it seriously
affects the owner and contractor in many
ways.
3. The initial duration of Project was 401 Days
and the planned duration was 366 days that
is the difference in the duration is 35 days
this increase in days also increased the cost
of project by 7.5%
4. The initial cost of project was
Rs.1,89,96,293.24/- and the planned cost of
project was Rs. 1,76,80,368.11/- thus the
difference is Rs.13,15,925.13/-.
5. This difference leads to decrease in
profitability of project and delay of project.
6. The project actually complete on 2th June
2014 and by planning it should be
completed by 25th April 2014.
7. To improve the productivity of a
construction industry the planning according
to activity is necessary. There are so many
factors that affect the planning on
construction site. It is observed that in
housing constructions projects the effect of
poor planning results in losses in project.
8. The absenteeism of planning is seriously
affects the construction industry. The effects
of absenteeism in the workplace are directly
proportionate to decreased productivity.
With the help of proper planning work on
site can be run smoothly and effectively.
9. There are five types of resources used in the
construction industry like manpower,
machineries, money, material and space.
The management of resources in a proper
way is the important thing. So we studied
about various types of resource management
like manpower management. Money
management,
equipment
management,

Ayachit et al, International Journal of Advanced Engineering Research and Studies

material
management
and
space
management.
10. As we know that if the cost and time for the
construction
industry
is
reduce
simultaneously the productivity of project is
get increase. There are so many methods to
find out the time duration to complete the
project like Microsoft Project and CPM. But
practically the project is not completed
within the estimated time. There are so
many factors which affect the time and cost
of the project gets adversely affected.
11. From the study conducted on housing
construction project for 2BHK flats and
shops it is observed that we get the optimum
duration for project with minimum cost the
actual duration for project was maximum.
12. So by applying the grant chart analysis we
get the optimum duration for both blocks.
So we manage activities effectively by grant
chart analysis we get the optimum solution.
13. The Table 4.2 shows the cost for various
scenarios, and from that we observe that for
the minimum duration, cost is also minimum
as compare to original duration and cost.
And important thing is that we get the
optimum duration without crashing any
activity.
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