ADDIS ABABA UNIVERSITY

ADDIS ABABA INSTITUTE OF TECHNOLOGY

SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERING

Study on Construction Cost Accounting System of State

Owned Road Contractor: A Case Study on Ethiopian
Construction Works Corporations – Transport
Infrastructure Sector
by

Tigist Tsegaye Molla | GSR/4447/10

A thesis submitted to the School of Graduate Studies of Addis Ababa University in

partial fulfillment of the requirements of the Degree of Master of Science in Civil
Engineering in Construction Technology and Management

Advisor:

ABRAHAM ASSEFA TSEHAYAE (PhD)

 © 2020
Tigist Tesgaye Molla
All rights reserved.
 ADDIS ABABA UNIVERSITY
ADDIS ABABA INSTITUTE OF TECHNOLOGY
SCHOOL OF CIVIL AND ENVIRONMENTAL ENGINEERING

Study on Construction Cost Accounting System of State Owned Road

Contractors: A Case Study on Ethiopian Construction Works
Corporations – Transport Infrastructure Sector
by

Tigist Tsegaye Molla | GSR/4447/10

Abraham Assefa Tsehayae (PhD) __________________ _____________

ADVISOR SIGNATURE DATE

Asregedew Kassa (PhD) ___________________ _____________

INTERNAL EXAMINER SIGNATURE DATE

Eng. Yibeltal Zewdu ___________________ _____________

EXTERNAL EXAMINER SIGNATURE DATE

_____________________ ___________________ _____________

COMMITTEE CHAIRPERSON SIGNATURE DATE
DECLARATION

I certify that this research work titled “Study on Construction Cost Accounting System of
State Owned Road Contractors: A Case Study on Ethiopian Construction Works
Corporations – Transport Infrastructure Sector” is my own work. The work has not been
presented elsewhere for assessment. Where material has been used from other sources, it
has been properly acknowledged /referred.

_________________________________
TIGIST TSEGAYE MOLLA | GSR/4447/10
DATE:
M.Sc. Thesis A.Y. 2020

ACKNOWLEDGEMENT
First and foremost I would like to thank the almighty God and his mother for supporting
me to accomplish this research. Then I would like to give my full heartiest gratitude to
my advisor, Abraham Assefa (PhD.) for his guidance and suggestion. Finally, I am most
grateful to all members of my family and friends for their understanding and support.

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ABSTRACT
This research investigated the cost accounting system of state-owned road contractor by
taking Ethiopian Construction Works Cooperation‟s transport infrastructure sector as a
case study. The construction industry consumes different resources such as, material,
manpower and equipment which have to be managed properly to ascertain the profit. The
research is based on the problem of ascertaining the cost of each cost object in order to
evaluate the project status and helps the decision makers to make corrective measure on
time. The proper implementation of costing system is necessary to determine the
profitability of each cost object whereby management can identify whether the cost
object is contributing profit or loss. Both primary and secondary data collection were
used in this research. The primary data were obtained from the company using a
questionnaire and secondary data were obtained from company cost records, reports, and
cost accounting implementation manuals. Desk studies by randomly selecting three
ongoing projects were done for detail study on current system. Based on the collected
data, the detailed analysis has been conducted to find answers for the research question
and modified costing system was proposed.

The study found out that the organization does not have a structured and typical cost
accounting system. The respondents revealed that the company‟s current system is weak
when evaluating based on different requirements of the costing system. According to the
research, the ability of the current system in providing relevant information to decision-
makers for future planning and decision making is poor. Lack of training on updated cost
accounting techniques, difficulties in data collecting and gathering, and lack of adequate
information on cost data are the mostly occurred problem during implementing costing
system in the organization. It is recommended that the company should use the proposed
system of cost accounting to overcome the shortcoming of the current system based on
the data findings. The proposed costing system is expected to improve responsibility
center identification, cost determination, indirect cost allocation, variance analysis at
activity and resource level and data presenting format.

Key words: Activity based costing system; Costing system

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ABBREVIATION
ECWC : Ethiopian construction works corporation
TICS : Transport infrastructure construction sector
ABC : Activity based costing
TC : Traditional costing
IGPG : International Good Practice Guidance
IFAC : International Federation of Accountants
PVA : Process Value Analysis
ICAI : The Institutes of cost accountants of India
PAVIC : Productivity Analysis with Video and Computer

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TABLE OF CONTENTS
ACKNOWLEDGEMENT ................................................................................................. i
ABSTRACT ....................................................................................................................... ii
ABBREVIATION ............................................................................................................ iii
TABLE OF CONTENTS ................................................................................................ iv
LIST OF FIGURES ........................................................................................................ vii
LIST OF TABLES ........................................................................................................... ix
1. INTRODUCTION....................................................................................................... 10
1.1 Background ............................................................................................................. 10
1.2 Problem statement ................................................................................................... 11
1.3 Aim and Objective .................................................................................................. 12
1.4 Research question .................................................................................................... 12
1.5 Significance of the study ......................................................................................... 12
1.6 Scope and limitation of the study ............................................................................ 13
1.7 Structure of the research .......................................................................................... 13
2. LITERATURE REVIEW ....................................................................................... 14
2.1 Definition of cost ..................................................................................................... 14
2.2 Classification of cost ............................................................................................... 15
2.3 Accounting .............................................................................................................. 19
2.3.1 Financial accounting ......................................................................................... 20
2.3.2 Management accounting ................................................................................... 20
2.3.3 Cost accounting ................................................................................................ 20
2.4 Difference between cost accounting and financial accounting ............................... 21
2.5 Objectives of Cost Accounting ............................................................................... 22
2.6 Importance of cost accounting ................................................................................ 23
2.7 Method of costing.................................................................................................... 24
2.7.1 Job Costing ....................................................................................................... 24
2.7.2 Process Costing................................................................................................. 25
2.8 Process of cost accounting ...................................................................................... 26
2.8.1 Performance data recording .............................................................................. 26
2.8.2 Data processing................................................................................................. 28
2.8.3 Evaluating the performance .............................................................................. 28
2.8.4 Corrective decision making .............................................................................. 31
2.9 Overheads ................................................................................................................ 31
2.9.1 Overhead distribution ....................................................................................... 32
2.10 Cost Assignment ................................................................................................... 37
2.11 Costing systems ..................................................................................................... 38
2.11.1 Traditional costing system .............................................................................. 39
2.11.2 Activity-based costing .................................................................................... 40
2.12 Evaluating and improving costing in organizations .............................................. 42
2.12.1 Key Principles of Evaluating and Improving Costing in Organizations ........ 43

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2.13 Problems in the implementation of costing system ............................................... 44

2.14 Construction theories and cost accounting system ................................................ 47
2.15 Applications of Cost accounting in construction .................................................. 48
2.16 Research Gap......................................................................................................... 50
3. RESEARCH METHODOLOGY .............................................................................. 51
3.1 Introduction ............................................................................................................. 51
3.1.2 Types of research .............................................................................................. 51
3.2 Research process ..................................................................................................... 52
3.3 Research Design ...................................................................................................... 53
3.3.1 Research method and strategy .......................................................................... 53
3.3.2 Study focus area and Selection criteria ............................................................. 54
3.3.3 Sampling design ............................................................................................... 55
3.3.4 Structure of questionnaire ................................................................................. 56
3.3.5 Target population .............................................................................................. 56
3.3.6 Determination of sampling size ........................................................................ 58
3.4 Data collection and sources ..................................................................................... 58
3.5 Research instruments............................................................................................... 60
3.6 Research validity and reliability .............................................................................. 61
3.7 Data Analysis and presentation ............................................................................... 62
4. RESEARCH FINDINGS AND DATA ANALYSIS................................................. 63
4.1 Introduction ............................................................................................................. 63
4.2 Response rate........................................................................................................... 63
4.3 Research finding and data analysis: Cost accounting Implementers ...................... 64
4.3.1 Respondent profile ............................................................................................ 64
4.3.2 Objectives of implementing the cost accounting .............................................. 65
4.3.3 Costing system of the company ........................................................................ 66
4.3.4 Allocation of head office overhead to the project ............................................ 67
4.3.5 Allocation of project overhead to the work section .......................................... 67
4.3.6 Cost accounting standard cost sheet ................................................................. 68
4.3.7 Computer software used ................................................................................... 68
4.3.8 Encountered problems during implementation................................................. 69
4.3.9 Evaluating the current system........................................................................... 71
4.3.10 Satisfaction with the current system ............................................................... 77
4.4 Research finding: Management (Decision makers) ................................................ 79
4.4.1 Respondent profile ............................................................................................ 79
4.4.2 Objectives of implementing the cost accounting .............................................. 80
4.4.3 Costing system of the company ........................................................................ 81
4.4.4 Encountered problems during implementation................................................. 81

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4.4.5 Evaluating the current system........................................................................... 83

4.4.6 Satisfaction with the current system ................................................................. 89
4.5 Desk Study .............................................................................................................. 91
4.5.1 Ethiopian Construction Works Co-corporation ................................................ 91
4.5.2 Organizational structure ................................................................................... 92
4.5.3 Cost accounting in ECWC................................................................................ 95
4.5.4 Cost accounting analyzing team in ECWC TICS ............................................. 96
4.5.5 Overhead allocation in ECWC TICS................................................................ 98
4.5.6 Costing system in ECWC TICS ....................................................................... 99
4.5.7 Data capturing in ECWC TICS ...................................................................... 100
4.5.8 Data processing in ECWC TICS .................................................................... 102
4.5.9 Performance evaluation in ECWC TICS ........................................................ 104
4.5.10 Decision making in ECWC TICS ................................................................. 107
4.5.11 Comparison between ECWC TICS system and ICAI or IFAC .................... 108
4.6 Proposed cost accounting system .......................................................................... 110
4.6.1 Comparison between the existing system and proposed system .................... 112
4.6.2 Test the implementation ................................................................................. 114
4.6.3 Summary......................................................................................................... 144
5. CONCLUSION AND RECOMMENDATION ...................................................... 145
5.1 Conclusion............................................................................................................. 145
5.2 Recommendations ................................................................................................. 147
5.3 Recommendation for Future Research .................................................................. 148
REFERENCES .............................................................................................................. 149
Appendices A: Covering letter ..................................................................................... 155
Appendices B: Questionnaires for management staffs .............................................. 156
Appendices C: Questionnaires for implementers ...................................................... 161

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LIST OF FIGURES
Figure 1: Cost Assignment Method (Drury, 2012) ........................................................... 38
Figure 2: Costing System Classification ........................................................................... 39
Figure 3: Cost systems – Levels of sophistication (Drury, (2012)) .................................. 40
Figure 4: Types of research (Kumar, 1999) ...................................................................... 52
Figure 5: Method of data collection (Kumar,2011) .......................................................... 59
Figure 6: Respondents year of experience ........................................................................ 65
Figure 7: Costing system of the company......................................................................... 67
Figure 8: Allocation of project overhead .......................................................................... 68
Figure 9: Level of using computer tools ........................................................................... 69
Figure 10: Determination of Cost ..................................................................................... 71
Figure 11: Providing of relevant cost data for decision-makers ....................................... 72
Figure 12: Performance evaluation ................................................................................... 73
Figure 13: Efficiency controlling of the current system ................................................... 74
Figure 14: Ascertainment of the profit.............................................................................. 75
Figure 15: Serving as an effective information system .................................................... 75
Figure 16: Identifying the profitable and unprofitable activity ........................................ 76
Figure 17: Ability to forecast ............................................................................................ 77
Figure 18: Satisfaction of staff with the current system ................................................... 77
Figure 19: Costing system of the company....................................................................... 81
Figure 20: Determination of cost ...................................................................................... 84
Figure 21: Providing Relevant Cost Data ......................................................................... 85
Figure 22: Performance Evaluation .................................................................................. 85
Figure 23: Efficiency controlling ...................................................................................... 86
Figure 24: Ascertainment of profit ................................................................................... 87
Figure 25: Serving as an effective information system .................................................... 87
Figure 26: Identifying profitable and unprofitable activity .............................................. 88
Figure 27: Ability to forecast ............................................................................................ 89
Figure 28: Satisfaction with the current system ................................................................ 89
Figure 29: Corporate Structure of ECWC ........................................................................ 93
Figure 30: TICS Organizational Structure ........................................................................ 94
Figure 31: Cost accounting manual implementation procedure of ECWC TICS ............. 96
Figure 32: Cost accounting analysis flow chart ................................................................ 97
Figure 33: Data collection procedure ............................................................................. 101
Figure 34: Daily activity actual cost analysis ................................................................. 103
Figure 35: Summary of activity actual Cost ................................................................... 104
Figure 36: Variance Analysis.......................................................................................... 106
Figure 37: Proposed cost accounting system structure ................................................... 111
Figure 38: Actual cost and earned value variance analysis for Dulecha –Awash Arba
project ............................................................................................................................. 122
Figure 39: Variance analysis for site clearing for Dulecha –Awash Arba project ........ 125

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Figure 40: Variance analysis for cut and borrow to fill for Dulecha –Awash Arba project
......................................................................................................................................... 126
Figure 41: Variance analyses for Rock fill in embankment for Dulecha –Awash Arba
project ............................................................................................................................. 127
Figure 42: Variance analyses for sub-base layer construction for Dulecha –Awash Arba
project ............................................................................................................................. 128
Figure 43: Variance analyses for base- course layer construction for Dulecha –Awash
Arba project .................................................................................................................... 128
Figure 44: Variance analyses for asphalt concrete surfacing construction for Dulecha –
Awash Arba project ........................................................................................................ 129
Figure 45: Variance analyses for class 'B' stone masonry construction for Dulecha –
Awash Arba project ........................................................................................................ 130
Figure 46: Variance analyses for class 'C' concrete construction for Dulecha –Awash
Arba project .................................................................................................................... 130
Figure 47: Variance analyses for backfill with selected material construction for Dulecha
–Awash Arba project ...................................................................................................... 131

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LIST OF TABLES
Table 1: The Difference between Financial Accounting and Cost Accounting (ICAI,
(2012))............................................................................................................................... 22
Table 2: Common problems in implementing costing, (Nangan 2012)............................ 46
Table 3: Cost accounting implementers (experts) ............................................................ 57
Table 4: Management Staffs ............................................................................................. 57
Table 5: List of Responses ................................................................................................ 63
Table 6: Educational Background of Respondents ........................................................... 64
Table 7: Objectives of implementing cost accounting ...................................................... 66
Table 8: Problems Encountered ........................................................................................ 69
Table 9: Respondents comment ........................................................................................ 78
Table 10: Respondent Profile............................................................................................ 79
Table 11: Respondents' Experience .................................................................................. 79
Table 12: Objectives of implementing cost accounting .................................................... 80
Table 13: Encountered problems during implementation ................................................. 82
Table 14: Respondents' Suggestion .................................................................................. 90
Table 15: Comparison between ECWC TICS system and ICAI or IFAC ...................... 108
Table 16: Comparison between the existing system and proposed system .................... 112
Table 17: List of consumed resource, Dulecha – Awash Arba road project .................. 115
Table 18: List of responsibility centers for Dulecha –Awash Arba project ................... 117
Table 19: List of cost allocated to support center for Dulecha –Awash Arba project .... 118
Table 20: List of cost allocated to product centers Dulecha –Awash Arba project ........ 119
Table 21: Allocation of cost to cost objects for Dulecha –Awash Arba project............. 121
Table 22: Cost Variance Analysis for Dulecha –Awash Arba road project .................. 123
Table 23: Cost variance at resource level for Dulecha –Awash Arba project ................ 124
Table 24: List of responsibility center for Dimma-Rad road construction project ......... 132
Table 25: List of cost allocated to support center for Dimma-Rad road construction
project ............................................................................................................................. 133
Table 26: List of cost allocated to support center for Dimma-Rad road construction
project ............................................................................................................................. 134
Table 27: List of cost allocated to cost objects for Dimma-Rad road construction project
......................................................................................................................................... 135
Table 28: Variance analysis at activity level for Dimma-Rad road construction project 136
Table 29: Variance analysis at resource level for Dimma-Rad road construction project
......................................................................................................................................... 137
Table 30: List of responsibility center for Jinka Mender project.................................... 138
Table 31: List of cost allocated to support center .......................................................... 139
Table 32: List of cost allocated to product center ........................................................... 140
Table 33: List of cost allocated to cost objects for Jinka - Mender project .................... 141
Table 34: List of variance analysis at activity level for Jinka- Mender project .............. 142
Table 35: List of variance analysis at resource level for Jinka- Mender project ............ 143

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1. INTRODUCTION
1.1 Background
The construction industry is one of the foremost industries of today that has a great
impact on the economy of any nation. The industry has a huge contribution to sustainable
economic development by satisfying some of the basic objectives of development
including output generation, employment creation, and income generation and re-
distribution (Serdar & Syuhaida, 2012). It has also a significant role in satisfying basic
physical and social needs, including the production of shelter, infrastructure, and
consumer goods.

The industry is a complex business sector where the need for accurate costing systems is
more vital than any other since competitive bidding is deeply rooted in its tradition
whereby the lowest bidder wins the contract (Lehtonen, 2001). If a contractor wants to
involve in a competitive bid, maintaining proper costing systems is needed with sound
mechanisms for accurate cost allocation, apportionment and performance measurement.
Lehtonen,(2001) also argues that to produce performance information, a cost build-up for
each project must be done, after which the profitability of each project can be accurately
determined and management can identify which projects are contributing profits and
which are making losses.
Construction costs are classified based on traceability to cost objects as a direct and
indirect cost. These costs have to be allocated to each activity to obtain the total cost of
each cost object. Evanse,(2015) indicate that direct costs are those costs that can be
linked or traced to the final product or service offered, whereas indirect costs are
representing the consumption of company resources that are shared by its products. These
costs can be allocated to cost objects either by using a traditional costing system or
activity-based costing system.

In order to ascertain the profit and give relevant information to the managers cost
accounting system is very essential. Cost accounting aims to give management the basis
for decision making, improved efficiency and how to enhance the performance of
organization. From a managerial point-of-view, the effort to develop, implement and

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operate a cost system is justifiable only when the cost information provides effective
support for decision making (Evanse, 2015). Cost accounting measures, analyzes, and
reports financial and non-financial information relating to the costs of acquiring or using
resources in an organization (Charles, Srikant, & Madhav, 2015). It classifies, records,
allocates and appropriation expenses for the determination of cost of products or service
and the presentation of suitably arranged data for control and guidance of management
(Horngern, 1978).

This research aims to give some relevant understanding about the Ethiopian Construction
Works Corporation Transport Infrastructure Construction Sector (ECWC TICS) current
practice of cost accounting system, encountered problems during the implementation and
finally proposes a modified costing system. The proposed system is prepared to
overcome the shortcoming of the current system based on the data findings.

1.2 Problem statement

Completion of a construction project within the intended budget is a major criterion of
project success by clients, contractors, consultants and related stakeholders (Zewdu &
Getachew, 2015). There are usually several problems that prevent the project from
executing based on the planned budget. According to Jouni, (2009), the main problems in
construction projects are related to cost accounting and cost control. One of the most
problematic issues is that cost accounting and controlling methods are not operating in
real-time. A study made on project management maturity in the Ethiopian construction
industry by Abadir, (2011) found out that 44% and 50% of the contractors cost
management process maturity is either incomplete or perform informally. Whereas the
cost management practices maturity is 58% apply no practice, or are incomplete. This
indicates that there is poor construction cost management practice in the country.

In a construction company, an unsuitable costing system may result in management

failing to measure the project‟s performance accurately. This might, in turn, lead to
strategic decisions being made on the basis of inaccurate project costs. Ali and
Kamaruzzaman (2010), put proper project costing and financing as the first measure to be
taken to control construction costs. According to Gulham (2013), the lack of proper cost
accounting leads to inefficient use of materials, overstocking and inefficient decisions

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leading to project cost overruns. This research will study on the overall system, method
and problems encountered in the actual implementation of cost accounting in ECWC
TICS and propose a modified costing system in order to fill the gap in the current system.

1.3 Aim and Objective

The aim of the research is to study the cost accounting system of state-owned road
contractors in Ethiopia. The study considers Ethiopian Road Construction Corporation
Transport Infrastructure Sector cost accounting system as a case study. To achieve the
study aim, the following specific objectives have been established as below:

 Explore the cost accounting system of an Ethiopian construction industry,

 Investigate and evaluate the cost accounting system in Ethiopian construction
industry,
 Determine the problem area and difficulties in implementing the system of cost
accounting using a case study company, and
 Modify existing system of cost accounting using a case study.
1.4 Research question
The study sought to answer the following specific questions

 What is the knowledge of the company staffs about cost accounting?

 What type of costing system does the company use to determine the cost?
 How do they implement the costing system?
 What are the problems encountered in implementing the costing system?
 Does the costing system provide relevant information to management for future
planning and decision making?
1.5 Significance of the study
The outcome of this study will benefit the organization to improve the costing system by
enhancing awareness of the materiality of cost accounting in an organization,
investigating the current practice of the cost accounting system, identifying the problem
encountered during the implementation and proposing a modified costing system. Also,
this study is significant to other contractors in familiarizing with the concept, importance
and different methods of cost accounting and providing some insights into the

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prerequisites of a successful cost accounting procedure and the importance of such cost
control practices and processes.

1.6 Scope and limitation of the study

The research scope is limited to cost accounting system of state-owned road contractor.
Due to the absence of cost accounting system and required data the study is limited to a
case study on Ethiopian Construction Works Corporation Transport Infrastructure Sector
(ECWC TICS).

1.7 Structure of the research

This research consists of five chapters. Chapter 1 is an introduction to the research and
includes seven sections that present the background, problem statement, objectives and
research questions, significance of the research, scope of the study, structure of the thesis
and research methodology. Chapter 2 discusses the literature review for the study.
Chapter 3 presents how the study will conduct and also discusses how the data is
collected. Chapter 4 focuses on research findings and data analysis. Chapter 5
summarizes the findings and outlines the recommendations of the study. The chapter also
highlights the contributions of the research and concludes with suggestions for further
studies.

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2. LITERATURE REVIEW

2.1 Definition of cost

The term cost can be defined as the monetary measurement of expenditure incurred on or
attributable to achieve a specific objective, such as acquiring goods or services (Drury,
2012). It can also be described as the resources that have been sacrificed or forgone to
attain a particular objective.

The terms „Cost‟ and „Expenditure‟ are used interchangeably to mention the same thing
in the field of business. Costs that are incurred for the production of a product or service
have to be determined, the techniques and process of ascertaining costs are known as
costing. Costing includes classifying, recording, allocation and appropriation of expense
to determine the cost of product or service and for the presentation of arranged data for
control and guidance of management (ICAI, Cost and managment accounting, 2012).

Terminology

A cost object is any activity, product, service or job order for which the cost is assigned.
Drury (2012) defines cost objects as any activities for which a separate measurement of
cost is desired. Carefully identifying the cost object is very crucial for a sound costing
system.

A cost pool is assembling the cost in a meaningful group in an organized manner. A cost
pool is defined by CIMA (2005), as a grouping of costs relating to a particular activity in
an activity-based costing system. In the case of a manufacturing organization, as regards
stores, cost of classification, cost of issue of store requisitions, inspection costs, etc. can
be pooled under the heading „stores‟ (ICAI, Cost and managment accounting, 2012). In
another word, it is the sum of the total cost assigned to an activity. (Charles, Srikant, &
Madhav, 2015)
Cost drivers are any factors that have the effect of changing the level of total cost.
Chales, Srikant, & Madhav, (2015) defines cost drivers as a variable, such as the level of
activity or volume that causally affects costs over a given period.

