Date of Graduation
Applying activity-based costing to project bidding will assist companies make better bid selections, use overtime or subcontracting more effectively, and minimize under/over allocation of overhead costs. Two models, the Overhead Allocation Model and the Bidding Strategies Model, were constructed to explore the implications of activity-based costing on bidding strategies. The Overhead Allocation Model simulates the two step overhead allocation method of activity-based costing. The model, based on user input, assigns cost accounts to overhead cost pools, allocates cost pools to activities using resource cost drivers, calculates a unit cost for each activity cost driver and allocates activities to projects using activity cost drivers. The Bidding Strategies Model, using input from the Overhead Allocation Model, simulates project bidding decisions and their impact on overhead cost allocation. Decisions on which projects to bid on, whether to use overtime or subcontracting, and what mix of projects is most profitable are the three major evaluations that can be performed with the Bidding Strategies Model. Data from a woodworking company, Company X, was evaluated by the models to determine the best combination of overhead cost pools, resource cost drivers, activities and activity cost drivers and to find the best way to define projects and mix of projects. Three objectives were sought--(1) provide more accurate project costs than the traditional labor-only allocation technique, (2) reduce the annual variance between absorbed and actual overhead to 196 or less, and (3) find a cost-effective activity-based costing method. The models showed it was possible to achieve more accurate project costs than Company X's method, with a variance between absorbed and actual overhead of.8%, using three cost pools and five activities. Additional findings were: modeling an activity-based costing system is strongly recommended; activities should be defined as processes to make it easier to use activity-based costing for process analysis; it is more important to assign costs to the proper cost pool rather than to classify them as either overhead or direct, even when overhead costs are driven by labor; activity-based costing more accurately reflects project costing than pooling all overhead into one pool.
Mansuy, John Edward, "The impact of activity-based costing on project bidding." (1996). Graduate Theses, Dissertations, and Problem Reports. 9353.