2. Wednesday, June 16, 2010 Overhead cost accounts (each individual category of expenses, e.g., quality inspection, depreciation, etc) Department cost centre 1 Cost objects (Jobs, Projects or Services) Overhead cost accounts (each individual category of expenses e.g., quality inspection, depreciation, etc) Cost objects (Jobs, Projects or Services) Activity cost centre 1 Activity cost centre 2 Activity cost centre n Traditional System: ABC System: Direct costs resource cost drivers activity cost drivers Direct costs direct labour based Figure 1: Overhead Allocation Process for Traditional versus ABC System Source: Modified from Drury (2008). Department cost centre 2 Department cost centre n Indirect costs Indirect costs
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4. Wednesday, June 16, 2010 Over-costed (hidden profit) Under-costed (hidden loss) Construction Project Simplistic Traditional System (Overheads allocated averages) 50% - 200% 1,000% + 0% 0% Distortion Figure 2: Overheads Assigned for Construction Project. Source: Adapted from Cokins (2001). Highest Volume, Least Complex Product and Services Lowest Volume, Most Complex Product and Services Rank-ordered Products/Services Sophisticated ABC System (Overheads assigned for each activity)