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Cost accumulation is a process of collecting cost data in some organized way (Charles,
Srikant, & Madhav, 2015). The accumulated cost is then assigned to designate the cost
object.
Cost assignment is a general term that encompasses both tracing direct costs to a cost
object and allocating indirect costs to a cost object. . Chales, Srikant, & Madhav, (2015)
defines cost assignment as gathering a cost in a cost pool and assigning it to a specific
cost object.
Cost allocation is the process of assigning costs when a direct measure does not exist for
the quantity of resources consumed by a particular cost object (Drury, 2012). It is a form
of cost assignment of indirect cost to a cost pool and cost object through the use of cost
drivers.
Cost sheet is a statement that shows various components of the total cost or per unit cost
in a systematic manner (ICAI, Cost and managment accounting, 2012). It is important for
ascertaining cost, fixing of selling price, cost control and facilitating managerial
decisions. The cost sheet can be prepared based on historical and estimated costs. In
historical cost basis, the cost sheet is prepared after the actual cost is incurred. Whereas
the estimated costs sheet is prepared before the commencement of production.

2.2 Classification of cost

In performing an activity there may be different costs incurred. Cost classification is a
process of identification of each item and systematic placement of like items together
according to their common features. As per cost accounting standard by ICAI,(2012) cost
can be classified regarding the nature of the expense, its traceability to a cost object, its
relation to functions/activities, its behavior and its relationship to the production process.
Based on this cost can be classified as follows: -

I. Classification based on traceability to a cost object

Depending upon the traceability of expenditure to cost object, cost can be classified into
the direct and indirect cost. Direct costs are an expense that is related to a particular cost
object and can be traced to it in a cost-effective (economically feasible) manner (ICAI,
Cost accounting, 2018). Otherwise, the cost component can be termed as an indirect cost.
For example, the costs of rock material in rock fill activity in construction considered as

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direct cost because it can be easily traced or identified with the rock fill activity. Whereas
the cost of the store, safety facility, workshops, offices, parking facilities can be
considered as an indirect cost because these costs are not particularly done for the rock
fill activity rather it is required to support the working crew all activity.

II. Classification based on the nature of the expense

Costs should be gathered together in their natural groupings such as material, labor,
equipment and other expense. Material costs are any cost of material which are used for
the production of a product or provide a service. Labor cost indicates the payment made
to the permanent or temporary employees for a production of a product or rendering of
service. Equipment cost means the cost of machinery or any other equipment which are
used for the production of a product. For example, in construction firms activities use
different types of machinery and equipment, it is important to accurately estimate the
equipment cost as part of the total cost of the construction project. Expenses are other
than material, labor and equipment which are involved in an activity.

III. Classification based on function

A company performs several functions like manufacturing, selling, research, etc. In this
case, costs may be required to be determined for each of these functions. For example,
functional cost for a manufacturing sector can be classified as production and
manufacturing cost, administration cost, selling and distribution cost, research and
development cost.

IV. Classification based on the nature of the behavior

Based on the behavior in response to the change in the activity levels costs can be
classified as a fixed cost, variable cost, and semi-variable cost. Identifying these costs
provides valuable information for making management decisions and evaluating the
performance. Fixed cost is an expense that a company is obligated to pay which doesn‟t
vary with the change in the volume of activity. These costs are not affected by temporary
fluctuation in the activity of an enterprise and it is usually time-related. For example,
rent, depreciation, etc. Variable cost is an expense that changes or directly varies with the
total activity or volume of output produced. For example, direct material, piece-rate

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labor, etc. Semi-variable costs contain fixed and variable elements they are partly
affected by the fluctuations in the level of activities. Maintenance and supervision are a
good example.

V. Classification based on the nature of production or process

To identify costs in manufacturing it is important to classify the costs based on the

production process of the industry. For example, a type of cost based on a production can
includes

1. Batch cost is total cost related to a cost unit which consists of a group of similar
courses which maintain its identity through one or more stage of production (ICAI,
Cost accounting, 2018).
2. Process cost

Some products are produced from a sequence of the continuous or repetitive process the
cost incurred during a period is considered as a process cost. This type of costing is
applied in industries where continuous manufacturing is carried out and the unit costs are
identified by dividing the process cost by the number of units produced during the period
(ICAI, Cost accounting, 2018).

VI. Classification based on costs for management decision making

The main purpose of ascertaining the cost is to provide relevant data for management to
make the decision-making process reasonable. For managerial decision making, cost data
can be analyzed keeping in view the following cost concepts:

Marginal costing is variable costs which indicate the rate at which the total cost of a
product increases or decreases due to the production increase by one unit (ICAI, Cost
accounting, 2018). Since fixed costs don‟t change with the change in the volume of
product the marginal cost is only influenced by the change in the variable cost.

Differential cost also known as incremental cost, is the difference between the total costs
because of the selection of one alternative to the other (Drury, 2012). It has a similar
principle with the marginal cost but the main difference is that the marginal costing
represents the increasing or decreasing of cost due to adding one extra unit of output,

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whereas incremental cost represents the additional cost/revenue resulting from a group of
additional units of outputs.

Opportunity cost is the cost that measures the revenue forgone or sacrificed because of
not making the best alternatives or choosing one option over the other (Charles, Srikant,
& Madhav, 2015). It refers to the return expected from an investment other than the
present one.

Replacement cost is the expense of an asset in the current market for the purpose of
replacement (ICAI, Cost accounting, 2018). It is useful in determining the optimum time
of replacement of an asset.

Relevant cost is costs which are relevant for a specific purpose and pertinent for making
a decision. Those costs can be changed by a decision whereas the other cost which is not
affected by the decision is irrelevant.

Imputed cost also known as „implicit cost‟ are a hypothetical cost that a firm forgoes by
taking one action or strategy over another. According to Drury (2012), this type of costs
isn‟t involving cash outlay computed only for the purpose of decision making. It is a type
of opportunity cost that cannot be recorded in the books of account but significant for
making a decision.

A sunk cost is the costs that have been incurred before where the decision will be
unaffected. These costs are irrelevant made in the past can‟t be changed by any decision
that will be made in the future (Drury, 2012).

Normal/Abnormal cost normal costs are the expenses that are usually incurred or
expected to incur at a given level of output (CIMA, 2005). Unusual or unexpected costs
occur due to abnormal situation of production is called abnormal cost.

Avoidable/unavoidable cost

Avoidable costs are those cost which can be kept by under a given performance
efficiency or by not adopting a given alternative, whereas unavoidable costs can‟t be
saved. Unavoidable costs are fixed cost which can‟t be eliminated or escape because they
are essential to be incurred to acquire the product.

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VII. Classification by time

Historical costs are the actual costs of product or service which are determined after the
event. Those costs are ascertained after they have been incurred and they represent the
cost of actual operational performance.

Predetermined costs are computed based on the specification of all factors affecting the
cost and cost data which can be standard or estimated.

Standard cost is planned unit cost of a product, component or service (CIMA, 2005).
The predetermined calculation of the amount of cost from an assessment of the value of
cost elements correlates technical specifications and the quantification of materials, labor
and other costs, that will occur under the specified working condition. It is useful in
providing bases for controlling costs and efficiency.

Estimated cost is forecasting a cost based on the past performance which focuses on the
level of costs not to be exceeded. It is also used in price fixation and tendering.

2.3 Accounting
Accounting is a tool that transfers economical information to people who have an interest
in an organization such as the managers, shareholders, investors, and even for the
government (Drury, 2012). It is an art that focused on keeping records of receipts and
payments as well as income and expenditure (ICAI, Cost and managment accounting,
2012). Many kinds of literature named it as a “language for financial decision”. In any
business after gaining a sound knowledge on different types of cost which can occur in
the business, it is also crucial to have the proper format of recording the costs for the
future and present decisions. For accounting information to be appropriate for decision
making, the accountant who process the data must be conscious about for what is the
purpose the information be used and by whom (Sharma B. , 2007). There are many
groups of users of this information and each of these groups will have different needs for
accounting information (Atrill, 2009). According to ICAI (2012), it can be broadly
divided into 3 categories namely:

 Financial Accounting,

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 Management Accounting, and

 Cost Accounting,

2.3.1 Financial accounting

Financial accounting can be defined as a branch of accounting that keeps track of a
company‟s financial transaction by classifying, analyzing and recording in a systematic
manner to prepare a summary at the end of the year to and out the results of the
concerned accounting year (ICAI, Cost and managment accounting, 2012). Basically,
financial accounting desire at looking at the outcome of an accounting period in part of
profits or losses and assets and liabilities. Financial accounting is mainly concerned with
the provision of information to external parties outside the organization (Drury, 2012).

2.3.2 Management accounting

According to Drury (2012), management accounting is concerned with the provision of
information to people within the organization to help them make better decisions and
improve the efficiency and effectiveness of existing operations. Management accounting
is primarily concerned with management by which it helps in making rational decisions
for the accomplishment of these objectives. Management accounting is an accounting
system that will help the management to improve its efficiency. The main thrust of
management accounting is towards determining policy and formulating plans to achieve
the desired objectives of management (ICAI, Cost and managment accounting, 2012).

2.3.3 Cost accounting

Cost accounting measures, analyzes and reports financial and non-financial information
relating to the costs of acquiring or using resources in an organization (Charles, Srikant,
& Madhav, 2015). It refers to the process of recording all incomes and expenditures and
ends with the preparation of statements and reports for ascertaining and controlling the
costs of a product. Cost Accounting is classifying, recording and appropriate allocation of
expenditure for the determination of the costs of products or services, and the
presentation of suitably arranged data for control and guidance of management (ICAI,
Cost accounting, 2018). Cost accounting accounts for the cost of products, service or an
operation. According to the Institute of cost accountants of India (2018), cost accounting

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is defined as a quantitative method that collects, classifies, summarizes and interprets

information for product costing, operation planning, and control and decision making.

It is conspicuous from an exploration of different literature that the separation between

cost accounting and management accounting is highly ambiguous some writers citing to
the decision making facet in terms of cost accounting and other writers using the term
management accounting; the two terms are often used synonymously (Drury, 2012).

Cost accounting differs from other types of accounting in such a way that it focuses on
the computation of cost on a scientific basis and thereafter controlling and reduction of
cost. One of the main objectives of cost accounting is to collect records and measure
numbers that describe economic activity such as amounts, prices, values, and other
quantities. Another main task of cost accounting is to create and use reports and
calculations based on these numbers for decision-making, to reduce the company's costs
and to improve profitability.

2.4 Difference between cost accounting and financial accounting

There is a misunderstanding about the meaning of cost accounting and financial
accounting. Both types of accounting have their aims and purpose. The major difference
between these two branches of accounting as per Charles, Srikant & Madhav, (2015) and
ICAI, (2012) are:

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Table 1: The Difference between Financial Accounting and Cost Accounting (ICAI, (2012))

Cost accounting Financial accounting

Provides essential information to It provides information to different parties
the management staff for proper involved in business internally and
planning, operation, control, and externally.
decision making.
It helps to ascertain the cost of It helps to know the operational results and
goods produced. financial position of a business.
It classifies the costs into the Transactions are divided into debit and
material, labor, fixed overhead, credit terms.
and variable overhead.
It provides a detailed system of It emphasizes the recording aspect without
control for materials, labor and attaching any importance to control.
overhead cost with the help of
standard costing and budgetary
control
Variance analysis is to identify the It records only actual transactions
favorable and adverse difference occurring in the course of business
between standard cost and actual operations
cost.
Provides valuable information on Don‟t provide information on efficiency
the efficiency of employees, plant,
and machinery
Facilitates the presentation of cost Financial statements are annually
information at regular intervals. presented.

Profit or loss is estimated on a It presents the operational results of the

specific product, branch, entire business.
department or job.

2.5 Objectives of Cost Accounting

As per ICAI, (2012) the objectives of cost accounting can be summarized as under:

 Ascertainment of cost: the primary objective of cost accounting is to ascertain

the costs of a product or cost object on per unit basis or total cost, for example,
cost per kg, cost per meter, cost per liter, cost per ton, etc.
 Fixing of the selling (unit) price once the unit basis or total costs of a product
or cost objects is known then the selling price or the service price of the
product or service can be determined by adding a reasonable amount of profit.

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 Controlling and reduction of cost: - cost accounting helps to preserve the

cost of a product at optimum level without affecting the proper quality. Costs
can be controlled by comparing the Standard and actual costs of a product.
Cost reduction implies the retention of essential characteristics and quality of
products and genuine saving of expense by the elimination of wasteful and
inessential elements.
 Assisting the management for planning and decision making it provides
relevant data in a systematic manner and actual information about the cost to
the management for the evaluating, future planning and decision making. Cost
accounting helps in the presentation of relevant data to the management which
helps in decision making. Decision making is one of the important functions of
Management and it requires the presentation of relevant data. Cost accounting
enables the presentation of relevant data systematically so that decision
making becomes possible.
 Forecasting the future cost by using the past records of cost accounting the
product future cost of an activity can be done so that the budget can be
allocated.
 Control efficiency also helps in locating wastages, inefficiencies and other
loopholes in the production processes/services offered.
 Ascertainment of profit by using the cost accounting techniques division
wise, activity-wise and unit wise profitability can be ascertained. Also with the
help of cost accounting data the management can increase the level of output
and profit.
 Effective information of the system it enables us to ascertain the cost at every
level of the production process and activity level.

2.6 Importance of cost accounting

An effective and organized system of costing may have the following importance:

 Providing information to different bodies with respect to production, cost,

materials, labor, stores, plant capacity, etc. which assist out planning,

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 Identifying profitable and unprofitable activities that help the management to

reduce or eliminate wastages and inefficiencies such as underutilization, idle time,
spoilage of material, etc.
 Managing the cost in a systematic way which will lead to effective product
pricing.
 Supporting continuous inventory system, this ensures preparation of interim profit
and loss account.
 Assisting in the formulation of policies related to the product, price, etc.
 Comparison of cost between different periods, products, departments or firms.
 Revealing idle capacity, would help the management to deal with bottlenecks.
 Ascertainment of cost and profit more frequently and examination of their causes
in detail.
 Taking decisions based on facts and formulation of suitable policies for various
matters.

2.7 Method of costing

ICAI (2018), defines costing as a technique and process of ascertaining the cost. Costing
is classifying, recording, allocation and appropriation of expense for the determination of
cost of products or service and the presentation of suitably arranged data for the purpose
of control and guidance of management (Charles, Srikant, & Madhav, 2015). The
primary aim of cost accounting is to ascertain the cost of the product offered or the
services provided. To do the same, it is necessary to follow a particular method of
ascertaining the cost. To ascertain the cost of products or services offered different
methods of costing are applied in various businesses. According to ICAI, (2012) there are
two principal methods of costing:

1. Job Costing
2. Process Costing

2.7.1 Job Costing

This method of costing is the category of basic costing methods applicable where the
production is as per the requirement of the customer. In this method, a cost object is a

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unit or multiple units of a distinct product or service called a job (Charles, Srikant, &
Madhav, 2015). For industries, when the production is not on a continuous basis, rather it
is only when order from customers is received as per the specifications and with a
different product in such type of business, organizations use Job Costing or Job Order
Costing. This creates the need for the cost of each unit to be calculated separately (Drury,
2012). A job may be a product, unit, batch, sales order, project, contract, service, specific
program or any other cost objective that is distinguishable clearly and unique in terms of
materials and other services used (ICAI, Cost and managment accounting, 2012). The
cost of a completed job will be the materials used for the job, the direct labor employed
for the same and the production overheads and other overheads if any charged to the job.
Job costing includes batch costing and contract costing
 Batch Costing: is the extension of the job costing, used where units of a product
are manufactured in batches and used in the assembly of the final product. Thus
components of products like television, radio sets, air conditioners, and other
consumer goods are manufactured in batches to maintain uniformity in all
respects (ICAI, Cost and managment accounting, 2012). The cost per unit is
determined by dividing the costs of the batch by the number of units produced in
a batch.
 Contract Costing: is a method used when the job is big and spread over a long
period (ICAI, Cost and managment accounting, 2012). Contract costing is used by
concerns like construction firms, civil engineering contractors, and engineering
firms.

2.7.2 Process Costing

This type of costing is used in those industries where the production is in a continuous
process, i.e. the output of one process becomes the input of the subsequent process and so
on (ICAI, Cost and managment accounting, 2012). Examples of such industries are paint
works, chemical plants, food manufacturing, oil refining, paper mill, textile mills, sugar
factories, fruit canning, dairy and so on. In such industries, the input is put in the first
process and the output of each process becomes the input of the subsequent process until
the final product emerges from the last process. (McCaffer, Thorpe, & James, 1990)

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2.8 Process of cost accounting

To achieve the objectives of cost accounting the system should correctly follow each
process of cost accounting. NCC, (1979) classified the process of cost accounting into
four phases namely; performance data recording, data processing, performance
evaluation and corrective decision making.

2.8.1 Performance data recording

According to National Computing Centre, N.C.C. (1979), data recording refers to the
process of "accumulating, regularly, the necessary information so that progress on a
project can be measured, both as regards time and cost utilization, and also the
completion status of current activities". The data recording method can be manual or
computerized. In manual recording the cost data are maintained by hand while in a
computerized system the cost data are maintained by using computers. Many researchers
like Rasdorf, (1991) discouraged manual data capture because the system is subject to
human errors during filling out forms by hand, summarizing the paper forms onto others
and keying information into computer work stations. Also McCaffer, Thorpe & James,
(1990) criticized manual data capture via the use of forms or cards for being inaccurate,
laborious and containing only limited details to enable effective monitoring and control
of projects. To overcome the problems, many researchers proposed a computerized data
capture system using portable laptop computers such as Charles Gregory in association
with Loughborough University of Technology quoted in Abubakhar, (1992), developed a
program the Site Manager System (SMS). The SMS software was designed to be used
on portable (laptop) type computers. The design philosophy was that the user could take
his/her data wherever he/she went. The site machines were coordinated by a central PC at
the head office. This machine ensured that all sites were kept up to date with the latest
software and data. Communication between site and head office was achieved via the
exchange of floppy disks, usually on a weekly basis (Abubakhar, 1992).

As mentioned in Abubakhar, (1992) PAVIC system (Productivity Analysis with Video

and Computer) was also developed at the Department of Construction Engineering and
Management of Chalmers, University of Technology in Sweden. The PAVIC system

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entailed video recording of work operations and analyzing the film by connecting it to a
specially coded computer which was programmed to imprint time marks on the sound
track of the videotape and transform the recorded information into statistics such as
means, maxima, minima and standard deviation for each operation studied. Abubakhar
(1992), states three methods of performance data capturing that appear to be particularly
for construction projects are card recording system, computer-generated turn around the
system and graphical method.
1. Card recording system
In this system all items of expenditure on-site should be captured systematically and
progressively such as; labor operational time and cost, materials consumption and
wastage, equipment utilization, breakdown and idle time, overhead expenses, and costs
of subcontractors, subcontractor's . Depending on the activities to be carried out, a
foreman collects the relevant forms for labor, materials, plant, and attendance before
starting time each day and enters the relevant data through the day as the operations
proceed (Abubakhar, 1992). At the end of the day, he signs and drops the completed
forms at the site office where all the forms for that day will be processed. Clough, Searse,
& Koki (2008), have identified designed forms or cards as the most popular means of
capturing data on construction sites. Such forms include time sheets for labor, plant and
subcontractors, site diary, equipment utilization register, work quantity summaries, and
stores forms.
2. Computer-generated Turnaround Document
As the name indicates it is a communication tool of primary significance for conveying
information between the office environment and the job site. The turnaround document is
not much different from the card system. Each foreman picks up an exception printout of
his expected activities for the day from the (site) computer room and returns the
completed document at closing time for feeding into the computer. Strictly speaking, the
turnaround document is simply a case of the card system linked to the computerized
database and with automated processing and evaluation
3. Graphical method
This method of data capturing can be applied into generally small projects with very
simple schedules, repetitive projects and on management contracts where a main

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contractor schedules and monitors the activities of subcontractors. The foreman gets a
copy of the project schedule in bar charts or networks and shades the progress of his
operations on a daily, weekly or monthly basis and reports regularly to the management.
As Abubakhar, (1992) states this method is not effective in monitoring actual costs even
though it provides a good focus on the project schedule.

2.8.2 Data processing

As per Abubakhar, (1992) data processing is a process of accumulation, classification and
recording of received information into some recognized and meaningful manner to
facilitate identification of significant deviations from plans and or standards. The raw
data provided from the data capturing stage uses to answer most of the questions that
form the aim and objective of performance measurement. To measure and interpret the
raw data some computational and or analytical routine is needed to present the data to the
management and supervisors.

2.8.3 Evaluating the performance

A periodic performance evaluation is done to measure the degree of deviation between
completed activities and plans. As per the institute of cost accountants of India, (2012)
the main aspect of performance measurement is a comparison between the targets and
actual. There are several tools and techniques like budgets and budgetary control,
standard costing and marginal costing, which are used in measuring the actual
performance against the target performance. This will facilitate introspection and
corrective action can be taken for further improving the performance.
It is a means by which unnecessary causes of waste can be identified so that the
organization knows where to focus its effort. As per Tunji-Olayeni, (2016) the purpose of
performance measurement is to provide timely and accurate feedback on the efficiency
and effectiveness of operations and to focus attention on continuous improvement.
Takim, R., Akintoye, A. and Kelly, J. (2003) state in a construction project context, it is
regarded as a systematic way of judging project performance by evaluating the inputs,
outputs and final project outcomes (Takim, Akintoye , & Kelly, 2003). In different
literature there are different methods for evaluating the performance Abubakhar, (1992)
tries to list out two methods that are suitable for construction.

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1. Performance ratio
Performance ratio provides a more pragmatic approach to the evaluation of performance
data and involves direct matching of data on an activity by activity basis to provide a
basis for corrective decision-making (Abubakhar, 1992) . The formula for calculating
performance ratios is:
Performance Ratio (PR) = Actual performance (AP) x100%
Planned Performance (PP)
If PR> 1, something has gone wrong to warrant corrective action; or that as long as PR <
1, there is nothing wrong with the project, and that conditions are all favorable.

2. Variance analysis
Constriction project works are usually planned to ensure that work is carried out
according to the budget, to the desired quality and in the allowed time. Mostly
divergences from plans occur. Nevertheless, such divergences are expected because of
the nature of the work and uncertainties associated with it. So the progress of the project
is required to be monitored and compared as the work proceeds to be able to identify and
measure cost and time variances. Variance analysis helps to monitor the project at every
level of an organization. Kabiru and Abuh, (2013) states the basic concept of variance is
simply the difference between actual costs incurred and standard or budgeted costs
applied to an activity or service process in a period. When practical or realistic standards
of performance are put in place, taking into consideration wastage and other losses, and
the actual performance deviates positively or negatively from the predetermined level of
performance, then there will be a question of why cost variance has occurred.

Kabiru I. and Abuh A,(2013) states that when the variance occurs first, the management
should recognize that the variances are only a starting point, a clue for investigation and
secondly, from the viewpoint of control, these variances should be measured as soon as
possible. The longer the delay, the staler would be the data and the fewer the
opportunities for corrections (Horngern, 1978).

The analysis of variance will be based on the various elements of costs in a process,
usually into material, labor, equipment, and overheads. It is the analysis and comparison

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of the variables that had caused the variation between the standards and actual
performance to highlight and prevent wastes in whatever form. Dandago K.I and Tijjani
B, (2005), states material variance could arise from the instability of prices, a supply of
material and management lapses such as inefficient purchasing policy, the uncertainty of
required materials and mistakes, reversal of specification and inadequate resources. Labor
variances are said to be caused mainly by management lapses like the improper
determination of internal rate, provision for labor turnover and idle time, quality of labor
and poor conditions of the machine. And variances from overheads are due to changes in
production volume, labor disputes, poor production scheduling, poor production quality
and major shifts in demand for products. Abubakhar, (1992) state the general formula for
calculating variance as;

V = (A-P) R

Where: V = variance of the resource being measured

A = actual amount of resource used
P = planned amount of resource to be used
R = planned rate/price for the resource

Abubakhar, (1992), states different types of variances that have to be computed but not
limited for construction for each cost code or center. Such as:
1. LRV = labour rate (price) variance
2. LEV = labour efficiency variance
3. MPV = materials price variance
4. MUV = materials utilization variance
5. MYV = materials yield variance
6. EEV = equipment efficiency variance
7. ERV = equipment rate variance
8. OHV = overhead variance
9. TCV = total cost variance

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2.8.4 Corrective decision making

After analyzing and evaluating the performance a corrective decision have to be taken. In
this level, the managements are concerned about what must be done immediately to
restore performance to the desired level or correct standards and the basic causes of
deviation. According to Abubakhar (1985) cited in Abubakhar, (1992), the decision-
making process has the following steps:
1. Analyzing reported performance data to determine the cause(s) of any
identified loss of performance.
2. Making rational decisions as to what action to take to correct the deficiency and
to attempt to return performance to the desired level.
3. Communicating the corrective decisions to the right level and at the right time,
(usually as soon as possible), for implementation.
4. Implementing the corrective decisions by instructing staff and management of
the new approach.
Abubakhar, (1992), list out the following as a corrective decision option for management
in the case of construction
1. Change the resource mixes of adverse activities
2. Review/change the plan, schedule, and budget of the project.
3. Review/change site organizational structure and/or project information
system.
4. Review the activities of vendors, subcontractors, consultants, and clients.
5. Re-evaluate local market for labour, materials, equipment, subcontractors
etc..
6. Employ alternative methods and or procedures for site operations and
management.
7. Review contract conditions in relation to claim generating clauses.

