What Is Activity‐Based Costing?

This chapter addresses the problems of the current method and follows with a methodology of activity-based costing (ABC). The premise of traditional cost accounting is that products or services consume resources directly; this is called “one-stage costing”. The chapter also addresses two important roles of the overhead cost management system. Traditional cost accounting allocates resource costs to cost objects using volume-based allocation, such as direct labor costs. The following two propositions are central to ABC: activities consume resources, and products consume activities. Traditional cost accounting uses “one-stage costing” whereby resources are directly assigned to cost objects such as projects or buildings using volume-based allocation. In construction, ABC systems commonly take advantage of a cost hierarchy with different levels of activities: production system (or work division) level, project level, and organization level. Project-level costs are defined as home office resources used for activities performed on a specific project.