Multidisciplinary Journal Supported by TETFund. The journals would publish papers covering a wide range of subjects in journal science, management science, educational, agricultural, architectural, accounting and finance, business administration, entrepreneurship, business education, all journals

1. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
ASSESSING THE PERCEPTION OF CONTRACTORS ON OVERHEAD COST
ALLOCATION USING ACTIVITY BASED COSTING IN NIGERIA
Sani Abdullahi Sarki1,
AbdullahiSalisu Halidu2
, Luqman Gwadabe3
, Abdullah Isa Adam4
1
Department of Quantity surveying, Faculty of Built Environment,
Universiti Technologi Malaysia
abdulsani43@yahoo.com1
2
Department of Quantity surveying, School of Environmental Studies,
NuhuBamali Polytechnic, Zaria, Nigeria
ashalidu@yahoo.com2
3 & 4
Department of Architecture, School of Environmental Studies,
NuhuBamali Polytechnic, Zaria, Nigeria
arcgwadabe@gmail.com3
, isaarc2002@yahoo.com4
Abstract
The components that keep Contractors in business in construction industry are the Direct Cost,
Indirect Cost (Overhead Cost) and the Profit margin. The overhead cost is an important driver of
the construction cost constituting up to 30% of the total cost of the project and is derived using the
Traditional method (Job-cost and General ledger) and Activity Based Costing method (ABC).The
ABC method is said to have advantages over the Traditional method in that it helps to prevent cost
distortion and minimize wastages, but it is a relatively new cost accounting method to many
contractors. The paper aimed at assessing the perception of contractors on the use of the ABC for
overhead cost allocation. The data for this was generated using questionnaire by adopting
purposive sampling technique. The result of the study indicated that the 30% Contractors strongly
opposed the use of ABC; 20% supported it while 10% were undecided. This implied that ABC is
not fully accepted. The paper therefore recommended that construction cost experts should create
more awareness on ABC to contractors and other stakeholders.
Keywords: Contractors, Overhead Cost, Job Cost and General Ledger, Activity Based Costing.
Introduction
According to Magellanes (2015), overhead is a very significant cost driver in engineering,
manufacturing and construction. Indirect labour, employee benefits, the costs of managing
facilities and the cost of capital equipment are important drivers of total cost and can result in a
total per-hour cost per employee that is two or three times the employee’s hourly wage rate as
such, it is an area for rationalizing to reduce production cost.
It is very important that all the items of building costs are accurately estimated and adequately
provided for as this form the basis on which a highly competitive tender submission is made.
According to Adnan, (2008) the financial components of construction item consist of three main
parts; the direct cost, indirect cost (overhead costs) and profit margin. Paul (2015), identified two
types of overhead costs; overhead costs chargeable to a specific job operation and general overhead
costs that are not chargeable to a specific operation. Project Overhead (OH) costs are called job

2. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
site overhead or general condition OH (Dagostino, 1989). Project OH costs comprise the
contractor’s expenses in managing the project at the job site. It is the cost specific to a project, but
not specific to a trade or work item (Cluenseck, 1991 and Taylor, 1994)
According to Susan (1999) OH costs are those general expenses incurred during the normal costs
of operating a business. At times these costs may be called general and administrative fringe
benefit costs, overhead or payroll burden. According to Frein (1980), project administration gears
to provide administrative services for specific project involved; the costs and services are directly
related to the project and are not performed to the benefit of the company as a whole or for the
benefit of other projects. These administrative services are accounting, purchasing, warehousing,
personnel, safety and payroll. Assaf et al (1999, 2001) in Adnan et al, (2008) stated that these
components include supervision, equipment, construction financing, contingency insurance taxes
& bonds as the main component of the indirect cost. Eksteen and Rosenberg (2002) in Adnan et al
(2008) added other components such as communication travelling, human resources, financial
auditing, asset ownerships, subscription legal fees, depreciation, bank & financing charges,
corporate insurances and professional fees.
Overhead can be measured using Traditional method (Job-cost & General ledger) and Activity
Based Costing (ABC). ABC is the method of measuring the cost and performance of activities on
cost objects. It assigns cost to activities based on their use of resources and cost-to-cost objects
based on their use of activities. ABC recognizes the causal relationship of cost drivers to activities
(James 2007).
The Nigerian contractors are more conversant with the Traditional method of overhead cost
allocation. Kim & Ballard (2001), Holland and Hobson (1999) in Kim and Ballard, (2002) reported
that, traditional construction overhead uses resources based costing and volume based allocation.
Kim and Ballard (2002) criticized the traditional overhead cost and proposed a new costing method
referred to Activity Based Costing (ABC). However, in Nigeria the problem of current practice
regarding overhead cost assignment is that the firms do not know real cost for each work division
and those for each participants such as subcontractors because either they do not assign overhead
cost or they use a uniform cost driver (that is direct labour cost) for assignment of overhead. The
Federal Capital Territory, Abuja, Nigeria was considered as the study area.
LITERATURE REVIEW
Traditional Method of Overhead Cost Allocation
Overhead cost allocation is one of the most misunderstood concepts contractors face in running
their business (Fredode, 2006). Generally two methods are used to allocate overhead cost in
construction today. The first method often referred to as ‘Job-Cost’ method is simple to use and
understand but often less accurate. It uses a single predetermined rate multiplied by job costs to
determine overhead cost. The hard part of it, is to come up with this predetermined rate, which
involves estimating the percentage of the actual costs that represent overhead (based on the actual
past overhead cost) to arrive at a single rate that applies across all jobs. The second method of
overhead cost allocation is ‘General Ledger’ which is more complex, yet more accurate in
determining true overhead cost; instead of using an estimated rate. This method is based on
tracking actual overhead cost just as actual jobs are tracked. A percentage of these costs are

3. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
allocated to individual jobs based on each job’s percentage of total actual cost. The general ledger
method allows more complex formula to accommodate weighting of overhead costs, based on
which type of costs are more relevant to the contractors (Fred, 2006).
Activity Based Costing (ABC) Method of Overhead Cost Allocation
ABC is a relatively new cost accounting method that relies on the concept of relative cost to the
activities that causes it (Assaf et al 2001).Cost allocation is a practice of incorporating indirect cost
into the product cost used to satisfy managers in pricing their products because indirect costs were
in general, much lower than current levels. This implies that the result of cost allocation would not
significantly affect the final bid. Product costs usually consist primarily of direct material and labor
costs. Today OH costs constitute up to 30 percent of the production costs and this figure is even
on the rise, which makes cost allocation an invalid approach simply because extremely important
decisions are based on distorted cost information. Furthermore, if substantial advancements take
place in an industry, then the costing system must also incorporate these advancements if it is to
provide valuable information to decision makers. One of the substantial changes in today’s
production is that increased proportions of total costs do not change with volume but rather exist
as shared costs (Drury, 1990 cited in Mohammed, 1997). Traditional cost accounting has been
criticized for cost distortion and the lack of relevance during the last 20 years (Johnson & Kaplan
1987). A traditional system reports where and by whom money is spent on, but fails to report the
cost of activities and processes (Miller 1996). Many organizations, including petroleum and
semiconductor companies in the manufacturing industry, have adopted the new costing method,
ABC. There are two purposes of ABC. The first is to prevent cost distortion. Cost distortion occurs
because traditional costing combines all indirect costs into a single cost pool. This pool is allocated
on the basis of some resource common to all of the company’s products, typically direct labor.
Cost distortion is prevented in ABC by adopting multiple cost pools (activities) and cost drivers.
The second purpose is to minimize waste or non-value-adding activities by providing a process
view. This objective can be achieved by activity analysis and (or) the function of monitoring
activities (Kim & Ballard, 2002).
The ABC as an alternative accounting method is premised on simply obtaining better
understanding of cost behaviour by tracing activities causing costs, especially indirect costs, which
help in accurately pricing products. Under ABC, costs are either short-term or long-term variable
costs. Short-term variable costs are volume related while long-term variable costs only vary with
the extent to which the activity is performed. Moreover, this variation is limited and slowly
obtained. For example, head office cost for a construction contractor is really a long-term variable
cost which slowly changes even if the contractor is not working at full capacity. Furthermore, the
change in this cost is limited unless there is a vital change in workload (Drury, 1990).
ABC tries to obtain greater understanding of cost behaviour to be able to accurately determine
product costs. It does so by understanding the forces behind costs, which are called cost drivers.
A cost driver is defined as the activity or transaction, which significantly determines the magnitude
of the cost. Therefore if head office costs are driven, presumably, by marketing, new projects
pricing, support site operations, accounting, etc. These activities would then be the cost drives for
head office costs. ABC suggests that an accurate and fair recovery of this indirect cost is possible
if cost is assigned to different projects based on these cost drives by knowing how much of each

4. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
activity is directed to a particular project. Cost drivers are thus, used as a cost assigning base
instead of traditional allocation bases and it is from that concept ABC gets its strength. Needless
to mention that short-term variable costs are more easily assigned to product total cost using
volume related cost drivers such as material or man-hours consumed. The allocation of indirect
costs (OH costs) as suggested by Copper and Kaplan (1991) in Mohammed (1997) ABC is shown
in Figure 1.
The major distinction between ABC and traditional costing system is that ABC claims that volume
related cost drivers are not necessarily the correct way to incorporate long-term variable costs,
Set-up department Raw material
inventory
department
Manufacturing
engineering
department
Set-up
Machine
Support
Direct labour
Administer parts
$/Set-up
Product 1
$/Direct Labor Hour
Product 2
$/Part
Product 3
Stage 1
Stage 2
Stage 1: Determine what activities company resources perform
Stage 2: Attribute costs to products based on their use of resources
Figure 1: Assignment process for OH costs during Activity Based Costing.
Sources : Copper and Kaplan, 1991 in Mohammed, 1997

5. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
which are OH costs (Copper, 1988 and Drury, 1990 cited in Assaf, 2001). The reason is that ABC
is a more relevant approach for costing products than traditional costing systems, simply because
it forces deeper traceability of costs to products. The main factors here are activities and their
associated drivers. The logic behind the ABC approach is if a product does not use an activity,
then the product should not absorb any of that activity’s cost (Raffish, 1991). However,
implementing ABC needs more detailed insight into OH costs and how they are spent, which
consumes more resources, especially in the beginning. However, the problem of excessive OH
costs gets more aggressive as the benefits of ABC become greater.
According to Copper and Kaplan, (cited in Assaf 1999), introducing ABC system results in far
more accurate product costing. However, the use of ABC system in construction is not yet
documented and may have some limitations due to the fact that in the construction industry,
construction costs are determined before the production process starts, which means that almost
all costs are only predicted. Second, each construction project is unique and thus has different
production arrangement, which cause different cost components. Third, company OH costs
significantly vary from time to time depending on many factors and the number of projects which
is not known when project costing is performed. Fourth, there are, sometimes, many cost drivers
for the same OH cost. These lead to inconsistency in the amount of burden OH costs each project
has to handle. In spite of that, ABC system may be used to reduce the severity of the problem by
concentrating on major company OH costs and try to overcome obstacles in the way to implement
ABC in construction. This important approach will be examined in the survey so that it can be
better evaluated.
METHODOLOGY
The data was generated using questionnaire by adopting purposive sampling technique. This is a
non-probabilistic sampling procedure which involves picking typical population elements to make
up a sample size (Rubin, 1983). In this case, the population consists of building construction
contractors classified by Federal Ministry of Land, Housing and Urban Development in the
categories of registration A, B, C & D. The total number of contractors that renewed their
registration were 60 which was considered as the study population; 2 out of every 12 were
considered to arrive a total sample size of 10. Questionnaires were administered to the sampled
contractors and the data collected from the respondents were analysed using a relative importance
index (Likert scale).
ABC is a relatively new cost accounting method, which relies on the concept of relating, cost to
the activities causing them. The idea was completely new to many contractors; hence, the concept
was explained to the contractors prior to their responses in order to gauge their perception.

6. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
Results and Discussion
In this study descriptive statistic of percentages was carried out based on the data generated from
the respondents in Abuja metropolitan within the study area as shown Tables 1 and 2.
Table 1: Contractor’s Perception Regarding Company Overhead Costs Allocation
Factors related
to allocation
Strongly
agreed
Agreed Neutral Disagreed Strongly
disagreed
Total
Job Cost
method
5
50%
2
20%
0
00%
2
20%
1
10%
10
100%
General ledger
method
4
40%
1
10%
1
10%
2
20%
2
20%
10
100%
Activity based
costing (ABC)
2
20%
2
20%
1
10%
2
20%
3
30%
10
100%
Sources: Field Survey, (2015)
The result in Table 1 in respect to the ABC shows that, 20% of the respondents strongly agreed
with use of ABC while 30% strongly disagreed with the use of ABC. In discussing the concept
many contractors have the perception that although the ABC method of cost allocation is valid, it
may be difficult to apply in the construction industry because Firm resources are continuously
performing many activities in a manner which makes tractability very difficult.
Table 2: Contractors Reason for the Choice of a Particular Allocation Method
S/N Reason why a particular allocation method is used Frequency Percentage
I Project is similar in nature 01 10%
II Firm overhead is a time related expenditure 05 50%
III Firm overhead is related to direct costs 02 20%
IV Easy to apply 02 20%
Total 10 100%
Sources: Field Survey, (2015)
The result in Table 2 shows motivations behind using a particular allocation method, which is
dependent on the nature of company and projects. From the table it is clear that 50% of the
contractors perceived overhead costs as a function of time expenses, while 20% of the respondents

7. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
indicated that overhead costs is closely related to the estimated direct cost of the project and thus
direct costs are used as an allocation base. Moreover, 10% of the respondents indicated that
projects are similar in nature; it is easy to depend on the number of projects as a base for calculating
what each project has to recover. Another 20% of the respondents indicated that they preferred
using a method with ease of application. However, direct cost which were the project site
indication were used as allocation base because it is easy to estimate whereas estimating time
needed to finish the project, is costly because it needs expert planners who set activities production
rate, scheduling resources and other steps which are time consuming and costly at bidding stage.
CONCLUSIONS
Although many writers have advocated the use of ABC because of its accuracy, relevant
approaches for costing procedures, activities and their drivers, the finding of this study showed
that most professionally registered Contractors in Abuja, Nigeria have not fully accepted the ABC
method. This is because of its time related expenditure. The study therefore recommends serious
enlightenment campaign by construction cost experts to educate contractors on positive values of
ABC as a better overhead costing method for the future.
References
Adnan E. (2008), factor-affecting accuracy of cost estimation of building contract in the Gaza strip
financial management of property and construction vol.10 no.2 August .
Assaf S. A. (1999) The Management of Construction Company overhead costs international
journal of project management 19 pages 295-303
Assaf S.A.(2001) The Project Overhead cost in Saudi Arabia Cost Engineering journal volume 41
pages 33-41
Cluenseck, R. (1991): “Understanding Contract or Overhead Cost” Cost Engineering (AACE) Vol.
3 No. 12, 21.23
Cooper, R. and Kaplan, R. (1988): Measure Cost. Right: Make the right Decisions Hen void
Business Review 196 – 103
Dangostino, F.R. (1989): Estimating Construction: Prentice-Hall Englewood Cliffs, N.J.

8. Nuhu Bamalli Polytechnic Multidisciplinary Journal 1 :( 1) 73-82 Sarki et al., (2016)
Drury, C. (1990): Product Costing in 1990s Accountancy, 122-126
Frein P. J (1980) Handbook of construction management and organization 2nd edition by van
Nostrand Reinhold co.inc
Fred O. (2006) Overwhelmed by Overhead Allocation, Construction Executive pp 44-47
James D. Tarr (2015) Activity Based costing in the imformation age.doc [online]
http://www.goggle.com [Accessed may 5, 2015]
Kim, Y., & Ballard, G. (2001.). Case Study - Overhead Costs Analysis, (Lci), 1–13.
Magallanes M (2015) the effect of lean manufacturing [online] http://www.google.com [accessed
2015]
Paul I.T (2015) Construction cost estimating; common sources of error. The contractors field
guide, prentice hill [online] http://www.google.com [accessed 2015]
Mohammed, H.A Overhead cost in building construction in Saudi Arabia. Unpublished M.sc
Thesis King Fahd University of Petroleum and Minerals Dhahran Saudi Arabia. (1997)
Reffish .N (1991) How Much Does that Really Cost?’’ Management Accounting 36-39
Susan D (1999), overhead costs Audit guide for consultant August page 6-2
Tailor, G.R. (1994): The Importance of Estimating Overhead Cost Engineering (AACE) Vol, 36,
No. 2, 15-18