2.9 Overheads
As discussed earlier, based on the nature costs are classified as a direct and indirect cost.
Direct costs are those which are identifiable and traceable to the cost object while indirect
costs are not traceable to the cost object. If the company manufactures or produce only

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one product all cost is direct and easily traceable to the product but if more than one
product is offered by the firm the indirect costs are not traceable with a particular
product. This indirect or supplementary cost which cannot be wholly debited to a
particular job is called Overhead cost (ICAI, Cost and managment accounting, 2012). As
per CIMA,(2005) overheads comprise costs of indirect materials, indirect employees and
indirect expenses which are not directly identifiable or allocable to a cost object in an
economically feasible manner. Thus all indirect material, indirect labor and indirect
expense are called overheads. For example, rent, tax, depreciation, maintenance repairs,
supervision, etc.

2.9.1 Overhead distribution

The ultimate aim of knowing overhead is to absorb the cost in product unit produced by
the firm. Absorption of overhead means charging of each unit of a product based on the
appropriate portion of its share of overhead expense (ICAI, Cost and managment
accounting, 2012). A lot of care has to be taken in the absorption of overheads as accurate
absorption will help in arriving at an accurate cost of production. The steps in overhead
distribution are discussed below.

1. Collection and classification of Overheads

The collection of overhead is very important. It is a process of recording each item of
cost in the records maintained for the ascertainment of cost of each cost center (ICAI,
Cost and managment accounting, 2012). The documents can be collected from different
sources like store issues, payroll sheets, subsidiary records, and other reports.

After the overhead costs have been collected it is advisable to classify them according to
their category. Classification is defined by CIMA (2015) as, „the arrangement of items in
logical groups having regard together nature (subjective classification) or the purpose to
be fulfilled (Objective classification. Classification of cost in an accurate manner is a
prerequisite to any form of cost analysis and control system. It can be made according to
the following basis:

I. Classification according to Nature: - based on the nature overheads are classified as

follows

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Indirect material: can be defined as the costs of materials that cannot be directly
attributed to a particular product unit (ICAI, Cost accounting, 2018). For example,
lubricants used in a machine are indirect material.

Indirect Labour: These are indirect employee cost which cannot be directly attributed to
a particular cost object. Wages and salaries paid to indirect workers, i.e. workers who are
not directly engaged in the production are examples of indirect wages (ICAI, Cost and
managment accounting, 2012).

Indirect Expenses: are expenses, which cannot be directly attributed to a particular cost
object. For example, expenses such as rent and taxes, printing and stationery, power,
insurance, electricity, marketing and selling expenses, etc.

II. Classification according to function depending on their function overheads can be

classified as follows:

Manufacturing overhead has a different name such as factory overheads, production

overheads and works overhead. The indirect expense which is incurred for production or
manufacturing process, but cannot be identified with the product unit are called
manufacturing overheads (ICAI, Cost and managment accounting, 2012). For example,
factory rent insurance, repair, and maintenance of plant and machineries, salaries of
foreman and supervisor, lubricant oil, stationery, etc.

Administrative overhead these are costs that are incurred for running the general
management and administration of the organization (ICAI, Cost and managment
accounting, 2012). The expense may be for policy formulation, directing the organization
and controlling the operation of the organization. These costs are incurred for the benefit
of the organization as a whole.

Selling and distribution overheads are all indirect expenses related to sales
management for the organization. An expense incurred for getting an order from the
consumers is called selling expense whereas costs incurred for the execution and
handling of order from the time it is ready for dispatch until it reaches the consumers are
called distribution expense (ICAI, Cost and managment accounting, 2012). This overhead

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in the total cost would depend on many factors such as the nature of the product, type of
customers, spread of market, statutory restrictions, etc.
III. Classification based on behavior or variability
Fixed overheads also known as period cost are constant expenditures incurred during a
period without regard to the volume of production during that period (Maharshi
Dayanand university, 2004). These costs are not affected by the outputs of production
only when the change in output is not substantial. If the change in the output is
substantial these will increase and remain constant.
Variable overheads are costs that fluctuate in the same ratio to the volume of output. For
example, power, and selling commission.
Semi- variable overheads these are costs which are partly fixed and partly variable. For
example telephone costs. There are two types of semi-variable overhead, the expense
which changes with the change in the volume of output and the cost which remains
constant with a certain range of output, then jump up and remain constant for another
range and so on (Maharshi Dayanand university, 2004).
2. Departmentalization of overhead
The term departmentalization of overheads refers to creating the department in the firm
so that the overhead expense can be easily allocated and apportioned to the departments
like fabrication, assembling, maintenance, test room, etc (ICAI, Cost and managment
accounting, 2012). The process helps in the ascertainment of cost of each department and
control of expense. This involves the following stages:

a. Allocation is a process of charging a full amount of overhead cost from a

particular cost object (Maharshi Dayanand university, 2004). According to CIMA,
(2005) cost allocation is defined as, the charging of discrete, identifiable items of
cost to cost centers or cost units. For example, electricity charges can be allocated
to various departments, depreciation of machinery can be allocated to various
departments, and the salary of the store clerk can be allocated to the stores
department. Therefore, the allocation is a direct process of identifying overheads
to cost units or cost centers. The term allocation indicates ration of the whole item
of cost to a particular cost center or cost object without any division (ICAI, Cost
and managment accounting, 2012).

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b. Apportionment there is a situation where the allocation of overheads to a specific

cost center is not possible; in this case, the overhead costs have to be apportioned
to different departments based on suitable bases. This process is known as
„apportionment of overheads‟. Apportionment is a process of allotment or
splitting up the overhead costs and charging it to the cost centers on an equitable
basis (Maharshi Dayanand university, 2004). For example rent of the factory,
general manager‟s salaries, etc. The bases for the apportionment have to be
studied and decided carefully. For example, for rent, the basis for apportionment
can be floor area occupied by each department, for general lighting numbers of
light points for each department, for material handling value of materials used are
the bases. This apportionment of overheads is called the primary distribution of
overheads (ICAI, Cost and managment accounting, 2012).
c. Reapportionment of overheads as we have seen earlier before starting allocation
of overheads the firm has to be classified to a different department to ascertain
and identify the cost incurred in each department. The firm can be broadly
classified as production department and service department. Production
departments are departments where the actual production process takes place.
Whereas service departments are the department that gives service to the
production departments (ICAI, Cost and managment accounting, 2012). For
example, human resource department, maintenance department, general service
department, store department, etc. The apportionment of the service department
to the production department is known as the reapportionment of overheads
(Maharshi Dayanand university, 2004). This reapportionment of service
overheads to the production overheads is called a secondary distribution summary
of overheads (ICAI, Cost and managment accounting, 2012).
3. Absorption of overheads

Absorption refers to charging of overheads of cost centers to different cost units in such a
way that each cost unit bears an appropriate portion of its share of overheads (Maharshi
Dayanand university, 2004). This is done by means of overhead rates. An overhead rate
refers to the rate at which the overheads are to be charged to different cost units. It can be
in the form of a rate per unit or percentage (Maharshi Dayanand university, 2004). ICAI,

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(2012) indicates several methods in determining the overhead rates such as actual,
predetermined overhead, blanket, and multiple rates.

Actual overhead rate is obtained by dividing the overhead expenses incurred during the
accounting period by actual quantum on the base selected (ICAI, Cost and managment
accounting, 2012). Assuming that the rates are worked out on a monthly basis the
formula is:-

Predetermined overheads rates it is computed by dividing budgeted overhead expense

for the accounting periods by the budgeted bases (quantity, hours, etc.) (ICAI, Cost and
managment accounting, 2012).

Blanket overhead rates this may be absorbed either based on one single rate (known as
a blanket rate) computed for the factory or based on separate rates for each individual
department or cost center (ICAI, Cost and managment accounting, 2012). It is applied
where one product is manufactured or where work performed in different departments is
more or less on a uniform pattern.

Multiple overhead rates this method is most commonly used to determine the multiple
overhead rates, i.e. separate rates: for each producing department, for each service
department, for each cost center and for each product line (ICAI, Cost and managment
accounting, 2012). The multiple rates are worked out according to the below formula:

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Under-absorption and Over-absorption of Overhead

Overhead costs that are absorbed in the costs unit is the total sum of the overhead costs
allotted to individual cost units by application of the overhead rate. If the amount
absorbed is less than the amount incurred, which may due to actual expenses exceeding
the estimate and / or the output or the hours worked may be less than the estimate, the
difference denotes under-absorption (ICAI, Cost and managment accounting, 2012). On
the other hand, if the amount absorbed is more than the expenditure incurred, which may
be due to the expense being less than the estimate and / or the output or hours worked
may be exceeding the estimate, this would indicate over-absorption, which goes to inflate
the costs (ICAI, Cost and managment accounting, 2012).

2.10 Cost Assignment

As we have seen earlier based on their nature costs are classified as a direct and indirect
cost. These two costs have to be assigned to a cost object to know the cost of each
product or service. The direct cost can be assigned accurately to cost objects because they
can be specifically and exclusively traced to a particular cost. This direct assignment of
direct cost to cost object is termed as direct cost tracing. In contrast, the indirect cost
cannot be traced directly to cost objects because these costs are common for several cost
objects (Drury, 2012). So that indirect costs are assigned to the cost objects by allocating
the cost. Cost allocation is the process of assigning the cost when the quantity of
resources consumed by a particular cost object can‟t be directly measured (Drury, 2012).
Allocation of the cost can be based on a different basis for example machinery hour, a
quantity of material used, direct labor hour, etc. The bases which are used to allocate the
indirect cost called allocation bases or cost drivers. Drury, (2012) states that when
allocation basis is significant determinants of the cost it is known as the cause – and –
effect allocation whereas where the cost allocation base is used that is not a significant
determinant of its cost, the term arbitrary allocation is used.

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Figure 1: Cost Assignment Method (Drury, 2012)

2.11 Costing systems

The main objective of any costing system is to determine scientifically the cost of a
product or service. For facilitating the calculation, costs are divided into direct and
indirect. Direct costs are the costs which are traceable to the products/ services offered.
On the other hand, indirect costs which are also called „overheads‟ are not traceable to the
particular products/services. Based on the assignment of cost to the cost object there are
two types of costing system named as direct and absorption costing system (Drury,
2012). A direct costing system also known as a marginal or variable costing system
assigns an only direct cost to the cost object whereas the absorption costing system
assigns both direct and indirect cost to cost object (Drury, 2012). Charging of direct cost
of a product is comparatively a simple procedure and can be done with better accuracy.
There are problems in charging the indirect costs of a product and there is a possibility of
distortion of costs. Distortion in a cost results into incorrect cost calculation may lead to
wrong decisions such as errors in fixing selling price, missing profitable activities,
ignoring customer orientation, etc. (Drury, 2012). Depending on the allocation of

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overhead, absorption costing system, it can be divided into divided into traditional
costing system and activity-based costing system.

Direct
costing
Costing
System Traditional
costing
Absorption
costing
Activity
based costing

Figure 2: Costing System Classification

2.11.1 Traditional costing system

The traditional costing system of cost accounting refers to the allocation of
manufacturing overhead costs to the products manufactured. The system also known as
the conventional method was developed in the early 1900s. It uses arbitrary cost
allocation and assigns or allocates the company‟s indirect costs to the items manufactured
based on volume such as the number of units produced, the direct labor hours, or the
production machine hours (Drury, 2012).

Limitation of the traditional costing system

 In a traditional costing system, overheads are allocated, apportioned and finally

absorbed in the cost units. There can be distortion in computing costs due to the
basis selected for absorption (ICAI, Cost and managment accounting, 2012).
 The division between fixed and variable may not be realistic as there are many
complications due to the complexity of the modern business (Majid & Sulaiman,
2008).

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 There should be a linkage between the activities and the costs. Similarly, the
information should be available simultaneously which means that information
should be made available while the activities are going on. The information
available after the activity is over will not be of much use (Charles, Srikant, &
Madhav, 2015).

2.11.2 Activity-based costing

Activity-Based Costing (ABC) is a costing system that tries to charge the indirect costs to
the products and services fairly accurately. According to Akyol, Tuncel, and Bayhan,
(2005) an activity-based costing system defined as a methodology that measures the cost
and performance of activities and cost objects. Also Reeve W. and Duchan, (2012) define
the activity-based costing system as an accounting framework that is based on relating
the cost of activities to final cost objects, such as products or customers. According to
Drury, (2012) the ABC system was promoted in the 1980s as a mechanism for more
accurately assigned the indirect cost to the cost object. ABC system differs from the
traditional costing system by the level of sophistication. The traditional costing system is
simplistic whereas ABC is sophisticated. Simplistic systems are inexpensive to operate,
but they are likely to result in inaccurate cost assignment and reporting of inaccurate cost,
which can cause managers to make a dangerous mistake. The end result may be high cost
of error. Conversely, sophisticated systems are more expensive to operate but they
minimize the cost of errors.

Figure 3: Cost systems – Levels of sophistication (Drury, (2012))

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CIMA, (2005) defines activity based costing as cost attribution to cost units based on
benefit received from indirect activities e.g. ordering, setting up, and assuring quality.
Activity-Based Costing has been introduced to overcome the limitations of traditional
costing systems.

Objectives of Activity-based costing

 To bring more accurate result in the computation of the cost of a product or

service by removing the distortions as seen in the traditional costing system
 To help the management in decision making by accurately computing the costs of
products and services.
 To allocate overheads based on activities.
 To identify value-adding activities and eliminate non-value-adding activities.
 To detect the opportunities for improvement and reduction of costs.
As per the institute of cost accountants of India,(2012) the following steps have to be
followed to install a cost accounting system in an organization. The stage of activity
based costing is explained below.

 Understanding and analyzing manufacturing process: -to install any costing

system, the study of the manufacturing process is essential. For activity based
costing system also, it is necessary to study the manufacturing process and
ascertain various stages involved in the same so that „activities‟ involved in the
same can be identified (ICAI, Cost and managment accounting, 2012).
 Study of the Activities involved: -The next step is to study the activities
involved in the manufacturing process. This step is very crucial as the entire
Activity Based Costing is based on the identification of activities. In this step, the
activities involved in a process are identified.
 Activity Cost Pool: - Cost pool is defined by CIMA, (2005) as, „the point of
focus for the costs relating to a particular activity in an activity-based costing
system. In the case of a manufacturing organization, as regards stores, cost of
classification, cost of issue of store requisitions, inspection costs, etc. can be
pooled under the heading „stores‟. Thus cost pool concept is similar to the

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concept of a cost center. The cost pool is the point of focus or in other words, it is
the total cost assigned to an activity. It is the sum of all the cost elements
assigned to an activity.
 Cost Drivers: - is any factor which causes a change in the cost of an activity.
(CIMA, 2005). Thus a cost driver is an activity that generates cost. Activity-
based costing is based on the belief that activities cause costs and therefore a link
should be established between activities and products. The cost drivers thus are
the link between the activities and the cost (ICAI, Cost and managment
accounting, 2012).
 Identification of costs with the products: - The final stage in Activity based
costing is to identify the cost with the final products which can also be called as
cost objects. Cost objects include products, services, customers, projects and
contracts. As mentioned earlier, direct costs can be identified easily with the
products but the indirect costs can be linked with the products by identifying
activities and cost drivers. Thus Activity Based Costing is the process of tracing
costs first from resources to activities and then from activities to specific products
(ICAI, Cost accounting, 2018)
For effective implementation of an activity-based costing system, there is a need for
involvement of the staff and their training on a continuous basis (Maharshi Dayanand
university, 2004). Similarly, there is a need to review the working of the system at
periodic intervals and keep a follow up of the feedback received. These actions will
ensure the effective implementation of the system. Support of top management is also
required for the effective implementation of this system. Activity based costing system is
definitely a better system but much depends on the implementation of the same (ICAI,
Cost and managment accounting, 2012). Traditional cost systems tend to report less
accurate costs because they use cost drivers where no cause-and-effect relationships exist
to assign support costs to cost objects (Drury, 2012).

2.12 Evaluating and improving costing in organizations

Every organization whether it is private, public or voluntary sector consumes economic
resources to operate every action or function. Those resources of the organization have to

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be measured, accumulated and assigned to various processes and outputs to allow the
structure and operation of the organization to explained, understood and improved.
Costing, the accounting term that embraces these processes and expresses them using
money as a common language lies at the heart of managerial accountancy and, exercised
intelligently. Costing contributes to an understanding of how profits and value are
created, and how efficiently and effectively operational processes transform input into
output (IFAC, 2009). The information available in costing can be used to provide
feedback on past performance and motivate to change the future performance. IFAC,
(2009) states that costing for decision support is valuable for performance improvement,
value creation, “what if” analysis, and the effective and efficient application of an
enterprise‟s resources and processes.

2.12.1 Key Principles of Evaluating and Improving Costing in Organizations

International Federation of Cost Accountants (IFAC), (2009) states that using costing
effectively for decision making requires understanding clear, timely cause-and-effect
relationships between an output and the inputs required to produce it. Conflicts can arise
when managers use the wrong cost information to support decision making.
The IFAC, (2009) establishes six fundamental costing principles that will help
organizations to evaluate and improve their approach to providing relevant and reliable
managerial information. According to IFAC,(2009) these principles are designed to apply
in all organizations and provided as a benchmark to evaluate the good practice in
applying costing systems and methods and using costing information, for managerial
decisions. It will enable the decision-makers by providing a descriptive and historical
view of costs and a predictive forward-looking view that together provide the basis for
analysis, evaluation, planning, and decision support. The key principles underlying
widely accepted as good practice by IFAC, (2009) are:
A. The importance of costing to good financial management:-The ability to
identify, measure, interpret, and present costs as they relate to an organization‟s
economic flow of goods and services, both historically and in a forward-looking
context, is necessary for an informed understanding of the organizational drivers
of profit and value.

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B. Fitness for purpose: -Cost information should be prepared in a manner

appropriate to the specific context and purpose of its use, of which there are three
principal applications:
• External reporting – historical and descriptive
• Performance evaluation and analysis – interpretative and diagnostic
• Planning and decision support – analytical and predictive
C. Business model/reality-driven: - Cost models should be designed and
maintained to reflect the cause-and-effect interrelationships and the behavioral
dynamics of the way the organization functions. The information needs of
decision-makers at all levels of an organization should be taken into account, by
incorporating an organization‟s business and operational models, strategy,
structure, and competitive environment.
D. Materiality/cost-effectiveness: - The design, implementation, and continuous
improvement of costing methods, data collection, and systems should reflect a
balance between the required level of accuracy and the cost of measurement (i.e.,
cost benefit tradeoff), based on the competitive situation of the organization.
E. Comparability over time and consistency: - Cost information should be
collected and analyzed systematically and in such a way as to ensure
comparability over time, whether in a routine information system or for a specific
application and/or purpose.
F. Transparency and auditability: - Definitions and sources of cost data, the
operational and other non-financial data underpinning them, and the methods of
calculating costs, should be transparent to users and recorded and capable of
review, risk analysis, and assurance.

2.13 Problems in the implementation of costing system

According to Abedalqader A. (1992), the main problems encountered in the
implementation of costing are lack of top management support, difficulties of choosing
cost drivers and difficulty in identifying activities. Based on the literature review Nangan,
(2012) tries to list out and state the common problems which can be occurred in the

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implementation of costing system as tabulated in Table 2 and defines some of the

problems as follows:
1. Lack of top management support

The lack of top management support in the implementation of costing is one of the
common problems encountered in the implementation of the costing system. Wessels
S.and Shotter M(2000: 222) states that the intensity of the lack of management support
increases especially when the top management is more concentrated or focused on other
priorities in the firm, as being more important than the costing initiative or when costing
initiative is not aligned with the company strategy. Also, a key-related problem cited by
Wessels and Shotter,(2000) is that the implementation of costing is too time-consuming
for operational managers.

2. Technical or resource constraints

Marivic, (2004) quoted in Nangan, (2012), states that the difficulties in implementing
costing are technical and complex since the steps involved need detailed records of the
costs associated with producing products and services. Marivic, (2004), also observes that
employees lack of basic knowledge and skill of costing techniques. Sartorius, (2007)
states that other technical or resource obstacles include a difficult definition of cost
centers and cost drivers, a lack of adequate information or technology system, a difficult
accumulation of data needed for costing and a difficult integration of costing data with
another system. Also, Majid and Sulaiman, (2008) argue that the high cost of the
implementation, especially the cost of IT (purchasing and updating specific software) are
one of the resource constraints encountered by companies during the implementation of a
costing system. A study by Wessels and Shotter (2000), indicates that the lack of
adequate employee resources is also one of the resource constraints.

3. Misconceptions about costing

According to Nangan, (2012), most companies face employee resistance while

implementing costing. In this regard, Majid and Sulaiman, (2008) state that lower-level
employees are skeptical of the new system, primarily because they do not know what
costing is all about. According to Sartorius, (2007) the misconceptions about costing

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leads to inadequate marketing of costing and negative publicity within companies.

Marivic (2004) quoted in Nangan 2012 states that cost would be adopted more readily by
various companies if costing were marketed better by the accountants themselves.

4. Lack of coherence with the organization’s goal and culture

According to Wessels and Shotter, (2000) the problems relating to a lack of coherence
with the organization‟s goal and culture are the incompatibility of costing with company
strategy, and inadequate training of managers, and inadequate training of implementers,
inadequate training of users and resistance to change in organizational culture.

Table 2: Common problems in implementing costing, (Nangan 2012)

Main obstacles in implementing a costing system

Top management support

Lack of top management support

Management resistance; seeing costing as just a passing “fad”

Management gives more emphasis to other priorities in the firm

Too time-consuming for operational managers

Absence of project sponsor

Technical or resource constraints

Complex and require detailed records and more effort

Employees lack basic knowledge and skill of costing techniques

Difficulty in identifying and defining cost centers and suitable cost drivers

Lack of adequate systems and IT

Difficulty with data collecting and gathering

Difficulty in integrating cost data with other systems

The high cost of implementation - especially the cost of IT

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Too time-consuming for accounting personnel

High turnover of costing project team individuals

Only accounting personnel on the project team

Misconceptions about costing

Inadequate marketing of costing - especially by accountants themselves

Negative publicity about costing

Employees‟ resistance because they do not exactly know costing

Negative perception about costing

Satisfaction with the current system

Lack of coherence with the organization’s goal and culture

Incompatible with company strategy

Inadequate training of managers

Inadequate training of implementers

Inadequate training of users

Resistance to change in organizational culture

2.14 Construction theories and cost accounting system

Any costing techniques which are used in construction need to be aligned with
construction production theory and should not conflict with theories that have been
developed to achieve efficiency in the industry. According to Evanse (2015), there is a
close similarity between principles of the TC and ABC systems and some construction
production theories. Lean construction theory is one of the most important theories
related to construction production. As per Womack & Jones, 1996 cited in Evanse
(2015), lean thinking was first established by Womack, Jones, and Ross in 1991. Khataie
& Bulgak, (2013) define a lean concept as “a management philosophy combined with a

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set of processes and methodologies which can eradicate and minimize the waste from the
production process”.

The concept of lean construction is the application of lean concepts to the construction
industry. According to Kramer, Henrich, Koskela, and Kagiolou (2002) quoted in
Evanse, (2015) lean construction tries to manage and improve construction processes at
low cost and with maximum value through a consideration of customer value. Similarly,
ABC aims to add value and reduce wastage by eliminating non-value adding activities
(Evanse, 2015). Both lean construction theory and ABC systems emphasize customer
value additions and product quality.

According to Khataie and Bulgak (2013), lean manufacturing is focused on approaches

that can help an organization to reduce the waste factors in its processes. Similarly,
Garrison (2011) state, one of the first steps in developing an ABC system is Process
Value Analysis (PVA), which helps the manager to eliminate non-value added activities
in the company and to improve quality.

2.15 Applications of Cost accounting in construction

The construction industries, like other industries, have been experiencing deep changes
involving both the business environment and internal organization. In this context, new
cost management information that provides a better understanding and helps to manage
increasingly turbulent and complex production processes is needed (Johnson & Kaplan,
1987). In the construction industry, the inadequacy of cost accounting systems has
resulted in the dissociation between cost management and the production planning and
control processes (Marchesan & Formoso). In general, construction cost control consists
basically of monitoring actual performance against cost estimates and identifying
variances.

Using the traditional cost account information has become mostly irrelevant and even
dangerous for managerial purposes (Kaplan & Cooper , 1997). According to Johnson &
Kaplan (1987) cited in Evanse, (2015), states that traditional management accounting
information tends to be too late, too aggregated and too distorted to be relevant for
production planning and control. According to Marchesan, and Formoso, (2013) the

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failings of the traditional management accounting systems have three important

consequences. Firstly, the system cannot provide accurate product costs. Costs are
distributed to products simplistically and arbitrarily that usually does not represent the
real demand imposed by each product on the company's resources. Secondly, traditional
management accounting systems fail to stimulate decisions that can affect the overall
production result. Finally, the cost management information provided by the traditional
systems is of little help to managers in their effort to improve production performance.

According to Marchesan, and Formoso, (2013) some alternatives for traditional cost
accounting systems have been developed, aiming to regain the managerial relevance of
cost information. One of these alternatives is the activity-based costing (ABC) method,
which has been suggested as the leading contender to replace traditional cost accounting
methods due to its capability to make the processes and activities performed in an
organization transparent and observable. The information produced by ABC cost systems
can increase process transparency, guiding to identify non-value adding activities and
take the necessary corrective actions (Kaplan & Cooper , 1997).

According to Kim & Ballard, (2002), traditionally construction companies use resource-
based costing (RBC) and volume-based allocation to deal with the problem of allocating
indirect costs to cost objects. The system of allocating overheads directly to cost objects
by the resource is known as resource-based costing, whereas volume-based allocation
refers to a system of cost allocation in which costs are assigned to products or services
using direct labor hours consumed or contract value. The difficulty with the current
system is that companies do not obtain accurate project costs because they fail to allocate
overhead costs, or they use a uniform cost driver to assign overhead costs to work
divisions (Kim & Ballard, 2002).
This makes it difficult to find where the money is being made or lost because progress
payments for each work division contain overhead costs (Kim & Ballard, 2002).
Therefore, using the current system of overhead allocation, contractors may be unable to
reduce or influence profitability since the system does not pinpoint how much the
contractor has spent on each section of the project (Evanse, 2015). ABC was chosen as

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the conceptual basis of the proposed system for its capability to provide a better
understanding of the processes and the activities performed, as well as for its affinity with
the new operations management ideas.

Donizetti, (2015) classifies the cost accounting system for manufacturing industry into
three main parts chart of account, responsibility center, and allocations system. A chart of
account is related to the acquirement of resources. This resource has to be classified
based on destination to the responsibility centers; each center contains costs related to
activities done in that center. Responsibility centers are classified as a support center and
product center. Support centers are a department or a section that is not directly involved
in performing the activity but it gives support to the production department or unit.
Whereas product centers are a subdivision of cost objects which has a direct relationship
with the final product or service. Finally, the costs which are classified as a support
center and product center have to be allocated to the product or cost objects.

2.16 Research Gap

There is limited research made on study about the cost accounting system of construction
companies. The measurement of project performance is essential as it enables important
management decisions to be reached on time and also helps in identifying areas requiring
improvement. Jouni (2009), states that the main problem in the construction industry is
related to cost accounting and cost control. The most problematic issue is that cost
accounting and controlling methods are not operating in real time. Due to the use of
unsuitable costing system the managements might fail to measure the project
performance accurately. Moreover, the lack of proper costing system leads to inefficient
uses of material, overstocking and inefficient decision leading to project cost overruns.
Therefore, need for research to investigate the overall costing system of an organization
is essential to evaluate the cost ascertainment system and identify the problem
encountered in implementing the system.

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3. RESEARCH METHODOLOGY

3.1 Introduction
Kothari (2004), defines research as the systematic method consisting of enunciating the
problem, formulating the hypothesis, collecting the facts or data, analyzing the facts and
reaching certain conclusions either in the form of the solution toward the concerned
problem or in a certain generalization for some theoretical formulation. Singh (2006),
stated that research is simply the process of arriving as a dependable solution to a
problem through a planned and systematic collection, analysis and interpretation of data.

3.1.2 Types of research

There are different types of research. Kothari (2004), tries to classify different types of
research as Descriptive vs. Analytical, Applied vs. Fundamental, Quantitative vs.
Qualitative, and Conceptual vs. Empirical. Descriptive research includes surveys and
fact-finding enquires of different kinds. The major purpose of descriptive research is a
description of the state of affairs as it exists at present. In analytical research, on the other
hand, the researcher has to use facts or information already available and analyze these to
make a critical evaluation of the material. Applied research aims at finding a solution to
an immediate problem facing a society or an industrial/business organization, whereas
fundamental research is mainly concerned with generalizations and with the formulation
of a theory. Quantitative research is based on the measurement of quantity or amount. It
is applicable to phenomena that can be expressed in terms of quantity. Qualitative
research, on the other hand, is concerned with a qualitative phenomenon, i.e, phenomena
relating to or involving quality or kind. Conceptual research is related to some abstract
idea(s) or theory. It is generally used by philosophers and thinkers to develop new
concepts or to reinterpret existing ones. On the other hand, empirical research relies on
experience or observation alone, often without due regard for system and theory. It is
data-based research, coming up with conclusions that are capable of being verified by
observation or experiment. Kumar (1999), tries to categorize different types of research
based on three perspectives application, objectives and the type of information sought.

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Figure 4: Types of research (Kumar, 1999)

From the above classification, this research is descriptive and analytical, applied and
quantitative research. It is analytical as it uses the company‟s existing cost accounting
reports to study the overall system; It is applied as it tries to find the solution for the
problem areas in implementing the system and propose a modified cost accounting
system for the company; It is descriptive as it tries to describe and find out the facts about
the cost accounting system of the company; It is quantitative as it tries to quantify the
response of the company employees through questionnaires.

3.2 Research process

A brief overview of the research process is essential before embarking on the details of
research methodology and techniques. The research process consists of a series of actions
or steps necessary to effectively carry out research and the desired sequencing of these
steps (Kothari, 2004). The first step determines the nature of the last step to be
undertaken. If subsequent procedures have not been taken into account in the early
stages, serious difficulties may arise which may even prevent the completion of the study.
By using the Kothari, (2004) flow chart as a guideline, this research follows the
following research process. Firstly, research objectives are identified from the
problems and the literature review will be assess from different books, journals and

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previous research. The research is designed to collect data through questionnaires and
desk study and then the collected data will be analyzed by using computer tools and
statistics. Finally, conclusion and recommendation will be made based on the
research findings.

3.3 Research Design

A research design is a procedural plan that is adopted by researcher to answer questions
validly, objectively, accurately and economically (Kumar, 2011). According to Selltiz,
Deutsch and Cook, (1962: 50) cited by Kumar (2011), „A research design is the
arrangement of conditions for the collection and analysis of data in a manner that aims to
combine relevance to the research purpose with economy in procedure‟.
According to Kumar (2011), the research design should provide detailed information on
the following aspects of the study;
 Who will constitute the study population?
 How will the study population be identified?
 Will a sample or the whole population be selected?
 If a sample is selected, how will it be contacted?
 How will consent be sought?
 What method of data collection will be used and why?
 In the case of a questionnaire, where will the responses be returned?
 How should respondents contact you if they have queries?
 In the case of interviews, where will they be conducted?
 How will ethical issues be taken care of?
Thus, depending on the above question this research has been designed as shown in the
following sections.

3.3.1 Research method and strategy

Singh (2006), states that the research method is a style of conducting a research work
which is determined by the nature of the problem. According to Singh (2006), research
methods can be classified under three heads;
1. Theoretical problem – survey, experimental method.
2. Factual problem – Historical, case study and genetic methods.

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3. Application problem – Action Research.

The survey method and case study methods are selected for this research. According to
Singh (2006), the survey method of research is concerned with the present and attempts
to determine the status of the phenomena under investigation. The major purpose of the
survey method in research is to tell „„what is”? i.e., to describe the problem or
phenomenon, but many surveys go beyond a mere description of the existing situation.
To answer the research question one, four and five this research use survey method by
distributing three different questionnaires to organization experts, decision makers
(managements staffs) and planning and marketing division.

A case study is essentially an intensive investigation of the particular unit under

consideration. It is a method of study in depth rather than breadth. The case study places
more emphasis on the full analysis of a limited number of events or conditions and their
interrelations. The case study deals with the processes that take place and their
interrelationship. According to Kumar(2011), „to qualify as a case study, it must be a
bounded system, an entity in itself. A case study should focus on a bounded subject/unit
that is either very representative or extremely atypical.‟ To explore in-depth about the
actual costing system case study is opted as a suitable method. Researches question two
and three is checked by the randomly selecting three ongoing projects to study deeply the
costing system of the company. According to Kumar (2011), the source of the case study
can be a personal document, life history, related person, official records, and the subject
himself. This research uses the project‟s cost accounting report as a source.

3.3.2 Study focus area and Selection criteria

Due to the utilization of a large number of human, material and machinery resources, the
study focuses on only state-owned road contractors. The decision to select Ethiopian
Construction Works Corporations is made for three main reasons:

1. ECWC TICS undertakes most of the large and complex projects all over the country
that are given to local contractors; hence, the impact of any improvement achieved will
significantly contribute to the overall improvement of the contractor‟s performance.

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2. ECWC TICS has many types of machinery and human resources in addition to
organizational and financial capability than private contractors; hence they are better
suited for studying the costing system.

3. The contractor is handled by the state and constructs different governmental projects.
To ensure that the public properties are used efficiently their costing system has to be
studied.

3.3.3 Sampling design

Kothari (2004), states that sample design is a definite plan for obtaining a sample from a
given population. It refers to the technique or the procedure the researcher would adopt in
selecting items for the sample. According to Kothari(2004), depending on the two
factors, representation basis and the element selection technique sampling are classified
as on representation basis probability and non-probability sampling and element selection
basis, the sample may be either unrestricted or restricted. Probability sampling is also
known as „random sampling‟ or „chance sampling‟ under which every item of the
universe has an equal chance of inclusion in the sample. Non-probability sampling is also
known by different names such as deliberate sampling, purposive sampling, and
judgment sampling. In this type of sampling, items for the sample are selected
deliberately by the researcher. When each sample element is drawn individually from the
population at large, then the sample so drawn is known as „unrestricted sample‟, whereas
all other forms of sampling are covered under the term „restricted sampling‟

By considering the above methods, this research purposively selects the Ethiopian Road
Construction Corporation Transport Infrastructure Construction Sector (ECWC TICS) to
study longitudinally the company‟s costing system. After identifying the sample size of
the research, the respondents were selected purposively gather the desired information
through questionnaires. Then from those ongoing road construction projects for an in-
depth study of the actual system, 3 projects have been randomly selected and a detailed
study has been undertaken.

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3.3.4 Structure of questionnaire

In order to answer the research question, this research uses two types of questionnaires,
implementers (experts) and management staffs. The questionnaire distributed for experts
are to find the answer for the research question number one and four which is about the
knowledge of the professionals on the cost accounting and its different techniques, and
the encountered problem during the implementation. The questionnaires for management
staff are prepared with the aim of answering research question number five which is on
the capability and appropriateness of the costing system in providing relevant information
for future planning and decision making. The respondents were asked to answer a
different question by choosing from the different alternatives and rating the current
costing system of the company based on the cost accounting requirement by selecting
poor, satisfactory, good, very good and excellent.

3.3.5 Target population

According to Kumar, (2011) the target population refers to the entire aggregation of
respondents that meet the designated set of criteria. The target population in this research
includes the professionals (engineers) who are in the position of implementing cost
accounting, management staff and engineering service and marketing department of the
company. The cost accounting implementers are those who implement the system like
data collecting, processing and analyzing the cost. The engineering service team leader
and office engineer are the responsible persons for this task in the company. From the
management staff, project managers, counterpart engineers, project management team
leaders and marketing team engineers are included. The marketing department of the
company is the responsible department for estimating the project cost and fix the unit rate
price of activity for bid. Thus, they are included in the survey to know the ability of the
system for forecasting and fixing the rate. Excluding the canal construction project,
currently the sector has a total of 18 road construction and maintenance projects on
2020G.C. Eight of them are new road construction projects and the remaining ten are
road maintenance works which are controlled by ten districts. Table 3and 4 shows a
summary of the target population.

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Table 3: Cost accounting implementers (experts)

Total Total number Total

Number of
number of of number
Concerned questionnaire to
Respondent project in questionnaire of
Body be distribute per
the to be question
each project
organization distributed naire
Office
engineer 1 18
Engineering
service team Engineering 18 36
service team
leader 1 18

Table 4: Management Staffs

Number of Total
questionnaire number of Total number
Respondent to be distribute project in of Remark
per each the questionnaire
project organization
Project One project
1
Manager manager &
18 36 counterpart
Counterpart engineer for each
1
Engineer project
Project
For all 4 team
management
1 4 4 leaders of the
Team
company
leaders
Engineering
For all 6 team
service and
1 6 6 members of the
marketing
company
team

Therefore, there are a total of 82 respondents for this research, 36 from implementers and
46 from management staff.

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3.3.6 Determination of sampling size

Sampling is related to the selection of a subset of individuals from within a population to
estimate the characteristics of the whole population (Singh & Masuku, 2014). The
advantages of sampling are faster data collection and lower cost.

As we can see from the above table there are 86 populations in this study. Yamanes,
(1967) provides a simplified formula to calculate the sample size.

n = ___ N ___

1+N(e)2

Where, n is the sample size, N is the total population size and e is the margin of error.

Therefore, by using Yamanes, (1967) formula the sample size for implementers survey,
where N is 36, 95% confidence level and 5% margin of error is:

n = ___ 36 ___

1+36(0.05)2

= 33 peoples
Using same formula the sample size for management staff survey, where N is 50, 95%
confidence level and 5% margin of error is:

n = ___ 46 ______

1+46(0.05)2

= 42 peoples
Therefore, 75 sample size shall be used in this research.

3.4 Data collection and sources

After defining the research problem and designing a research the next task is to collect
the relevant data. According to Kothari (2004), depending on the source data are
classified as primary and secondary. The primary data are those which are collected for

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the first time and thus happen to be original. The secondary data, on the other hand, are
those which have already been collected by someone else and which have already been
passed through the statistical process. Kumar (2011), states that primary data are the data
collected from primary sources such as observation, interview and questionnaire, and
secondary data are collected from secondary sources like government publication, earlier
research, census, personal records, client histories and service records.

Figure 5: Method of data collection (Kumar,2011)

This research uses both primary and secondary data collection. The primary data refers to
the data which was obtained from the company by using questionnaires. Both open and
close-ended questionnaires were used as a primary data collection method for this
research. Secondary data was obtained from the company‟s existing records, reports, and
cost manuals. In the secondary data collection, the real information about how the
companies are implementing the cost accounting system, the methods and overall
practice were gathered.

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Furthermore, a literature review was used as one of the secondary data collection
methods to gather information about the concept, method, techniques, and practice of
cost accounting in construction and other businesses. Depending on the information
obtained from this review then used to evaluate the current system of costing, identify
which method of costing was used and modifying the existing system from other
countries experience. Thus, the study made use of several sources of literature such as
relevant books, journals, related websites on the internet, and other documents that are
related to the topic used under study.

3.5 Research instruments

The data was collected using questionnaires and case study of the companies‟ reports.
The purpose of the research is to study the costing system of the contractors. The
questionnaires will be designed to provide answers to the research questions. Questions
were grouped into sections to answer the following:

 Whether or not the company professionals have appropriate knowledge

about the costing system,
 The methods of costing the company used to determine the construction
cost,
 The implementation method of costing,
 Encountered problems and difficulties in the implementation of the
system,
 The proficiency of the system in providing relevant information for
management for making decisions, planning, controlling and evaluating
the resource.
The questionnaire is selected for its efficient method of collecting reliable data that can
be quantitatively analyzed. The research will use both questionnaires containing, close
and open-ended questions.

Kumar (2011), classify questionnaires open-ended and close-ended. In an open-ended

questionnaire, the respondent writes down the answers in his/her words. Whereas in a
close-ended questionnaire, the possible answers are set out in the questionnaire or

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schedule and the respondent or the investigator ticks the category that best describes the
respondent‟s answer. It is usually wise to provide a category „Other/please explain‟ to
accommodate any response not listed. In this research, the questionnaire was addressed to
company experts, management staffs and marketing department.

3.6 Research validity and reliability

Validity is a very important and useful concept in all forms of research methodology
which is used to evaluate the quality of the research. According to Kumar (2011), validity
is the ability of an instrument to measure what it is designed to measure. Its primary
purpose is to increase the accuracy and usefulness of findings by eliminating or
controlling as many confounding variables as possible, which allows for greater
confidence in the findings of a given study (Barry & Brooke, 2005). Reliability focuses
on the ability of an instrument to produce consistent measurement. When the researcher
gets the same result more than once using same instrument under similar condition, an
instrument is considered to be reliable (Kumar, 2011).

According to (Kumar, 2011) there are three types of validity face and content, concurrent
and predictive, and construct validity. When each question or item on the research
instrument has a logical link with objective face validity will be established. Content
validity assesses the extent to which the measurement covers all aspects of the concept
being measured. Predictive validity is judged by the degree to which an instrument can
forecast an outcome. And concurrent validity is judged by how well an instrument
compares with a second assessment. Construct validity is based up on statistical
procedure and is determined by ascertaining the contribution of each construct to the total
variance observed in a phenomenon. In this research the face validity has been
maintained.
The reliability and validity of a research results depends on creating strong research
design, choosing appropriate methods and samples, and conducting the research carefully
and consistently. To ensure the validity and reliability, this research use a standardized
questionnaire based on established theories or findings of previous studies which is
targeted to measure exactly what the research wants to find out. Also this research uses

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appropriate sampling method in selecting enough participants which are representative of

the population and apply the method consistently.

3.7 Data Analysis and presentation

In this study, a mixed-method of data analysis was used. Firstly, quantitative data will be
analyzed by using appropriate frequency tables to represent the findings. Computers will
be used to ensure accurate and speedy processing of the data. There is an inherent risk in
research studies of reaching conclusions that are based on wrong responses such as
coincidences; for this reason, Ms-Excel will be used to increase the accuracy of data
analysis. Secondly, the qualitative data obtained from the companies records, reports, and
cost manuals will be analyzed and presented in compilation sheets diagrams and tables.
Then, findings will be discussed by combining questionnaires result with survey data.
Finally, based on the findings, conclusions and recommendations will be made.

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4. RESEARCH FINDINGS AND DATA ANALYSIS

4.1 Introduction
This chapter analyzes the data gathered through questionnaire and desk study from the
cost accounting system implementers and decision-makers of the ECWC TICS. A total of
75 questionnaires were distributed to both implementers and decision-makers or
management staff. The document refereed during desk study includes cost accounting
reports, manual and cost data records of the company. In this chapter, the response rate,
research findings from the analysis of responses and the desk study results will be
discussed. The complete survey questions are presented in the Appendix B and C.

4.2 Response rate

The concept of response rate refers to the percentage of individuals who responded to a
survey that was administered to them. In this regard all the cost accounting system
implementers such as; office engineer and engineering service team leader and decision-
makers or management staffs like project manager, counterpart engineer, head office
project management team leaders, and engineering service and marketing division
engineers were considered under the survey. The detail of the questionnaire distributed to
the respondent and their response rate are summarized under Table 5.

Table 5: List of Responses

Response Number obtained

Completed questionnaires 56
Incomplete questionnaires 9
Unreturned questionnaires 10
Total 75

Table 5 indicates that the total questionnaires distributed in the study for both the cost
accounting implementers and for management staffs 56 or 74% out of 75 questionnaires
were fully completed and returned, while the remaining 9 or 12% were returned
incomplete and 10 or13% unreturned. The completed questionnaires were analyzed in the

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following sections in accordance with the content classification. This response was
considered adequate for the purpose of the statistical analysis to be carried out.

For cost accounting implementers, a total of 33 questionnaires were distributed. There

were 27 responses which represent a response rate of 82%, while the remaining 6 were
sent uncompleted and unreturned.

A total of 45 questionnaires were distributed to the management staff (decision-makers)

of the company. There were 29 responses which represent a response rate of 64 and the
remaining 5 were sent uncompleted and 11 were unreturned.

4.3 Research finding and data analysis: Cost accounting Implementers

4.3.1 Respondent profile
Out of the total of 27 respondents, 18 or 67% of respondents have an educational
background of BS.c degree and 9 or 33% have MSc degree. Table 6 shows the
educational background of the respondent.

Table 6: Educational Background of Respondents

Educational background Number of respondents Percentage

BS.c 18 67%
Msc 9 33%
Total 27 100%

Figure 6 indicates that out of 27 respondent 37% of the respondents have experience
within zero up to 5 years, 52% have five up to ten years and 11% have above ten years of
experience.

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60%
52%
50%

40% 37%

0-5
30%
6-10

20% Above 10

11%
10%

0%
Year of Experiance

Figure 6: Respondents year of experience

The above table and figure indicate that the respondents were adequately trained,
experienced and positioned to provide credible answers to the research inquiries.
Furthermore, they would be capable of understanding and implementing any proposals
arising out of the investigations.

4.3.2 Objectives of implementing the cost accounting

According to the literature, the researcher tries to list out the main objectives of cost
accounting and the respondents are requested to answer the question about their
objectives of implementing cost accounting. In this question, respondents were allowed
to choose all of their objectives listed in the questionnaire by choosing more than one
choice or write if there is any other which are not listed. As per the response, control and
reduction of cost were chosen by most respondents, 23 or 85% of the respondent as the
objective of implementing cost accounting. Measuring the performance and controlling
the efficiency take 74% and 67%. Table 7 summarizes all the responses of the
implementers about their objectives of implementing cost accounting.

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Table 7: Objectives of implementing cost accounting

Objectives Frequency Percentage

To control and reduction of cost 23 85%

To measure the performance 20 74%

To control the efficiency 18 67%

To ascertain the cost of an activity 17 63%

To ascertainment of profit 14 52%

To assist the management for

planning and decision making 14 52%

To forecast the future cost 13 48%

To use as an effective information
system 9 33%

To fix the unit rate of an activity 8 30%

other 2 7%

Seventeen of 27 respondents (63%) choose to ascertain the cost of an activity as an

objective of implementing cost accounting. Also, 52% of respondents select
ascertainment of the profit and assist the management for planning and decision making.
Respondents suggested that there were other objectives of implementing cost accounting
such as, to identify unprofitable activity and control the expenses to reduce the
occurrence of cost overrun.

4.3.3 Costing system of the company

Depending on the nature of the work different costing systems can be applied. The
respondents were asked to answer about what type of costing system they use. This
survey revealed that 56% of the respondents choose the activity-based costing system.

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As indicated in the Figure 7 11% of the 29 respondents revealed that the organization
uses direct costing system followed by 4% traditional costing system and the remaining
30% don‟t know about their organization costing system. These different answers on the
organization costing system indicate that there is a lack of training and knowledge on
different cost accounting systems and techniques in the company. This result indicates
that the company has to work more in training the staffs about cost accounting.

60% 56%

50%

40%
30%
30%

20% costing system

11%
10%
4%
0%
0%
Direct Traditional Activity I don’t know Other
costing costing based
system system costing
system

Figure 7: Costing system of the company

4.3.4 Allocation of head office overhead to the project

Respondents were asked whether or not they allocate head office overheads to the
projects. The research revealed that 11(41%) of respondents allocate head office
overhead and 16 (59%) don‟t allocate head office overhead to the project in determining
the cost of each cost object. This result indicates that the company doesn‟t have an
organized and typical cost accounting system in projects.

4.3.5 Allocation of project overhead to the work section

In the literature, it was discussed that project overheads have to be allocated to each work
section by using equitable bases in order to determine the cost of each work section.
Figure 8 summarized that 78% of the respondent allocate project overhead and the
remaining 22% didn‟t allocate the project overhead cost when determining the cost of the

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project cost object. This result shows that the cost data that are presented for the decision-
makers are incorrect. This can lead the managers to make the wrong decision and
evaluating the performance based on unreliable data which finally faces the project to
unexpected cost overruns.

90%
78%
80%

70%

60%

50%

40% Allocation of Project overheads

30%
22%
20%

10%

0%
Yes No

Figure 8: Allocation of project overhead

4.3.6 Cost accounting standard cost sheet

Respondents were asked about whether they use the organization‟s standard cost sheets in
analyzing and presenting the data to the decision-makers. Out of 27 respondents, 33%
revealed that they used a standard cost sheet of the organization and the rest 67%
responded that they used their own cost sheet format. This different answer indicates that
the organization doesn‟t have a typical costing system and there is a lack of training
about the cost accounting system.

4.3.7 Computer software used

The respondent revealed that they use Ms- Office Excel tool as software or tool. This
result indicates that the organization has not introduced any cost accounting software
which can be used in the process of implementing cost accounting system. As indicated
in the figure 9, 70% respondent uses computer tools in variance analysis. Also, 52% use
in allocating the costs, 26% uses in recording cost data and 11% uses in presenting the
relevant data.

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80%
70%
70%

60%
52%
50%

40%

30% 26% computer tools application

level
20%
11%
10%
0%
0%
In collecting In In In variance In
of cots data recording allocating analysis presenting
the cost the cost to the relevant
data different data
activites

Figure 9: Level of using computer tools

4.3.8 Encountered problems during implementation

Different problems can be encountered during the application of the cost accounting
system. Based on the literature the problems encountered in the costing system can be
mainly categorized as top management constraint, technical constraint, and resource
constraint. The respondents were asked on the problem they faced during the
implementation of the system and their answers are summarized in Table8.

Table 8: Problems Encountered

Problems Frequency Percentage Rank

Top management constraint

Lack of top management support
12 44% 12
Lack of training on updated cost accounting
techniques 25 93% 1
Incorrect perception about cost accounting
doing it just for reporting
19 70% 5

Technical constraint

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Lack of basic knowledge and skill on cost

accounting and its different techniques 18 67% 6
Lack of adequate information about the cost
10 37% 13
Difficulties in data collecting and gathering
24 89% 2
Difficulties in identifying and defining cost
center and cost drivers 20 74% 4
Difficulties in identifying the actual project
and head office overhead cost 16 59% 8
Inadequate knowledge about the allocation of
overhead cost to each activity 14 52% 10
Difficulties in assigning and allocation of cost
to each activity 12 44% 11
Using the approximate data rather than
collecting the actual cost 15 56% 9

Resource constraint
Lack of adequate number of employee
resource in the cost accounting team 17 63% 7
Lack of implementation software or computer
tools 21 78% 3

Other 1 4%

The survey result revealed a lack of training on updated cost accounting techniques
selected mostly by the cost accounting implementers of the company as a problem
encountered during the implementation of the system. Out of 27 respondents, 93% of the
respondents choose a lack of training on updated cost accounting techniques. Difficulties
in data collecting and gathering selected by 89% of the respondent. The respondents also
revealed that lack of implantation software and difficulties in identifying and defining
cost drivers are selected as a problem by 78% and 74% respectively. Out of 27
respondents, 4% of them revealed that there is another problem encountered during the
implementation of the system. The problem which is not listed in the list is the lack of
raw materials for print out and present the relevant data.

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4.3.9 Evaluating the current system

The respondents were asked to evaluate the company‟s current costing system depending
on the cost accounting system requirements and principles used for evaluating the costing
system of an organization. The research aimed to establish how the users are satisfied and
rated their costing system. As per the literature, the respondents rated their costing system
for different requirements as follows.

1. Cost determination
Determination of the cost of a product is one of the primary aims of the costing system.
The respondents were asked to rate the effectiveness of their costing system in
determining the costs of a product on per unit basis or total cost such as, cost per kg, cost
per meter, cost per liter, cost per ton etc. In figure10 it is indicated that 48% of the
respondent revealed the cost determination of the company costing system is good and
4% choose excellent. Out of 27 respondents, 22% rated the cost determination of the
current system as poor. In this regards most of the respondents are impressed with their
system in determining the costs of products per unit basis.

60%

50% 48%

40%
Poor

30% 26% Satisfactory

22% Good
20% Very good

10%
4%

0%
Determination of cost

Figure 10: Determination of Cost

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2. Providing relevant cost data for decision-makers

The costing system should provide cost data in a systematic manner and actual
information about the cost to the management for the evaluating, future planning and
decision making. Providing relevant cost data for decision-makers is one of the
requirements of a costing system. As indicated in figure 11 out of 27 respondents 44%
rated the current costing system as poor in assisting the management or decision-makers
for planning and decision making by providing relevant cost data. Also, 30% and 19% of
the respondents revealed satisfactory and good. Out of 27 respondents 4% rate the system
with regarding to providing the relevant cost data for decision-makers as very good and
excellent.

50%
44%
45%
40%
35%
30%
30%
25%
Providing of cost data
20% 19%

15%
10%
4% 4%
5%
0%
Poor Satisfactory Good Very good Excellent

Figure 11: Providing of relevant cost data for decision-makers

3. Performance evaluation

Evaluating the performance of the project based on the standards is one of the costing
system tasks. From the response, 37% of respondents revealed that the ability of their
costing system in allowing to evaluating and analyzing the performance was poor. Out of
27 respondents 26% thoughts, it was satisfactory, 30% of respondents choosing it was
good and the remaining 4% choose as very good and excellent. Figure 12 summarize the

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res

4%
4%

37% Poor

30% Satisfactory
Good
Very good
Excellent

26%

Figure 12: Performance evaluation

4. Controlling the efficiency

Different resources like labor, material, and machineries have to be used efficiently. To
control the cost of products the efficiency has to be controlled by avoiding
underutilization, idle time and spoilage of material. As summarized in the figure 13 37 %
of the respondents rated their costing system as poor in controlling the efficiency by
locating wastages, inefficiencies and other loopholes in the production processes.
Secondly, 26% of them rated as satisfactory and 33% of them rated good. This indicates
that the management is not impressed by the costing system of the company with regard
to efficiency controlling.

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40% 37%
35% 33%

30%
26%
25% Poor

20% Satisfactory
Good
15%
Very good
10%

5% 4%

0%
Conrolling the efficency

Figure 13: Efficiency controlling of the current system

5. Ascertainment of the profit

Costs of products are controlled to ascertain that the project is safe with regards of the
desired profit. This profitability of activity has to be ascertained in division, activity, and
unit wise. Sometimes an activity may seem profitable when seen at the level of unit wise
but it may be loss when the overall costs were checked. Figure14 summarizes the rated
ability of the system in ascertaining the profitability in division wise, activity-wise and
unit wise. As shown in the figure 52% of the respondent rated the costing system of the
company as poor in ascertaining the profitability in division wise, activity-wise and unit
wise followed by 26% satisfactory, 19% good and 4% very good.

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60%
52%
50%

40%

30% 26% Ascertainment of the profit

19%
20%

10%
4%
0%
0%
Poor Satisfactory Good Very good Excellent

Figure 14: Ascertainment of the profit

6. Serving as an effective information system

Every costing system has to serve as an effective information system for ascertaining the
cost at every level. Out of 27 respondents, 41% and 37% rated their company costing
system as poor and 37% with regards of serving as effective information of system which
enables them to ascertain the cost at every level of the production process and activity
level. Figure 15 summarizes the survey results.

45%
41%
40% 37%
35%

30% Poor
25% Satisfactory

20% Good
15% Very good
15%
Excellent
10% 7%
5%
0%
0%
Serving as an effective information system

Figure 15: Serving as an effective information system

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7. Identifying profitable and unprofitable activities

Identifying the profitable and unprofitable activities in the costing system assists to
reduce wastage and give special consideration for an unprofitable activity. The
respondent rated the company costing system for identifying profitable and unprofitable
activities which help to reduce or eliminate wastages and inefficiencies such as
underutilization, idle time, spoilage of material, etc. As figured below out of the total
respondent 37% & 30% of the respondents rated poor and satisfactory respectively. The
remainder 26% ,4% and 4% of respondents rated as good, very good and excellent.

40% 37%
35%
30%
30%
26%
25%

20% Identifying the profitable &

unprofitable activities
15%

10%

5% 4% 4%

0%
Poor Satisfactory Good Very good Excellent

Figure 16: Identifying the profitable and unprofitable activity

8. Ability to forecast

The cause and effect relation of activities are useful for forecasting or predicting future
costs. The respondents were asked to rate the ability of the current costing system to
forecast from the past cause and effect relation. Out of 27 respondents, 48% of
respondents revealed that the ability of their costing system to forecast the future cost of
an activity was poor. The remainder 37%, 11%, and 4% were rated as satisfactory, good
and very good respectively.

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60%

50% 48%

40% 37% Poor

Satisfactory
30%
Good

20% Very good

11% Excellent
10%
4%
0%
0%
Ability to forcast

Figure 17: Ability to forecast

4.3.10 Satisfaction with the current system

After rating the costing system of their company the respondents were asked about
whether they are satisfied with the current costing system of the company. The response
as indicated in the figure 18 revealed that out of 27 respondent only 11% are satisfied and

11%

Yes
No

89%

Figure 18: Satisfaction of staff with the current system

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The respondent also suggests different issues that have to be amended or added in the
current system which are listed as follows (Table 9).

Table 9: Respondents comment

I.N Respondent comment

The company should assign well-trained data collectors in order to avoid

1 collecting the wrong data.

2 The company should form a separated cost accounting team.

The company should train the staff about different costing systems and cost
3 accounting application software.
The company should create a proper and uniform cost accounting system for
4 all projects.
The company should take immediate decisions based on the outputs of the
5 data.

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4.4 Research finding: Management (Decision makers)

4.4.1 Respondent profile
Out of the total of 29 respondents, 24 or 83% of respondents have an educational
background of BS.c degree and 5(17%) have MSc degree. Table10 shows the educational
background of the respondent and their experience.

Table 10: Respondent Profile

Educational Number of Percentage

background respondents
BS.c 24 83%
Msc 5 17%
Total 29 100%

Table11 indicates that out of 29 respondent 55% of the respondents have experience of
zero up to 5 years, 34% have five up to ten years and 10% have above ten years of
experience. So they would be capable of understanding and implementing any proposals
arising out of the investigations.

Table 11: Respondents' Experience

Year of Number of Percentage

experience respondents
0-5 16 55%
5-10 10 34%
Above 10 3 10%
Total 29 100%

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4.4.2 Objectives of implementing the cost accounting

Depending on the literature the researcher tries to list out the main objectives of cost
accounting and respondents are requested to answer the question about their objectives of
implementing cost accounting. In this question, respondents were allowed to choose all of
their objectives listed in the questionnaire by choosing more than one choice or write if
there is any other which is not listed. Out of 29 respondents, 23 of them (79%) choose
that there objective of implementing cost accounting is to measure the performance of the
project. Table 12 summarizes the response about the objectives of implementing cost
accounting.

Table 12: Objectives of implementing cost accounting

Objectives Frequency Percentage

To measure the performance 23 79%

To determine the cost of an activity 18 62%

To control and reduction of cost 18 62%

To control the efficiency 16 55%

To ascertainment of the profit 15 52%

To use as an effective information system 14 48%

Other 3 10%

Eighteen of 29 respondents (62%) choose to determine the cost of an activity and cost
control and reduction as an objective of implementing cost accounting. Also, efficiency
control and profit ascertainment are selected by most of the respondents as 55% and 52%
respectively.

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Respondents suggested that there were other objectives of implementing cost accounting
such as to predict the profit and loss of the project and to capture the total cost of
production by assessing the variable and fixed costs of each step of production.

4.4.3 Costing system of the company

In order to implement the costing system in an organization, there are different costing
methods depending on the nature of the work. The respondents were asked to answer
about the organization current costing systems. As indicated in the figure 19 below from
different types of costing system stated in the literature 55% of the 29 respondents
revealed that the company uses activity-based costing system followed by 17% direct
costing system and 3% traditional costing system and the rest answered that they don‟t
know about their company costing system. This different answer about the companies
costing system can indicate that there is a lack of training and knowledge about different
cost accounting systems and techniques in the company.

60% 55%

50%

40%

30%
24%
17% Costing system
20%

10%
3%
0%
0%
Direct costing Traditional Activity based I don’t know Other
system costing costing
system system

Figure 19: Costing system of the company

4.4.4 Encountered problems during implementation

The literature discusses about different problems encountered during the application of
the cost accounting system. The decision-making process of a costing system is highly
affected by the accuracy of the collected data. Since the system participates in different
concerned bodies there are problems that lead the management to an incorrect decision.

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The respondents were asked about the common problems they faced in cost accounting
reports during the decision-making process and their answer are summarized as table13.

Table 13: Encountered problems during implementation

Problems Frequency Percentage Rank

Top management constraint

Lack of adequate information about the
cost data 23 79% 1
Lack of training on updated decision-
making techniques 15 52% 5
Incorrect perception about cost accounting
doing it just for the purpose of reporting 3
19 66%

Technical constraints
Incorrect assigning and allocation of cost
to each activity 12 41% 8
Difficulties in identifying the actual
project and head office overhead cost
16 55% 4
Using approximate data rather than
collecting the actual cost
13 45% 6
Absence of presenting easy and
understandable cost accounting reports 10 34% 9

Late reporting which makes unable to

decide on a time 20 69% 2
Resource constraints

Absence of different decision-making

software or computer tools 13 42% 7
Other 3 10%

As indicated in the survey result lack of adequate information about the cost data is the
most occurred problem in the system. Out of 29 respondents, 79% choose the lack of
adequate information about cost data as a problem in cost accounting reports. As

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discussed in the literature cot accounting aims to ascertain and control the cost of the
product. Table 13 revealed that 69% of the respondents chose late reporting of cost
accounting reports as a common problem of the system. Incorrect perception about cost
accounting doing it just for the purpose of reporting takes the third position, which is
selected by 66% of the respondent. Respondents were suggested that there were other
problems commonly faced in the decision-making stage. The problems which are not
listed in the question are incorrect data collection, using incomplete cost data and lack of
concern about the report.

4.4.5 Evaluating the current system

As discussed in the literature the international federation of cost accountants sets out
principles for evaluating the costing system of an organization. Depending on that and
different cost accounting system requirements the respondents were asked to evaluate the
company‟s current costing system. The research aimed to establish how the users are
satisfied and rated their costing system. As per the literature, the respondents rated their
costing system for different requirements as follows,
1. Determination of cost
Ascertaining the cost of a product is the primary aim of the costing system. The
respondents were asked to rate the effectiveness of their costing system in determining
the costs of a product on per unit basis or total cost, for example, cost per kg, cost per
meter, cost per liter, cost per ton etc. figure20 shows the response. In this regards most of
the respondents are not impressed with their system in determining the costs of products
on per unit basis. Only 24% of respondents indicated that the system was good in
determining the product cost on per unit basis.

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60%

50% 48%

40%

30% 28%
24% Determination of cost

20%

10%
0%
0%
Poor Satisfactory Good Very good

Figure 20: Determination of cost

2. Providing relevant cost data for decision-makers

Providing relevant cost data for decision-makers is one of the requirements of a costing
system. The costing system should provide cost data in a systematic manner and actual
information about the cost to the management for the evaluating, future planning and
decision making. As indicated in figure21 out of 29 respondents 41% of them rated poor
when they are asked about the ability of the system in assisting the management for
planning and decision making.

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45% 41%
40% 38%

35%

30% Poor
25% Satisfactory

20% 17% Good

15% Very good

Excellent
10%

5% 3%
0%
0%
Providing relevant cost data

Figure 21: Providing Relevant Cost Data

3. Performance evaluation

As discussed in the literature the performance evaluation of the project based on the sited
standards is an important task. From the response, 45% of respondents revealed that the
ability of their costing system in allowing to evaluating and analyzing the performance
was satisfactory. 28% of respondents thoughts it was poor, and 14% of respondents
choose it was good. Figure 22, summarize the result.

14%

28%
Poor
14% Satisfactory
Good
Very good

45%

Figure 22: Performance Evaluation

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4. Controlling the efficiency

The efficiency or proper usage of different resources like labor, material, and machinery
is one of the main issues that the management staffs have to be highly concerned. To
control the cost of products the management should control the efficiency by avoiding
underutilization, idle time and spoilage of material. As summarized in the figure 23 41%
of the respondents rated their costing system as poor in controlling the efficiency by
locating wastages, inefficiencies and other loopholes in the production processes.
Secondly, 34% of them rated satisfactory. This indicates that the management is not
impressed by the costing system of the company with regards of efficiency control.

45% 41%
40%
34%
35%

30% Poor

25% Satisfactory
21%
Good
20%
Very good
15%
Excellent
10%

5% 3%
0%
0%
controlling the efficency

Figure 23: Efficiency controlling

5. Ascertainment of the profit

Costs of products are controlled in order to ascertain that the project is safe with regard to
the desired profit. This profitability of activity has to be ascertained in division, activity,
and unit wise. Sometimes an activity may seem profitable when seen at the level of unit
wise but it may be loss when the overall costs were checked. Figure 24, summarizes the
rated ability of the system in ascertaining the profitability in division wise, activity-wise
and unit wise. As shown in the figure 24, 38% of the respondent rated the costing system

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of the company as poor in ascertaining the profitability in division wise, activity-wise and
unit wise.
40% 38%

35%
31%
30%

25%

20% 17%
Ascertainmnet of profit
15%
10%
10%

5% 3%

0%
Poor Satisfactory Good Very good Excellent

Figure 24: Ascertainment of profit

6. Serving as an effective information system

The cost information of activity has to be ascertained in every level of activity. Every
costing system has to serve as an effective information system for ascertaining the cost at
every level. Out of 29 respondents, 34% rated their company costing system as poor with
regards to serving as effective information of system which enables to ascertain the cost
at every level of the production process and activity level.

40%
34%
35%
Poor
30% 28%
Satisfactory
24%
25%
Good
20%
Very good
14%
15%
Excellent
10%
5%
0%
0%
serving as an effective information system

Figure 25: Serving as an effective information system

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7. Identifying profitable and unprofitable activity

Proper identifying of the profitable and unprofitable activities in the costing system
assists the managements to reduce wastage and give special consideration for an
unprofitable activity. The respondent rated the company costing system for identifying
profitable and unprofitable activities that help the management to reduce or eliminate
wastages and inefficiencies such as underutilization, idle time, spoilage of material, etc as
figured below. Out of the total respondent, 34% & 41% of the respondents rated poor and
satisfactory respectively. The remainder 17% and 7% of respondents rated as good, very
good and excellent.

45% 41%
40%
34%
35%

30%
Poor
25%
Satisfactory
20% 17%
Good
15% Very good
10% 7%
5%

0%
Identifying the profitable and unprofitable activities

Figure 26: Identifying profitable and unprofitable activity

8. Ability to forecast

The respondents were asked to rate the ability of costing system to forecast from the past
cause and effect relation. Out of 29 respondents, 45% of respondents revealed that the
ability of their costing system to forecast the future cost of activity was poor. The
remainder 21%, 17%, and 17% were rated as satisfactory, good and very good
respectively.

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50%
45%
45%
40%
35%
30% Poor

25% Satisfactory
21%
20% 17% 17% Good

15% Very good

10%
5%
0%
Ability to forecsast

Figure 27: Ability to forecast

4.4.6 Satisfaction with the current system

After rating the costing system of their company the respondents were asked about
whether they are satisfied with the current costing system of the company. The response
revealed that out of 29 respondent 97% are not satisfied and the rest 3% responded that
they are satisfied.

3%

Yes
No

97%

Figure 28: Satisfaction with the current system

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Finally, the management was asked to suggest what they would like to add or amend in
the current costing system of the company which is summarized in the Table14.

Table 14: Respondents' Suggestion

I.N Respondent suggestion

1 The system should be automated to easily evaluate the performance of an

activity.
2 The company has to give training for the project and head office staffs about data
collecting in the site and to analyze variance in each activity to increase the
quality of data.

3 The company should introduce different software to improve the decision-

making system.
4 The feedback system should get more attention to use the cost accounting results
for a better profit.

5 An independent cost accounting team should be organized at the project level.

6 On-time reporting of the cost accounting to timely amend the performance of an

activity.
7 A systematic approach needs to be implemented to improve the cost accounting
system.

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4.5 Desk Study

4.5.1 Ethiopian Construction Works Co-corporation
Ethiopian Construction Works Corporation was established on the council of ministers
Regulation No. 366/2015 on December 18/2015. It is established by merging the previous
famous governmental construction companies such as Ethiopian road construction
corporation (the former Awra - Godana), Ethiopian waterworks construction, Ethiopian
building construction and Ethiopian dam and irrigation construction to form federal
government public enterprise with the authorized capital of Birr
20,313,608,143.90(Twenty Billion Three Hundred Thirteen Million Six Hundred Eight
Thousand One Hundred Forty Three and Ninety Cent). The ministry of public enterprises
is the supervising authority of the corporation. The Corporation head office is found in
Addis Ababa and has a branch in other parts of the country. The corporation was
established to engage in domestic and overseas construction works as a contractor in
construction, upgrading and maintenance of roads, bridges, works relating to dams,
irrigations, hydropower generations, water supply systems, sewerage systems, drainage,
deep water wells, reclamations, river diversions, construction of buildings, airfields,
railways, ports and other civil works. It also engages in the assembling of construction
equipment and machinery, manufacturing spare parts and provide maintenance services
for construction equipment and machinery and produce construction materials and
different kinds of pipes necessary for its activities and sell them as may be appropriate.

ECWC acquire, own and administer irrigation dams, deep water wells and as may be
necessary water supply canals constructed and to be constructed by the federal
government budget and collect charges from the beneficiaries of such dams. The
Purposes for which the corporation is established are

 To engage in the rental business of construction machineries ;

 To produce qualified human resource with required discipline, number and
quality for the corporation by using its own training facilities or work in co-
ordination with relevant domestic or international research, education and training
institutions;

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 To make studies and forward proposals in line with directions given by the
ministry of public enterprises to get financial, technological and modern
administrative inputs (including attracting investment or to engage in investment )
to be competitive and profitable in domestic and overseas works ;
 To sell and pledge bonds and to negotiate and sign loan agreements with local and
international financial sources in line with the directive issued by the Ministry of
Finance and Economic Co-operation and in accordance with policy direction
given by the Ministry of public enterprises ;
 To undertake any other related activities necessary for the attainment of its
purposes.

4.5.2 Organizational structure

A framework, which enables us to bring together functions, people, and other resources
for achieving objectives by providing the means for clarifying and communicating the
lines of responsibility, authority, and accountability is known as the organizational
structure. (Montana, P. and Charnov, B., 1993). ECWC as an organization has its own
organizational structure. The organizational structures are organized for the office and the
site by assigning responsibility to different bodies. Figure 29 indicates the organizational
structure of the ECWC, TICS.

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Figure 29: Corporate Structure of ECWC

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Figure 30: TICS Organizational Structure

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4.5.3 Cost accounting in ECWC

As referred from the cost accounting manual of ECWC TICS, cost accounting system is
implemented in the company because the company has faced critical problems of cost
and progress variance when evaluating the completed projects. This late ascertainment of
the cost of a project has no importance to the management to make a corrective decision
on time. The cost of each activity in a project together with its variance from the standard
has to be ascertained during the construction process. So, in order to overcome the cost
variance problem and control cost on the progress of the project the company has
introduced a system called cost accounting.

The cost accounting manual of the company stated that the implementation of the system
involving different personnel ranging from the general manager, deputy general
managers, division managers to road construction project manager and road maintenance
project manager to initiate, plan, evaluate and monitor the implementation of cost
accounting at road construction and road maintenance projects. It is facilitated by
preparing a document and giving training about cost accounting procedures to give a
clear image to all levels of management members about the benefits and advantages of its
implementation. The cost accounting manual implementation procedure is shown in the
Figure 31.

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Figure 31: Cost accounting manual implementation procedure of ECWC TICS

4.5.4 Cost accounting analyzing team in ECWC TICS

The cost accounting manual of the company states that in every project there must be a
cost accounting analyzing team. Cost accounting analyzing team is a unit which is
established by road construction and road maintenance projects for the implementation of
cost accounting manual. It is part of a cost accounting unit. The team is responsible for
the analysis of project-level cost accounting with appropriate cost classification by labor,
material, equipment, and overheads. Cost accounting analyzing team comprising of one

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office Engineer, one accountant, one quantity surveyor and data encoder under
engineering service team leader. The cost accounting analyzing team is responsible for
the weekly computation of actual cost and weekly analysis of variance after properly
collecting data of labor, material, equipment, and overhead for a given road construction
or maintenance activity. The cost accounting analysis flow chart of the company is shown
in Figure 32.

Figure 32: Cost accounting analysis flow chart

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However, most projects don‟t have the cost accounting team as per the manual. They
consist of data collectors to collect data, office engineers to analyze and engineering
service team leaders to check the overall analysis process. Since the office engineer is
appointed for additional tasks of the project, this could influence the office engineer‟s
work in cost accounting reports.

4.5.5 Overhead allocation in ECWC TICS

As discussed in the literature, the indirect or supplementary cost which cannot be wholly
debited to a particular job is known as Overhead cost. These costs include indirect
materials, indirect employees and indirect expenses which are not directly identifiable or
allocable to a cost object in an economically feasible manner. For example, rent,
depreciation, maintenance repairs, supervision, etc.

In the cost accounting manual, it is stated that indirect expenses incurred from a project
which are associated with the construction of road project activities are summarized as
actual overhead cost of that particular project. The computation of actual overhead cost is
the summation of the project actual overhead cost & head office actual overhead cost for
assisting the given project. The project‟s head office overhead costs are being supplied
by the head office finance department. The computation of actual overhead cost should
be worked out at the project, based on the actual recorded data, by the cost accounting
analyzing team on a monthly basis. Project actual overhead cost is different from project
to project and which is highly dependent on project performance, location, topography,
weather, security, and size and type.

The head office overhead cost includes three costs; the cost of the head office supporting
department, cost of head office road construction and maintenance division and the cost
of equipment maintenance and administration department. Costs other than road
construction and road maintenance divisions are allocated to project costs depending on
the level of support that the head office provided to the respective projects. Road design
& construction division overhead costs are allocated to the various road construction
projects and the road maintenance division overhead costs are allocated to the various
road maintenance costs. The overhead costs of equipment maintenance and
administration costs are allocated to various projects (construction and maintenance).

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As per the manual, the computation of actual overhead cost should be worked out by the
project cost accounting analyzing team on weekly basis by computing the project actual
overhead costs based on the daily recorded data and estimates the actual overhead costs
incurred by the head office for supporting that particular project in the week.

In ECWC TICS, mostly head office overhead costs were not considered in the
computation of the actual cost and in some reports the head office overhead cost included
but the allocation percentage was constant through all the time which leads to incorrect
computation of cost. In order to know the actual costs of projects and profit, the actual
head office overhead costs of each project have to be calculated and allocated fairly to
each project. Otherwise, it is difficult to know the financial status of the project so that
the managements make an incorrect decision based on false information. Head office
overhead costs have to be calculated based on the accurate costs which are incurred by
the head office in order to provide supports to that specific project. This cost can vary
from time to time so instead of using the constant amount of cost, the company has to use
the actual calculated overhead amount in order to determine the actual cost of the project.

In ECWC TICS project overhead percentage rates are calculated by summing up the total
overhead cost and dividing it to the expected revenue to allocating it for each activity.
Some reports indicate that they consider the same amount of cost or predetermined
overhead cost but the calculated amount of overhead cost has to be used in order to get
correct cost information.

4.5.6 Costing system in ECWC TICS

As discussed in the literature based on the assignment of cost to the cost object, there are
two types of costing systems named as direct and absorption costing system. A direct
costing system also known as a marginal or variable costing system assign only the direct
cost to the cost object whereas the absorption costing system assigns both direct and
indirect cost to cost object. Depending on the allocation of overheads absorption costing
system also divided into the traditional costing system and activity-based costing system.
The traditional costing system uses arbitrary cost allocation and assigns or allocates the
company‟s indirect costs to the items manufactured based on volumes such as the number
of units produced, the direct labor hours, or the production machine hours. Whereas

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activity-based costing is cost attribution to cost units based on benefit received from
indirect activities e.g. ordering, setting up, and assuring quality. As a researcher can
observe ECWC TICS uses the ABC system. The overheads are charged to each cost
object or activity fairly accurately based on the benefit received from the indirect
activities.

4.5.7 Data capturing in ECWC TICS

Data recording is an important task that has to be implemented in order to provide timely
and accurate data for planning and control of construction projects. The entire
implementation of cost accounting and the benefits of analysis depend on the accuracy of
data collected. In the literature, it was cited that there is a different method of
performance data capturing that appears to be particularly for construction projects as a
card recording system, computer-generated turn around system and graphical method. In
this system all items of expenditure on-site should be captured systematically and
progressively such as; Labour operational time and cost, Materials consumption and
wastage, Equipment utilization, breakdown and idle time, Overhead expenses,
Attendance costs on subcontractors, and Subcontractor's performances. In the literature it
was discussed that depending on the activities to be carried out, a foreman collects the
relevant forms for labor, materials, plant, and attendance before starting time each day
and enters the relevant data through the day as the operations proceed. At the end of the
day, he signs and drops the completed forms at the site office where all the forms for that
day will be processed.

ECWC TICS cost accounting manual states that the data collection for actual cost
accounting is accomplished by the work execution team leader. And this team is
responsible for assigning data collectors for each road activity and establish a network for
proper flow of recorded daily resource utilization data for labor, equipment, manpower,
and overhead data to cost accounting analyzing team during executing a given road
activity. Project site data collection activities involve personnel of data collectors,
foremen, site engineers, work execution team leader, and engineering service team
leader.

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Figure 33: Data collection procedure

ECWC TICS had been capturing performance and cost data using the card recording
system. The daily cost and performance data are recorded by the data collector in the
daily data recording formats of the company. The format includes the crew of manpower
which are involved in such activity, material consumed and operated equipment for
performing an activity. Then the raw data collected by the data collectors are signed by
the foremen and approved by the work execution team leader, then send to the office
engineer for further analysis. Work Execution team leader is responsible for the daily
field data collection of resource utilization of labor, equipment, material and site
overhead for actual cost accounting.

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4.5.8 Data processing in ECWC TICS

As stated in the literature data processing is a process of accumulation, classification and
recording of received information into some recognized and meaningful manner to
facilitate identification of significant deviations from plans and or standards. The data
capturing stage provides cost data uses to answer most of the questions that form the aim
and objective of performance measurement. In order to present the raw data in an
understandable and meaningful way, some computational and analytical routine is
needed.

In ECWC TICS the captured raw data were classified, accumulate and analyzed in order
to give meaningful information for the decision-makers and evaluating the performance.
Beliveau (1984) and Clough, (1979) suggested that data processing on construction sites
be carried out in a standardized format, preferably similar to the data capture approach.
The raw cost data gathered from the data collector are inserted in a different excel
spreadsheet to calculate the direct cost and total cost including the overhead cost. First,
the daily activity cost data including labor, material and equipment cost were inserted in
the daily actual cost analysis sheet. In this sheet, the direct cost for the executed quantity
for each day and each activity was analyzed. Figure 34 indicates the direct cost analysis
format of the company.

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ETHIOPIAN CONSTRUCTION WORKS CORPORATION

TRANSPORT INFRASTRUCTURE CONSTRUCTION
Dulecha- Awash Arba Junction Road Upgrading Project
Daily Activity Actual Cost Analysis
Cut and Borrow To Fill
Actual labor index Factor:- 2.220 8/20/2019-9/19/2019

Act Work Item No :42.01(a)ii

Cut and Borrow to fill with unlimited hauling distancei) Compacted to 95% of modified AASHTO Density
Ex. Qty. 1255.1 m3 ST 59+740-60+000,100% Mesfine 21-Aug-2019
Actual Labor Cost Actual Material Cost Actual Equipment Cost
Mthly Workin Indexed Indexed Daily Qty. Material Operation Hourly Actual
Crew Members QTY UF Description Unit Unit price Type Qu. UF hr min.
Salery g Hrs Hrly Cost Cost required cost Hr. Rate Equ.cost
Data collector 3493 1 0.5 10 41.32 206.59 Borrow Mat. Prod. m3 1.00 24.73 24.73 Grader(0688) 9 50 9.83 1079 10,610.17
Time Keeper 2051 2 1 10 24.26 485.21 Borrow Mat. Hauling m3 1.30 16.75 21.78 W/truck(10933) 7 55 7.92 430 3,404.17
Con. Forman 1 4246 1 0.5 10 50.22 251.12 Borrow Mat. Loading m3 1.30 5.81 7.55 Roller(0535) 6 40 6.67 563 3,753.33
Laborer 2051 10 1 10 24.26 2,426.05 W/truck(05312) 9 10 9.17 430 3,941.67
Helper 2230 2 1 10 26.38 527.56
Total 3,896.53 Total 54.05 Total 21,709.33
A=Actual Labor Unit Cost 3.10 B=Actual Material Unit Cost 54.05 C=Actual Equipment Unit Cost 17.30 Direct cost 74.46 25,659.92
Act Work Item No :42.01(a)ii
Cut and Borrow to fill with unlimited hauling distancei) Compacted to 95% of modified AASHTO Density
Ex. Qty. 669.9 m3 ST 59+180-59+330,100% Mesfine 22-Aug-2019
Actual Labor Cost Actual Material Cost Actual Equipment Cost
Mthly Workin Indexed Indexed Daily Qty. Material Operation Hourly Actual
Crew Members QTY UF Description Unit Unit price Type Qu. UF hr min.
Salery g Hrs Hrly Cost Cost required cost Hr. Rate Equ.cost
Data collector 3493 1 0.5 10 41.32 206.59 Borrow Mat. Prod. m3 1.00 24.73 24.73 Grader(0688) 8 20 8.33 1079 8,991.67
Time Keeper 2051 2 1 10 24.26 485.21 Borrow Mat. Hauling m3 1.30 16.75 21.78 W/truck(16065) 8 35 8.58 430 3,690.83
Con. Forman 1 4246 1 0.5 10 50.22 251.12 Borrow Mat. Loading m3 1.30 5.81 7.55 Roller(0535) 10 10 10.17 563 5,723.83
Laborer 2051 11 1 10 24.26 2,668.66 W/truck(16022) 7 35 7.58 430 3,260.83
Helper 2230 1 1 10 26.38 263.78
Total 3,875.36 Total 54.05 Total 21,667.17
A=Actual Labor Unit Cost 5.78 B=Actual Material Unit Cost 54.05 C=Actual Equipment Unit Cost 32.34 Direct cost 92.18 25,596.58

Figure 34: Daily activity actual cost analysis

The summary of daily executed activity and their corresponding cost are listed in the
summary of the daily activity cost sheet. In this sheet, the total cost of each executed
activity (cost center) including the overhead cost are calculated to get unit cost of each
activity.
The next step is collecting the executed quantity and costs of each day. The summary of
the executed activity together with its actual unit cost are listed in this sheet. This sheet
differs from the previous one by its calculation of actual cost. The total executed quantity
of each activity is summed up and their earned cost for corresponding activity was
summed and then the summed cost divided by the summed total executed quantity.

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Finally, the overhead cost percentage rate will be allocated by multiplying with the total
direct cost. Figure 35 shows the format of the sheet.

ETHIOPIAN CONSTRUCTION WORKS CORPORATION

TRANSPORT INFRASTRUCTURE CONSTRUCTION
Dulecha- Awash Arba Junction Road Upgrading Project
Actual Cost
8/20/2019-9/19/2019

Actual
Actual Equipment Actual Material Actual Overhead
Item Activity Actual Labor Cost(A) ActivityCostE=A+B+
Cost(B) Cost(C) Cost(D)
C+D
2100 CLEARING AND GRUBBING
21.01 Clearing and grubbing 2493.56 17435.31 0.00 3696.80 23625.67
32.02(b) Backfilling using imported selected material 51.07 144.32 127.39 56.64 379.42
32.07 Cast In Situ Concrete and Formwork
32.07(f) Class "C" Concrete (C-20) 696.26 2730.29 1592.96 903.51 5923.03
34.03 STONE MASONRY WALLS
34.03(b)iii Class 'B' Masonry for town Ditch 803.90 2096.59 238.50 565.02 3704.01
4000 EARTHWORKS
Cut and Borrow to fill with unlimited hauling distance
42.01(a)ii i) Compacted to 95% of modified AASHTO Density 4.42 54.05 26.90 15.37 100.75
42.01 (c) Rock fill in embankment 3.91 22.81 193.09 39.56 259.37
5100 SUBBASES
51.01 Gravel
275mmsub-base layer, 97%
max. thickness MDD,
Gravel AASHTO
sub-base T-180
layer, 97% MDD,
51.01(a)ii AASHTO T-180 32.93 48.34 103.43 33.25 217.95
5200 ROAD BASES
52.01 Base layer
Crushed construction
stone base, compacted in layers of maximum
52.01(b) ii 200mm thickness, to 100% compaction 16.36 33.37 543.19 106.73 699.64
61.01 Prime Coat
64.02 Asphalt Sufacing
50mm thick Asphalt Concrete Surfacing, 60/70 Penetration
8.55 232.40 10.32 45.23 296.48
64.02 (a) (ii)Grade Bitumen, Continously Graded, Medium Grade.

Figure 35: Summary of activity actual Cost

4.5.9 Performance evaluation in ECWC TICS

ECWC TICS executes performance evaluation to identify the deviation between the
actual and target cost. From the different method of performance evaluation, a variance
analysis is used in the company to know that work is carried out according to the budget.
The analysis is done by comparing the actual cost with the budget or standard cost. The
budget cost or standard cost in the case of the company is the contract unit rate. The

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standard cost of an activity is the acceptable cost for a unit activity based on the market
price of resources, overhead and updated CMS manual & procedures. CMS is a standard
that has road construction activities together with their crew formation and expected
productivity. The company uses the CMS manual prepared by the company itself based
on the previously completed projects productivity experience and crew formation.
Establishing of road construction activity standard costs is used as target costs or basis for
comparison with the actual costs.

ECWC TICS uses CMS to evaluate the performance of a crew and its productivity. The
CMS manual consists of different activity and their allowable crew formation. Every
project has to form the working crew based on the manual and then the actual executed
quantity will be compared with the expected productivity as per the standard. Currently,
the company uses this standard for an effective measuring of productivity. If the
productivity is less than the expected it is maybe because of inefficient uses of resources
including labor, material, and machinery so the management can justify its loss and take a
corrective decision.

Even if the literature puts the different types of variance analysis in construction such as;
LRV = labour rate (price) variance, LEV = labour efficiency variance, MPV = materials
price variance, MUV = materials utilization variance, MYV = materials yield variance,
EEV = equipment efficiency variance, ERV = equipment rate variance, OHV = overhead
variance and TCV = total cost variance, the company perform only the total cost variance
at an activity and serious level. The following figure represents the variance analysis
formats at the serious and activity level in ECWC TICS.

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ETHIOPIAN CONSTRUCTION WORKS CORPORATION

TRANSPORT INFRASTRUCTURE CONSTRUCTION
Dulecha- Awash Arba Junction Road Upgrading Project (KM 40+000 - KM93+127)
Variance Analysis - At Series Level

8/20/2019-9/19/2019

Day works
Sub-Base,Road-
Site Clearance

BITUMINOUS
base&Gravel
Earth Works

SURFACING
AND ROAD

Structures
Drainage

Ancillary
Wearing
General

Course

Works
BASE
Activity Reference Total Cost

Series 11000
Series

Series

Series

Series

Series

Series

Series

Series
1000

2000

3000

4000

5000

6000

8000

9000
A Performance achieved per standard(BOQ)rate 10,232.07 89,476.17 2,713,600.30 723,741.23 464,245.60 4,001,295.38

B Actual cost incurred based on actual Cost rate 11,340.32 158,297.57 3,231,594.63 671,691.75 539,601.98 4,612,526.25

C=A-B Variance - (1,108.25) (68,821.40) (517,994.33) 52,049.49 (75,356.38) (611,230.87)

E=C/A Variance (%) -15.3%

Figure 36: Variance Analysis

The variance is calculated by summing up the labor, material and equipment cost of each
activity, then by the total cost from the budget cost. The calculated variance may be
negative or positive depending on the cost. If the variance is negative something has gone
wrong and if it is positive then nothing is wrong but it doesn‟t mean that the project is
safe to get the planned profit. Since the company computes variance analysis only for
total cost at an activity and serious level the cause for variance can‟t be determined so it
is complicated to take a proper corrective measure on the result.

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4.5.10 Decision making in ECWC TICS

As discussed in the literature review after analyzing and evaluating the performance the
final stage is making a corrective decision. Managements are concerned about what must
be done immediately to restore performance to the desired level or correct standards and
the basic causes of deviation. To overcome the deviation of the performance corrective
decisions have to be taken at the right level and at the right time as soon as possible.

The cost accounting manual of the company states that the analysis report should be sent
weekly to the head office for project management purposes. Furthermore, the
summarized monthly cost accounting analysis report should be compiled with a monthly
progress report and submitted to the road maintenance and road construction project
management teams located at the head office. Accordingly, each project‟s cost
accounting analysis reports are evaluated at the head office management staffs by
referring the variances concerning actual costs and standard costs (BOQ rates). Then after
feedback based on the analysis evaluation is forwarded to each project so that the project
incorporates the suggested comments and manages project costs. However, the projects
are sending the cost accounting reports on 15days and a monthly basis. This will leads to
a lack of making corrective decisions on time. The project manager together with other
project management staff has to be the primary user of the cost accounting reports so that
they will decide on the time it will prevent the loss occurred during the time until the
feedback has come from the head office.

During the case study, the researcher can observe that mostly in the cost accounting
reports the comments or reasons out from the project management staffs are the negative
variance of the cost stated as that it is occurred because of over expected productivity of
standard or underestimation of the unit rate of the activity.

The researcher can observe that in the company taking corrective measures and decisions
are less practiced. This is because of the less detail computation of the variance and the
late reporting of the cost analysis. Mostly the cost accounting reports are prepared after
15days or a month of the completed activities. This can preserve the managers to make a
decision on time. And due to less detailed computation of the variance, it is unable to
know whether the variance is because of labor cost, material cost or equipment cost.

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Identifying the cause of variance will lead to take the corrective decision so that restoring
the performance to the desired level or correct the standard can be done. If a positive
variance occurs in the analysis, the profitability analysis has to be done. Because
sometimes there might be positive variance while there is the desired profit variance. In
the ECWC TICS when there is a positive variance it simply took as the planned
performance achieved but the profitability has to be done.

After reviewing the cost accounting report the feedback about the overall reports sent to
the project from the head office. This feedback control comments about the variance,
crew formation together with their productivity, costs of labor, material and equipment
and overhead. The feedback is done to correct the action and overall system in the project
for the future.

4.5.11 Comparison between ECWC TICS system and ICAI or IFAC

ICAI and IFAC list outs different major requirements for cost accounting system which
are designed to apply in every organization. The requirements can be used as a
benchmark to evaluate the cost accounting system of any organization. The comparison
between those requirement and ECWC TICS are shown in table 15.

Table 15: Comparison between ECWC TICS system and ICAI or IFAC

ICAI/IFAC cost accounting system ECWC TICS system

requirements
 Determination of product cost on per  Cost of activities are determined
unit basis or total cost. on per unit basis and total cost, for
example, cost per cubic meter,
meter, kg, liter, etc.
 Providing relevant data to the  Relevant cost data are reported
managements about the actual cost from the project to the head office
of a product for evaluating, future managements to evaluate the
planning and decision making. project performance.

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 Evaluating the performance,  The cost accounting reports are

analyzing and efficiency controlling prepared by including crew
by locating wastages and loopholes formation and productivity of each
in the production processes. activity which enables the
managers to control the
performance and efficiency of each
crew.
 Profit ascertainment in division,  Profits are ascertained only on
activity and unit wise. serious and activity level.
 Serving as effective information of  There are different costs which are
system which enables to ascertain not taken in to consideration in
the cost at every level of production calculating the product cost so this
process and activity level. makes the system unable to serve
as an effective information system.
 Forecast the future cost from the past  The cost accounting data are used
cause-and –effect relation. by the engineering service and
marketing team in order to
estimate and fix the unit rate.
However, cost data aren‟t
considered in planning the budget
of project.

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4.6 Proposed cost accounting system

The aim of the alternative cost accounting system proposed in this section is to combine
the identified criteria‟s for good cost accounting system as defined in the literature with
the gathered investigation evidence of the company current practice to provide a more
effective procedure free from the identified deficiencies. Accordingly the proposal made
by this research concentrates on designing a procedure for executing clear costing system
at the level of site operation.

Currently the company has practiced cost accounting system by focusing on the
identification of the actual cost incurred for each cost object or activity during the
production. It is done by identifying the direct costs incurred and allocating the indirect
cost or overhead cost to the cost object. The direct cost is determined by summing up the
costs which are incurred particularly to that activity or cost object such as; labor, material
and equipment cost. Since the direct cost has a direct relation with the cost object it is
easy to trace the cost to each cost object, whereas indirect cost are shared to each cost
object by percentage allocation bases. The percentage value are taken from the estimated
overhead sets in the fixed unit rate or calculated by dividing the total indirect costs to the
expected revenue then the indirect costs are allocated by multiplying by the total direct
cost of each cost object. From the investigation evidence the existing system has two
main problems such as ignoring different expenses which are incurred and misallocate
the cost to the cost objects.

The proposed approach classifies the cost accounting system into three main parts
resource, responsibility center and cost objects. The system indicates that first all costs
incurred with in a specific reporting period has to be list out and then identify the
responsibility centers for the entire project. Depending up on their task the responsibility
centers can be divided in to support center and product center then the costs will be
allocated to each cost objects. Figure37 indicates the proposed cost accounting system
structure.

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Figure 37: Proposed cost accounting system structure

I. Consumed resource configuration

The first part is related to the acquirement of resources. The costs of acquired resource
with in specific period will be identified and classified on the basis of destination to the
responsibility centers. Construction based on its nature of complexity different resources
can be incurred which has to be allocates to cost objects. These costs can be labor,
material, equipment and overhead. This first identification of cost aims to prevent the
ignorance of cost in determination and allocation to cost objects.

II. Responsibility centers

After identifying the total acquired cost the next step is assigning those cost to the
responsibility centers and grouped in cost pool. The responsibility center can be a unit or
department in an organization for which the resources are acquired. Basically
responsibility centers are classified as support center and product center. Support center
are a department or a section which is not directly involved in performing the activity but
it gives support to the production department or unit. For example, administrative
department, equipment maintenance department, procurement and supply management
team, etc. whereas product center has a direct relationship with the product or service
such as, borrow material production, asphalt placing, sub base material production, etc.

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III. Cost objects

Finally the costs in support and product center will be allocated to responsible cost
objects. The direct and indirect costs will be allocated to the cost objects by using direct
costing system and activity based costing system respectively.

4.6.1 Comparison between the existing system and proposed system

After investigating the current costing system of ECWC TICS, this research proposes the
above cost accounting system structure. The proposed system focuses on fill the gaps in
the existing system. The comparison between the existing and proposed system are
indicate in table16.

Table 16: Comparison between the existing system and proposed system

Existing system Proposed system

Cost determination

 Costs are determined by using  All costs incurred during the

the crew worked hour report of reporting period are listed and then
each cost objects. Due to this allocated to the respective cost
there is a chance of ignoring object through responsibility center.
different costs which are not First identification of all acquired
done with a specific crew. For costs is done to overcome the
example, correction work and problem of distorted cost allocation
maintenance work. and ignorance of different cost.

Responsibility center identification

 There is no responsibility center  Responsibility centers for each
identification process. The incurred resources are identified as
costs are allocated to the cost support center and product center
centers based on their crew and their corresponding cost will be
formation and worked hour. allocated. This is done to prevent the
occurrence of inaccurate cost

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allocation.

Overhead cost allocation

 Head office overhead costs are  The actual head office overhead cost
either taken as a specific of a specific project will be
percentage amount of direct cost calculated and allocated to the
or not consider in cost project and then to the cost objects.
determination of cost objects.  The actual project overhead costs for
So the cost ascertainment a specific reporting period will be
process will be distorted computed and allocated to each cost
 Uses a predetermined overhead objects by using percentage rate.
percentage rate or they calculate The overhead percentage rate is
the percentage of project calculated by dividing the actual
overhead cost by dividing the overhead amount of the specific
sum of indirect cost of the period to total direct cost of
project to the expected revenue executed quantities.
from the executed work.

Variance analysis
 The variance analysis is done at  Variance analysis is done to the
serious and general activity activity and resource level in order
level. to evaluate the performance of the
project. The resource cost variance
of labor, material, equipment and
overhead from the standard is
computed in order to ascertain
which resource is the cause for the
negative or positive variance
Data presentation

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 Cost data is presented only in  The arranged cost data are presented
table format which is to the concerned body in easy and
complicated and difficult to understandable way. In addition to
understand. the table presentation format the cost
variance of each activities and
resources are presented graphically
in order to easily indicate the varied
activity and resource from the
standard.

4.6.2 Test the implementation

In order to assess the proposal made for improving the effectiveness of the system and to
provide a basis for obtaining useful recommendations from this research it was necessary
to test the proposal in real-life situations and evaluate the results of the test against
currently available system. Accordingly, this chapter presents the procedures carried out
to test the proposed cost accounting system the results obtained from the test and an
analysis of the results. The company is divided into different departments that are chosen
as cost centers. All the expenses, direct and indirect, sustained by the project in a
specified period of time are grouped based on their nature and then shared considering
the required resource. This means divide the company into product centers and support
centers and so, for each center, determine the respective expenses in order to calculate
costs.

The reference of Dulecha-Awash Arba , Dimma-Rad and Jinka Mender road construction
projects cost data is taken to test the proposed system.

4.6.2.1 Resources
The analysis of all the project cost incurred during the specified period is the first task
that has to be occurred. This is important firstly to identify the consumed resources in the
project and then to classify them into direct and indirect which is fundamental for the
configuration of costs. In addition it also prevents the chance of cost ignorance which is

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one of the problems of current system. Table17 shows all the resources or cost incurred in
the project during the specified period

Table 17: List of consumed resource, Dulecha – Awash Arba road project

I.N Consumed resource

I Labor cost
1 Daily labor
2 Time keeper
3 Data collector
4 Labor Forman
5 Construction Forman
6 Overtime Payment
7 Deseret allowance
II Equipment cost
8 Rental equipment expense
Own equipment Expense
9 Fuel
10 Oil & lubricant
11 Spare parts
12 Tyre & tubes
13 Equipment maintenance
14 Depreciation
III Material cost
15 Sand
16 Gravel
17 Stone
18 Asphalt
19 Borrow material
20 Sub- base
21 Base course
22 Electric supplies
IV Administrative expense
23 Permanent Emp. Salary & Pension
24 Contract employees payment
25 Overtime Payment
26 Deseret allowance
27 Communication expense
28 Fuel

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29 Oil & lubricant

30 Spare parts
31 Tire & tubes
32 Electrical Supplies
33 Equip. Rent expense
34 Entertainment
35 clothing and linen supplies
36 Food & Supplies
37 Medical supplies
38 Travel & perdiem
39 Office supplies
40 Repairs & maintenance of office & Building.
41 Janitor Supplies
42 Miscellaneous
43 Head office overhead cost

4.6.2.2 Responsibility centers

After identifying the resources the second step is determining the responsibility centers
for each incurred resources. Based on relation with the final product or cost object
responsibility centers are divided in to support center and product center. Support center
are centers which don‟t have direct relation to final products or cost object but they allow
production with their support. Whereas product centers has direct relation with the final
product. The responsibility centers for the incurred resource are listed in the table 18.

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Table 18: List of responsibility centers for Dulecha –Awash Arba project

I/N Product center Support center

1 Borrow material production Administration team
Financial Management
2 Borrow material hauling team

3 Borrow material loading Engineering service team

Procurement and supply
4 Borrow material fill management team
Equipment administration
5 Drilling & Blasting and maintenance team
6 Quarry Rock Material Production
7 Quarry RockMaterial loading
8 Quarry Rock Material Hauling
9 Rock fill
10 Rock sealing
11 Sub-Base Material Production
12 Sub-Base material hauling
13 Sub-Base material loading
14 Sub base layer construction
15 Base course material production
16 Base course material hauling
17 Base course material loading
18 Base Course material mixing
19 Base course layer construction
20 Asphalt batch plant opreation
21 Asphalt hot mix hauling
22 Asphalt surfacing
23 Stone masonary
24 Sand Production
25 Sand Hauling
26 Aggregate3/4 production
27 Aggregate3/4 Hauling
28 Aggregate3/8 production
29 Aggregate3/8 Hauling
30 Concrete mixing
31 Concrete placing
32 Selected Material Production
33 Selected Material Hauling
34 Back filling

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4.6.2.3 Cost allocation to support centers

The total cost for support centers are calculated and allocated to the responsible support
centers. Since support centers are supportive unit the costs incurred has to be equally
shared to the cost object based on their earned service. The costs which are allocated to
support centers for the project for the specified period are listed in the table 19 below.

Table 19: List of cost allocated to support center for Dulecha –Awash Arba project

I/N Indirect expense Cost

1 Permanent Emp. Salary & Pension 608,669.75
2 Contract employees payment 428,130.90
3 Overtime Payment 489,717.03
4 Deseret allowance 130,942.05
5 Communication expense 42,032.38
6 Fuel 97,951.37
7 Oil & lubricant 8,578.12
8 Spareparts 25,974.45
9 Tyre & tubes 34,695.00
10 Electrical Supplies
11 Equip. Rent expense
12 Entertainment 7,466.93
13 clothing and linen supplies 68,720.43
14 Food & Supplies 1,085.24
15 Medical supplies
16 Travel & perdiem 100,400.00
17 Office supplies 13,177.36
18 Repairs & maintenance of office & Building. 4,779.99
19 Jaintor Supplies 25,024.73
20 Miscellanous 45,869.07
21 Headoffice overhead cost 585,468.01

Total Cost 2,718,682.81

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4.6.2.4 Cost allocation for product centers

All the total cost incurred for the product center are calculated and allocated to each
responsible product center. Table 20 indicates the allocated cost to the product center.
The costs are identified based on multiplying the executed quantity to each activity unit
price.

Table 20: List of cost allocated to product centers Dulecha –Awash Arba project

Excuted Cost per

I/N Product center Unit Quantity unit Total cost (birr)
0.48
1 Clearing and grubbing ha 19,928.87 9,565.86
2 Borrow material production 24.73 204,702.58
3 Borrow material hauling 21.78 180,283.95
m3 8,277.50
4 Borrow material loading 7.55 62,495.13
5 Borrow material fill 31.33 259,334.08
6 Drilling & Blasting 31.75 293,503.35
7 Quarry Rock Material Production 74 684,070.80
8 Quarry RockMaterial loading m3 9,244.20 28.6 264,384.12
9 Quarry Rock Material Hauling 119.09 1,100,891.78
10 Rock fill 26.72 247,005.02
11 Rock sealing m3 1,312.00 63.18 82,892.16
12 Sub-Base Material Production 23.35 40,502.91
13 Sub-Base material hauling 37.75 65,481.15
m3 1,734.60
14 Sub-Base material loading 28.65 49,696.29
15 Sub base layer construction 81.28 140,988.29
16 Base course material production 292.23 122,736.60
17 Base course material hauling 145.41 61,072.20
18 Base course material loading m3 420.00 74.36 31,231.20
19 Base Course material mixing 31.2 13,104.00
20 Base course layer construction 49.72 20,882.40
21 Asphalt batch plant opreation 224 407,680.00
22 Asphalt hot mix hauling m2 1,820.00 7.89 14,359.80
23 Asphalt surfacing 18.87 34,343.40
24 Stone masonary m3 9.24 3139 29,004.36
25 Sand Production 14.462963 54.67
26 Sand Hauling 10.10 38.19
27 Aggregate3/4 production 207.14 783.00
28 Aggregate3/4 Hauling 9.57 36.18
m3 3.78
29 Aggregate3/8 production 51.76 195.66
30 Aggregate3/8 Hauling 2.39 9.05
31 Concrete mixing 4027.29 15,223.16
32 Concrete placing 696.3 2,632.01
33 Selected Material Production 23.67 6,343.56
34 Selected Material Hauling m3 268.00 79.79 21,383.72
35 Back filling 195.39 52,364.52
Total Cost 4,519,275.13

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4.6.2.5 Cost allocation for cost objects

Finally the cost allocated to the product and support centers are allocated to each cost
objects. Cost objects are a product or activity which has a payable value or fixed unit
price in the contract agreement. The allocations of costs are done in two ways. Since
direct costs has a direct relation with the cost object it can be easily trace by direct
costing system, whereas indirect costs are allocated based on the performed activity. The
total sum of all indirect costs is divided by the direct costs incurred with in the specified
period, and then the value will be allocated based on the activity. Table 21 shows the
allocation of support and product center cost to each cost object.

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Table 21: Allocation of cost to cost objects for Dulecha –Awash Arba project

Excuted Cost per Allocation

I/N Support center Cost Product center Quanti ty Uni t uni t Total cost Cost objects Di rect cost Indirect cost
Permanent Emp. Salary &
1 608,669.75 Clearing and grubbing 0.48 ha 19,928.87 9,565.86 Site clearing 9,565.86 5,754.58
Pension
2 Contract employees payment 428,130.90 Borrow material production 24.73 204,702.58
3 Overtime Payment 489,717.03 Borrow material hauling 21.78 180,283.95 Cut and borrow
8,277.50 m3 706,815.73 425,202.65
4 Deseret allowance 130,942.05 Borrow material loading 7.55 62,495.13 to fill

5 Communication expense 42,032.38 Borrow material fill 31.33 259,334.08

6 Fuel 97,951.37 Drilling & Blasting 31.75 293,503.35
Quarry Rock Material
Oil & lubricant
7 8,578.12 Production 74 684,070.80
8 Spareparts 25,974.45 Quarry RockMaterial loading 9,244.20 m3 28.6 264,384.12 Rock fill in
2,672,747.23 1,607,857.84
Quarry Rock Material embankment
9 Tyre & tubes 34,695.00 Hauling 119.09 1,100,891.78
10 Electrical Supplies Rock fill 26.72 247,005.02
11 Equip. Rent expense Rock sealing 1,312.00 m3 63.18 82,892.16
Sub-Base Material 275mm
Entertainment
12 7,466.93 Production 23.35 40,502.91 max.thickness
gravel sub-base
13 clothing and linen supplies 68,720.43 Sub-Base material hauling 1,734.60 m3 37.75 65,481.15 296,668.64 178,468.43
layer, 97%
14 Food & Supplies 1,085.24 Sub-Base material loading 28.65 49,696.29 MDD,AASHTO
15 Medical supplies Sub base layer construction 81.28 140,988.29 T-180
Base course material
Travel & perdiem
16 100,400.00 production 292.23 122,736.60
Crushed ston
17 Office supplies 13,177.36 Base course material hauling 145.41 61,072.20 base,compacted
Repairs & maintenance of in layers of
420.00 m3 249,026.40 149,808.05
18 office & Building. 4,779.99 Base course material loading 74.36 31,231.20 maximum 200mm
19 Jaintor Supplies 25,024.73 Base Course material mixing 31.2 13,104.00 thickness, to
Base course layer 100%
Miscellanous
20 45,869.07 construction 49.72 20,882.40 compaction
21 Headoffice overhead 585,468.01 Asphalt batch plant opreation 224 407,680.00
50mm thich
22 Asphalt hot mix hauling 1,820.00 m2 7.89 14,359.80 456,383.20 274,548.71
asphalt concrete
23 Asphalt surfacing 18.87 34,343.40 surfacing
class 'B' stone
24 Stone masonary 9.24 m3 3139 29,004.36 masonary 29,004.36 17,448.30
25 Sand Production 14.462963 54.67
26 Sand Hauling 10.10 38.19
27 Aggregate3/4 production 207.14 783.00
28 Aggregate3/4 Hauling 9.57 36.18 Class 'C'
3.78 m3 18,971.92 11,413.03
29 Aggregate3/8 production 51.76 195.66 concrete

30 Aggregate3/8 Hauling 2.39 9.05

31 Concrete mixing 4027.29 15,223.16
32 Concrete placing 696.3 2,632.01
33 Selected Material Production 23.67 6,343.56
Backfill using
34 Selected Material Hauling 268.00 m3 79.79 21,383.72 80,091.80 48,181.22
selected material
35 Back filling 195.39 52,364.52
Total Cost 2,718,682.81 Total Cost 4,519,275.13

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4.6.2.6 Variance analysis

The final step after identifying the cost of each cost object is evaluating the performance
and presenting the result to the decision makers. As discussed in the literature review one
of method of evaluating performance is variance analysis. The variance analysis is done
by comparing the actual cost with the estimated or standard cost. As shown in the table
22 two types of variance analysis is performed rate variance and cost variance. Rate
variance are calculated by subtracting actual cost from standard cost and the cost variance
are calculated by subtracting actual cost from the earned value. As indicated in the figure
38 the variance analysis results of the project except sub base layer activity all costs
earns negative variance which indicates that the project is under high risk. The rock fill
activities get the first place in earning high loss in the specified period.

4,500,000.00
4,000,000.00
3,500,000.00
3,000,000.00
2,500,000.00
2,000,000.00
1,500,000.00
1,000,000.00
500,000.00 Actual Cost
-
Earned value

Figure 38: Actual cost and earned value variance analysis for Dulecha –Awash Arba project

During the specified period a total of 3,236,488.35 birr loss is incurred. This result
indicates the project is performing its work below the specified unit rate. The loss can be
because of the work methodology, ideal hours of man power and machineries or poor
productivity of the crews. For decision maker the result shown in table 22, is not enough
to identify the real cause of the loss. The cause of the loss can be occurred on labor,
material, equipment and overhead cost. Therefore, further detailed variance analysis is
necessary.

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Table 22: Cost Variance Analysis for Dulecha –Awash Arba road project

Excuted Total cost Actual Unit Budgeted

Quantity (DC+IC) rate Rate Actual cost Earned Value Variance
Rate Cost
I/N Cost objects Unit (A) (B) (C=B/A) (D) (E=A*C) (F=A*D) (G=D-F) (H=F-E)

15,320.44 31,917.58 21,316.81 15,320.44 10,232.07

1 Site clearing ha 0.48 (10,600.77) (5,088.37)
Cut and borrow to fill m3 8,277.50 1,132,018.37 136.76 119.76 1,132,018.37 991,313.40
2 (17.00) (140,704.97)

Rock fill in embankment m3 9,244.20 4,280,605.07 463.06 186.31 4,280,605.07 1,722,286.90

3 (276.75) (2,558,318.17)
275mm max.thickness gravel
sub-base layer, 97% m3 1,734.60 475,137.07 273.92 282.14 475,137.07 489,400.04
4 MDD,AASHTO T-180 8.22 14,262.98

Crushed ston base,compacted

m3 420.00 398,834.45 949.61 558.37 398,834.45 234,515.40
in layers of maximum 200mm
5 thickness, to 100% compaction (391.24) (164,319.05)
50mm thich asphalt concrete
m2 1,820.00 730,931.91 401.61 255.08 730,931.91 464,245.60
6 surfacing (146.53) (266,686.31)
5,027.34 1,460.74 46,452.66 13,497.24
7 class 'B' stone masonary m3 9.24 46,452.66 (3,566.60) (32,955.42)

8 Class 'C' concrete m3 3.78 30,384.95 8,038.35 3,581.38 30,384.95 13,537.62 (4,456.97) (16,847.34)

9 Backfill using selected material m3 268.00 128,273.02 478.63 232.99 128,273.02 62,441.32 (245.64) (65,831.70)
Total Cost 21,777.80 7,237,957.94 7,237,957.94 4,001,469.59 (3,236,488.35)

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M.Sc. Thesis

A. Variance analysis at resource level

As discussed in the literature review the aim of cost accounting is to determine the cost of
cost objects which helps the decision makers in making corrective decision. In order to
make the decision makers able to take a corrective measurement on negatively performed
activity the detailed variance analysis of labor, material, equipment and overhead cost
have to be done. In this level of analysis the estimated labor, material and equipment cost
are compared with the actually incurred cost. Thus, the decision makers can easily
identify which resource is acquired above the expected cost in order to make corrective
measures. Table 23 indicates the detailed resource cost variance.

Table 23: Cost variance at resource level for Dulecha –Awash Arba project

Summary of cost for site clearing (Birr/ha)

I/N Cost Total cost Labour cost Material cost Equipment cost Overhead cost

1 Actual cost 31,917.58 2,493.56 - 17,435.31 11,988.71

2 Estimated cost 21,316.81 1,419.69 - 16,800.00 1,821.97
Variance (10,600.77) (1,073.87) - (635.31) (10,166.74)
Summary of cost for cut and borrow to fill (Birr/m3)
1 Actual cost 136.76 4.42 54.06 26.09 52.19
2 Estimated cost 119.76 5.05 54.67 42.64 10.24
Variance (17.00) 0.63 0.61 16.55 (41.95)
Summary of cost for Rock fill in embankment (Birr/m3)
1 Actual cost 463.06 3.91 316.68 22.81 119.66
2 Estimated cost 186.31 2.61 139.35 17.28 15.92
Variance -276.75 (1.30) (177.33) (5.53) (103.74)
Summary of cost for sub-base layer construction(Birr/m3)
1 Actual cost 273.92 32.93 89.75 48.34 94.06
2 Estimated cost 282.14 4.92 201.52 34.70 24.11
Variance 8.22 (28.01) 111.77 (13.64) (69.95)
Summary of cost for base- course layer construction(Birr/m3)
1 Actual cost 949.61 16.36 543.20 33.37 356.68
2 Estimated cost 558.37 4.75 437.35 35.14 47.72
Variance -391.24 (11.61) (105.85) 1.77 (308.96)
Summary of cost for Asphalt concrete surfacing construction(Birr/m2)
1 Actual cost 401.61 8.55 231.89 10.32 150.85
2 Estimated cost 255.08 1.00 208.76 8.26 21.80
Variance -146.53 (7.55) (23.13) (2.06) (129.05)
Summary of cost for class 'B' stone masonary construction(Birr/m3)
1 Actual cost 5027.34 803.90 238.50 2,096.59 1,888.35
2 Estimated cost 1460.74 263.85 850.10 134.58 124.85
Variance (3,566.60) (540.05) 611.60 (1,962.01) (1,763.50)
Summary of cost for class 'C' concrete construction(Birr/m3)
1 Actual cost 8,038.35 696.26 1,593.00 2,730.00 3,019.09
2 Estimated cost 3,581.38 209.59 1,526.54 232.33 1,612.92
Variance -4456.97 (486.67) (66.46) (2,497.67) (1,406.17)
Summary of cost for backfill with selected material construction(Birr/m3)
1 Actual cost 478.63 51.07 103.46 144.32 179.78
2 Estimated cost 232.99 11.08 136.74 51.32 19.91
Variance -245.64 (39.99) 33.28 (93.00) (159.87)

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M.Sc. Thesis

I. Variance analysis for site clearing

As figure 40 indicates the site clearing activity has earned a negative cost variance in all
resources as compared with the standard. Especially the variance due to the overhead is
too high. This indicates that the project is performing the site clearing activity above the
expected expenditure. The exceeding payment for labor and equipment from the
estimated costs are the cause for negative variance of labor and equipment. As indicated
in the figure 39 the overhead variance takes the highest portion. It is because of the
project has high overhead and lower executed activities. Therefore the decision makers
have to find a solution for the loss by taking a corrective measure. The measure can be
changing the work methodology, reducing the ideal hours, reducing the overhead cost or
take any other action to solve the problem.

35,000.00

30,000.00

25,000.00

20,000.00
Actual cost
15,000.00
Estimated cost
10,000.00

5,000.00

-
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 39: Variance analysis for site clearing for Dulecha –Awash Arba project

II. Variance analysis for cut and borrow to fill

In this activity the variance of labor, material and equipment are positive and the
overhead cost incurred negative variance. The result tells that the project has a high
overhead cost. In order to overcome this loss the decision makers have to focus in
increasing the volume of executed quantity of the project or reducing the overhead of the
project. Also the project has to keep and improve the positive cost variance of resources.

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M.Sc. Thesis

160.00

140.00

120.00

100.00

80.00 Actual cost

60.00 Estimated cost

40.00

20.00

-
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 40: Variance analysis for cut and borrow to fill for Dulecha –Awash Arba project

III. Variance analyses for Rock fill in embankment

The figure 41 shows that the rock fill activity has a negative cost variance in all resource.
Especially the material cost variance is too high about 177.33 birr/m3 which needs a high
attention. It is caused by under estimation of the material cost and unavailability of rock
material on the project site. Also there is a high negative cost variance in overhead cost.
The decision makers have to check the work methodology and other factors which can
cause this negative value.

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M.Sc. Thesis

500
450
400
350
300
250 Actual cost
200 Estimated cost
150
100
50
0
Total cost Labour cost Material cost Equipment Overhead
cost cost

Figure 41: Variance analyses for Rock fill in embankment for Dulecha –Awash Arba project

IV. Variance analysis for sub-base layer construction

The total cost variance for sub base layer construction activity is positive. This result
doesn‟t mean that all resources are performed based on the standard and acquire the
expected profit. Except material cost all of the remaining items incurred loss. The
material cost of the estimated value is greater than the actual cost it is about
111.77birr/m3. It is good for the project to keep the method of work for material. But the
remaining resources loss has to be minimized or covered. In order to remove this loss the
decision makers have to give a special consideration in the crew productivity, work
methodology and the overhead cost of the project.

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M.Sc. Thesis

300

250

200

150 Actual cost

Estimated cost
100

50

0
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 42: Variance analyses for sub-base layer construction for Dulecha –Awash Arba project

V. Variance analysis base- course layer construction

Except equipment cost the variance of base layer construction activity all resources are
negative. The figure 43 indicates every resource acquire loss especially the overhead cost.
The decision makers have to take corrective measure to clear the loss for the future.

1000
900
800
700
600
500 Actual cost
400
Estimated cost
300
200
100
0
Total cost Labour cost Material cost Equipment Overhead
cost cost

Figure 43: Variance analyses for base- course layer construction for Dulecha –Awash Arba project

VI. Variance analysis for Asphalt concrete surfacing construction

As the figure 44 shows the actual cost incurred in asphalt surfacing activity are greater
than the estimated or standard. The highest loss was come from the overhead. Therefore

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M.Sc. Thesis

the decision makers have to give a method to minimize the overhead and increase the
productivity.
450
400
350
300
250
Actual cost
200
Estimated cost
150
100
50
0
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 44: Variance analyses for asphalt concrete surfacing construction for Dulecha –Awash Arba project

VII. Variance analysis class 'B' stone masonry construction

In class „B‟ stone masonry activity both positive and negative variance has occurred.
Material cost can experience positive cost variance whereas the labor, equipment and
overhead incurred high negative variance. The ideal hours of equipment are the main
cause for negative variance. The decision makers have to check their work methodology
and take corrective measure in order to clear the loss for the future.

6000

5000

4000

3000 Actual cost

Estimated cost
2000

1000

0
Total cost Labour cost Material Equipment Overhead
cost cost cost

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 M.Sc. Thesis

Figure 45: Variance analyses for class 'B' stone masonry construction for Dulecha –Awash Arba project

VIII. Variance analysis for class 'C' concrete construction

Figure 46 shows under the class „C‟ concrete activity indicates a high negative variance
in all resources specially equipment and overhead cost. Higher rental rate of equipment
than the estimated are the cause for the variance. The decision makers have to take a
corrective measure to change this loss for the future.

9,000.00
8,000.00
7,000.00
6,000.00
5,000.00
Actual cost
4,000.00
Estimated cost
3,000.00
2,000.00
1,000.00
-
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 46: Variance analyses for class 'C' concrete construction for Dulecha –Awash Arba project

IX. Variance analysis for backfill with selected material construction

Under backfilling with selected material activity material cost can experience positive
variance. But the remaining earns negative variance which makes the activity to got loss.
It is because of difference in rental rate of equipment and payment for labour. The
decision makers can change this result by changing the methodology or taking any
corrective decision.

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M.Sc. Thesis

600

500

400

300 Actual cost

Estimated cost
200

100

0
Total cost Labour cost Material Equipment Overhead
cost cost cost

Figure 47: Variance analyses for backfill with selected material construction for Dulecha –Awash Arba project

B. Summary of results

The above results show that Dulecha-Awash Arba project has incurred negative variance
during the specified reporting period. Most of the variances are caused by
underestimation of the cost of resource and very high overhead cost. The contractual unit
rates of most activities are not well considering manpower and material availability in the
project. Most materials are available in the project far from the expected location and also
the actual equipment rental rates are higher than the expected. As indicated in the above
variance result overhead costs are the main causes for loss in all activities. The overhead
is estimated to be 10% of the direct cost but the actually calculated rate is 60% of the
direct cost. The cause for this high cost of overhead is the presence of large number of
unnecessary manpower hired to create work chance for the society. In order to minimize
loss the project should either reduce the overhead or increase the volume of executed
quantity.

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M.Sc. Thesis

By the same procedure the system was tested for Dimma- Rad and Jinka- Mender road
projects. The system result for both projects is described below.

Responsibility centers for Dimma-Rad road construction project.

Table 24: List of responsibility center for Dimma-Rad road construction project

I/N Product center Support center

1 Borrow material production Administration team

Financial Management
2 Borrow material hauling team

3 Borrow material loading Engineering service team

Procurement and supply
4 Borrow material fill management team
Equipment administration
5 Capping layer material production and maintenance team

6 Capping layer material hauling

7 Capping layer material placing
8 Sub-Base Material Production
9 Sub-Base material hauling
10 Sub-Base material loading
11 Sub base layer construction
12 Base course material production
13 Base course material hauling
14 Base course material loading
15 Base Course material mixing
16 Base course layer construction
17 Asphalt batch plant opreation
18 Asphalt hot mix hauling
19 Asphalt surfacing
20 Stone masonary
21 Sand Production
22 Sand Hauling
23 Aggregate3/4 production
24 Aggregate3/4 Hauling
25 Aggregate3/8 production
26 Aggregate3/8 Hauling
27 Concrete mixing
28 Concrete placing

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M.Sc. Thesis

Cost allocation to support center for Dimma-Rad road construction project

Table 25: List of cost allocated to support center for Dimma-Rad road construction project

I/N Administrative e xpe nse Cost

1 Permanent Emp. Salary & Pension 594,460.91

2
Contract employees payment 327,744.70
3 Overtime Payment 423,252.28
4 Deseret allowance 160,689.41
5 Housing allownace 18,142.46
6 Communication expense
7 Fuel 153,354.49
8 Oil & lubricant 3,979.97
9 Spareparts 51,834.19
10 Tyre & tubes
Electrical Supplies
11
12 Equip. Rent expense
13 Entertainment
14 clothing and linen supplies 132,965.28
15 Food & Supplies 4,210.00
16 Medical supplies

17 Travel & perdiem 208,289.70

18 Office supplies 14,144.13
Repairs & maintenance of office &
19 Building.
20 Jaintor Supplies 150,906.14
21 Miscellanous 54,873.75
22 Head office overhead cost 676,896.33

Total Cost 2,975,743.74

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M.Sc. Thesis

Cost allocation for product centers

Table 26: List of cost allocated to support center for Dimma-Rad road construction project

Excuted
I/N Product center Quantity (m3) Cost per m3 Total cost
1 Borrow material production 36.32 151,962.88

2 Borrow material hauling 48.02 200,915.68

3 Borrow material loading -
4 Borrow material placing 4,184.00 48.89 204,555.76
Capping layer material
5 production 37.78 13,600.80

6 Capping layer material hauling 61.22 22,039.20

7 Capping layer material placing 360.00 61.27 22,057.20
8 Sub-Base Material Production 37.25 19,332.75

9 Sub-Base material hauling 54.72 28,399.68

10 Sub-Base material loading -
11 Sub base layer construction 519.00 82.29 42,708.51
12 Base course material production 318.94 171,908.66
13 Base course material hauling 114.67 61,807.13
14 Base course material loading -
15 Base Course material mixing -
16 Base course layer construction 539.00 77.32 41,675.48
17 Asphalt batch plant opreation 205.342 2,213,586.76
18 Asphalt hot mix hauling 1.616 17,420.48
19 Asphalt surfacing 10,780.00 11.145 120,143.10
20 Stone production 481.71 149,484.25
21 Stone hauling 94.2 29,232.14
22 Stone masonary construction 1795.2 557,086.46
23 Stone dressing 310.32 55.77 17,306.55
24 Aggregate production 1743.15 35,560.26
25 Aggregate Hauling 20.40 136.76 2,789.90
26 Concrete mixing & placing 1952.37 39,828.35
27 Stone production ( retainig wall) 394.34 7,855.25
28 Stone hauling 63.75 1,269.90
29 Stone masonary construction 19.92 1479.09 29,463.47

Total Cost 4,201,990.61

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M.Sc. Thesis A.Y. 2019/2020

Cost allocation to cost object for Dimma –Rad road construction project.

Table 27: List of cost allocated to cost objects for Dimma-Rad road construction project

Excuted Cost per Allocation

I/N Support center Cost Product center Quantity Unit unit Total cost Cost objects Direct cost Indirect cost
Permanent Emp. Salary &
1 Pension 594,460.91 Borrow material production 36.32 151,962.88
Contract employees payment Cut and borrow
2 327,744.70 Borrow material hauling 4,184.00 m3 48.02 200,915.68 557,434.32 387,357.06
to fill
3 Overtime Payment 423,252.28 Borrow material loading - -
4 Deseret allowance 160,689.41 Borrow material placing 48.89 204,555.76
Capping layer material
5 Housing allownace 18,142.46 production 37.78 13,600.80

Communication expense 360.00 m3 Capping layer 57,697.20 40,093.36

6 Capping layer material hauling 61.22 22,039.20
Fuel
7 153,354.49 Capping layer material placing 61.27 22,057.20
8 Oil & lubricant 3,979.97 Sub-Base Material Production 37.25 19,332.75 275mm
max.thickness
Spareparts
9 51,834.19 Sub-Base material hauling 54.72 28,399.68 gravel sub-base
m3 90,440.94 62,846.75
10 Tyre & tubes Sub-Base material loading - layer, 97%
MDD,AASHTO
11 Electrical Supplies Sub base layer construction 519.00 82.29 42,708.51 T-180

Equip. Rent expense

12 Base course material production 318.94 171,908.66 Crushed ston
base,compacted
13 Entertainment Base course material hauling 114.67 61,807.13
in layers of
14 clothing and linen supplies 132,965.28 Base course material loading 539.00 m3 - 275,391.27 191,367.39
maximum 200mm
15 Food & Supplies 4,210.00 Base Course material mixing - thickness, to
100%
Medical supplies
16 Base course layer construction 77.32 41,675.48 compaction
17 Travel & perdiem 208,289.70 Asphalt batch plant opreation 205.342 2,213,586.76
Office supplies Asphalt
18 14,144.13 Asphalt hot mix hauling 10,780.00 m2 1.616 17,420.48 concrete surfacing 2,351,150.34 1,633,797.28
Repairs & maintenance of
19 office & Building. Asphalt surfacing 11.145 120,143.10
Cement-
Jaintor Supplies
20 150,906.14 Stone production 481.71 149,484.25 mortared stone
21 Miscellanous 54,873.75 Stone hauling 310.32 m3 94.2 29,232.14 masonry walls 753,109.40 523,330.25
22 Head office overhead cost 676,896.33 Stone masonary construction 1795.2 557,086.46 (Class 'B' stone
23 Stone dressing 55.77 17,306.55 masonry)
24 Aggregate production 1743.15 35,560.26 Cast In situ
25 Aggregate Hauling 136.76 2,789.90 concrete and 78,178.51 54,325.68
26 Concrete mixing & placing 20.40 m3 1952.37 39,828.35 formwork grade
27 Stone production 394.34 7,855.25 Stone masonry
28 Stone hauling 19.92 m3 63.75 1,269.90 walls (b) Cement- 38,588.63 26,814.96
29 Stone masonary construction 1479.09 29,463.47 mortared stone
30 General 1.00 Ls 80,316.00 80,316.00 General 80,316.00 55,811.00
Total Cost 2,975,743.74 Total Cost 4,282,306.61

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M.Sc. Thesis A.Y. 2019/2020

Variance analysis at the activity level for Dimma- Rad road project.

Table 28: Variance analysis at activity level for Dimma-Rad road construction project

Excuted Total cost Actual Unit Budgeted

Quantity (DC+IC) rate Rate Actual cost Earned Value Variance
Rate Cost
I/N Cost objects Unit (A) (B) (C=B/A) (D) (E=A*C) (F=A*D) (G=D-F) (H=F-E)
944,791.38 225.81 166.06 944,791.38 694,795.04
1 Cut and borrow to fill m3 4,184.00 (59.75) (249,996.34)
Capping layer having a CBR Value not
m3 360.00 97,790.56 271.64 201.08 97,790.56 72,388.80
2 less than 15% at a compaction level of (70.56) (25,401.76)

275mm max.thickness gravel sub-base m3 519.00 153,287.69 295.35 246.64 153,287.69 128,006.16
4 layer, 97% MDD,AASHTO T-180 (48.71) (25,281.53)

Crushed ston base,compacted in layers

m3 539.00 466,758.66 865.97 612.77 466,758.66 330,283.03
of maximum 200mm thickness, to 100%
5 compaction (253.20) (136,475.63)
50mm Asphaltic surfacing with m2 10,780.00 3,984,947.62 369.66 358.21 3,984,947.62 3,861,503.80
6 (penetration grade 60/70 bitumen ) (11.45) (123,443.82)
Cement-mortared stone masonry walls 4,113.30 2,584.49 1,276,439.65 802,018.94
7 (Class 'B' stone masonry) m3 310.32 1,276,439.65 (1,528.81) (474,420.71)
Cast In situ concrete and formwork
m3 20.40 132,504.19 6,495.30 5,229.61 132,504.19 106,684.04
8 grade 25 (1,265.69) (25,820.15)
Stone masonry walls (b) Cement-
mortared stone walls in check dams ,
m3 19.92 65,403.58 3,283.31 2,584.49 65,403.58 51,483.04
retaining walls , end wall, Inlet, gutter &
9 curb stone. (698.82) (13,920.54)
10 General Ls 1.00 136,127.00 136,127.00 186,175.00 136,127.00 186,175.00 50,048.00 50,048.00
Total Cost 7,258,050.34 7,121,923.34 6,233,337.85 (1,074,760.49)

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M.Sc. Thesis

Variance analysis at resource level for Dimma- Rad road project.

Table 29: Variance analysis at resource level for Dimma-Rad road construction project

Overhead
I/N Cost Labour cost Material cost Equipment cost cost
Summary of cost for cut and borrow to fill
1 Actual cost 9.91 84.34 38.98 91.93
2 Estimated cost 5.82 96.09 21.10 30.75
Variance (4.09) 11.75 (17.88) (61.18)
Summary of cost for capping layer
1 Actual cost 10.79 99.01 50.48 110.59
2 Estimated cost 10.16 105.03 33.75 37.24
Variance (0.63) 6.02 (16.73) (73.36)
Summary of cost for sub-base layer construction
1 Actual cost 14.91 91.97 67.39 120.25
2 Estimated cost 12.79 125.12 44.78 45.67
Variance (2.12) 33.15 (22.61) (74.57)
Summary of cost for base- course layer construction
1 Actual cost 14.79 433.61 62.53 352.54
2 Estimated cost 12.96 393.07 47.85 113.47
Variance (1.83) (40.54) (14.68) (239.07)
Summary of cost for Asphalt concrete surfacing construction
1 Actual cost 2.34 206.96 8.80 150.49
2 Estimated cost 1.27 260.34 3.70 66.33
Variance (1.07) 53.38 (5.10) (84.16)
Summary of cost for Stone masonry walls in check dams, retaining walls, end wall,
1 Actual cost 1,284.07 458.09 1,202.09
2 Estimated cost 920.11 869.03 125.29 478.61
Variance (363.96) 410.94 125.29 (723.48)
Summary of cost for cast in situ concrete construction
1 Actual cost 812.15 1,879.90 1,140.21 2,644.26
2 Estimated cost 569.38 2,792.83 511.56 968.44
Variance (242.77) 912.93 (628.65) (1,675.82)
Summary of cost for cement-mortared stone masonry walls (Class 'B' stone masonry)
1 Actual cost 1,018.97 575.91 832.29 1,674.75
2 Estimated cost 920.11 869.03 125.29 478.61
Variance (98.86) 293.12 (707.00) (1,196.14)

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Responsibility centers for Jinka - Mender road project

Table 30: List of responsibility center for Jinka Mender project

I/N Product center Support center

1 Borrow material production & hauling Administration team

2 Borrow material placing Financial Management team

3 Common excavation Engineering service team

Procurement and supply
4 Rock material production & hauling management team
Equipment administration and
5 Rock material placing maintenance team

6 Sub-Base material production & hauling

7 Sub base layer construction
Base course material production &
8 hauling

9 Base course layer construction

10 Asphalt batch plant operation & hauling

11 Asphalt surfacing
Stone production & hauling for retaining
12 wall
Stone masonry construction for retaining
13 wall
Stone production & hauling for town
14 ditch
Stone masonry construction for town
15 ditch
16 Curb stone material production

17 Curb stone placing

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Cost allocation to support center for Jinka - Mender road project.

Table 31: List of cost allocated to support center

I/N Indirect expense Cost

1 Permanent Emp. Salary & Pension 631,099.74

2 Contract employees payment 623,333.55

3 Overtime Payment 596,586.16

4 Deseret allowance

5 Communication expense 3,249.95

6 Housing allowance -

7 Employees training expense -

8 Fuel 301,372.81

9 Oil & lubricant 95,496.72

10 Spareparts 28,572.69

11 Tyre & tubes 208,307.72

12 Electrical Supplies -

13 Depreciation expense 13,330.47

14 Equip. Rent expense

15 Entertainment 7,172.99

16 clothing and linen supplies 65,075.81

17 Food & Supplies 14,543.56

18 Medical supplies 4,256.00

19 Travel & perdiem 299,362.95

20 Office supplies 24,896.67

Repairs & maintenance of office &
21 Building.
22 Jaintor Supplies 36,935.39

23 Miscellanous 189,814.54

Total Cost 3,143,407.72

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Cost allocation to product center for Jinka - Mender road project.

Table 32: List of cost allocated to product center

Excuted
I/N Product center Quantity Cost per unit Total cost

1 Borrow material production & hauling 29.00 68,875.00

2 Borrow material placing 2,375.00 73.50 174,556.30

3 Common excavtion 11,701.00 28.99 339,211.99

4 Rock material production & hauling 180.99 407,218.00

5 Rock material placing 2,250.00 31.72 71,362.26
Sub-Base material production &
6 hauling 0 -

7 Sub base layer construction 1,120.00 21.67 24,270.98

Base course material production &
8 hauling 845.47 2,971,827.05

9 Base course layer construction 3,515.00 169.87 597,093.05

Asphalt batch plant opreation &
10 hauling 191.96 940,604.00

11 Asphalt surfacing 4,900.00 20.63 101,087.00

Stone production & hauling for
12 retainig wall 436.70 122,538.02
Stone masonary construction for
13 retainig wall 280.60 527.08 147,898.65
Stone production & hauling for town
14 ditch 615.78 248,356.39
Stone masonary construction for
15 town ditch 403.32 390.82 157,625.52

16 Curb stone material production 185.32 61,805.24

17 Curb stone placing 333.50 218.37 72,825.27

Total Cost 6,507,154.73

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Cost allocation to cost object for Jinka - Mender road project

Table 33: List of cost allocated to cost objects for Jinka - Mender project

Excuted Cost per Allocation

I/N Support center Cost Product center Quantity Unit unit Total cost Cost objects Direct cost Indirect cost
Permanent Emp. Salary &
Borrow material production
Pension
1 631,099.74 & hauling 29.00 68,875.00 Cut and borrow to fill 243,431.30 167,652.93

Contract employees payment

2 623,333.55 Borrow material placing 2,375.00 m3 73.50 174,556.30
Overtime Payment 11,701.00 m3 Common Excavation 339,211.99 233,617.79
3 596,586.16 Excavtion 28.99 339,211.99
Rock material production &
Deseret allowance
4 hauling 180.99 407,218.00 Rock fill in
2,250.00 m3 478,580.26 329,601.74
embankment
5 Communication expense 3,249.95 Rock material placing 31.72 71,362.26
Sub-Base material production 275mm max.thickness
6 Housing allowance - & hauling 0 - gravel sub-base layer,
1,120.00 m3 24,270.98 16,715.61
97% MDD,AASHTO
7 Employees training expense - Sub base layer construction 21.67 24,270.98 T-180
Base course material Crushed ston
Fuel
8 301,372.81 production & hauling 845.47 2,971,827.05 base,compacted in
3,515.00 m3 3,568,920.10 2,457,941.49
Base course layer layers of maximum
Oil & lubricant
9 95,496.72 construction 169.87 597,093.05 200mm thickness, to

Spareparts Asphalt batch plant opreation 50mm thick asphalt

10 28,572.69 & hauling 4,900.00 191.96 940,604.00 1,041,691.00 717,420.24
concrete surfacing
11 Tyre & tubes 208,307.72 Asphalt surfacing m2 20.63 101,087.00

Electrical Supplies Stone production & hauling

12 - for retainig wall 436.70 122,538.02 Retaining wall
280.60 m3 270,436.67 186,251.72
Stone masonary construction construction
Depreciation expense
13 13,330.47 for retainig wall 527.08 147,898.65
Stone production & hauling
Equip. Rent expense
14 for town ditch 615.78 248,356.39
403.32 m3 405,981.91 279,602.73
Stone masonary construction Town ditch
Entertainment
15 7,172.99 for town ditch 390.82 157,625.52 construction
Curb stone material
clothing and linen supplies
16 65,075.81 production 333.50 m3 185.32 61,805.24 Curb stone 134,630.51 92,721.02
17 Food & Supplies 14,543.56 Curb stone placing 218.37 72,825.27 construction
Medical supplies
18 4,256.00
19 Travel & perdiem 299,362.95
Office supplies
20 24,896.67
Repairs & maintenance of
21 office & Building.
22 Jaintor Supplies 36,935.39
23 Miscellanous 189,814.54
24 Head office overhead 1,338,117.54
Total Cost 4,481,525.26 6,507,154.73

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Excuted Total cost Actual Unit Budgeted
Quantity (DC+IC) rate Rate Actual cost Earned Value Variance
Rate Cost
I/N Cost objects Unit (A) (B) (C=B/A) (D) (E=A*C) (F=A*D) (G=D-C) (H=F-E)

1 Cut and borrow to fill m3 2,375.00 411,084.23 173.09 123.29 411,084.23 292,818.50 (49.80) (118,265.73)
2 Common Excavation m3 11,701.00 572,829.78 48.96 41.70 572,829.78 487,955.10 (7.25) (84,874.68)

Rock fill in embankment m3 808,181.99 359.19 259.99 808,181.99 584,970.75

3 2,250.00 (99.20) (223,211.24)
275mm max.thickness gravel
sub-base layer, 97% m3 40,986.59 36.60 40,986.59 -
4 MDD,AASHTO T-180 1,120.00 (36.60) (40,986.59)

Crushed stone base,compacted

m3 3,515.00 6,026,861.59 1,714.61 612.52 6,026,861.59 2,153,011.32
in layers of maximum 200mm
5 thickness, to 100% compaction (1,102.09) (3,873,850.28)
50mm thich asphalt concrete
m2 4,900.00 1,759,111.24 359.00 308.56 1,759,111.24 1,511,919.50
6 surfacing (50.45) (247,191.74)
7 Retaining wall construction m3 280.60 456,688.39 1,627.54 1,674.24 456,688.39 469,792.87 46.70 13,104.48
8 Town ditch construction m3 403.32 685,584.64 1,699.85 1,674.24 685,584.64 675,256.09 (25.61) (10,328.55)
Variance analysis at activity level for Jinka- Mender road project

9 Curb stone consruction m3 333.50 227,351.54 681.71 360.00 227,351.54 120,058.67 (321.72) (107,292.87)
Total Cost 29,231.00 10,988,679.99 10,988,679.99 6,295,782.79 (4,692,897.20)
Table 34: List of variance analysis at activity level for Jinka- Mender project

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Variance analysis at resource level for Jinka - Mender road project

Table 35: List of variance analysis at resource level for Jinka- Mender project

Overhead
I/N Cost Labour cost Material cost Equipment cost cost
Summary of cost for cut and borrow to fill
1 Actual cost 3.59 29.00 69.91 70.59
2 Estimated cost 3.51 58.26 33.07 18.97
Variance -0.08 29.26 -36.84 -51.62
Summary of cost for common excavtion
1 Actual cost 0.86 0.00 28.13 19.97
2 Estimated cost 1.74 0.00 30.74 6.50
Variance 0.88 0 2.61 -13.47
Summary of cost for Rock fill in embankment
1 Actual cost 1.47 203.00 26.30 128.42
2 Estimated cost 13.66 149.70 36.63 40.00
Variance 12.19 -53.3 10.33 -88.42
Summary of cost for sub-base layer construction
1 Actual cost 6.87 0.00 14.80 14.93
2 Estimated cost 0.00 0.00 0.00 0.00
Variance -6.868958276 0 -14.80156342 -14.93
Summary of cost for base- course layer construction
1 Actual cost 8.71 845.47 161.16 699.27
2 Estimated cost 2.82 441.06 27.29 94.23
Variance -5.89 -404.41 -133.87 -605.04
Summary of cost for Asphalt concrete surfacing construction
1 Actual cost 3.02 191.96 17.61 146.41
2 Estimated cost 0.74 231.42 5.19 47.47
Variance -2.28 39.46 -12.42 -98.94
Summary of cost for retaining wall construction
1 Actual cost 474.24 436.70 52.84 663.76
2 Estimated cost 307.96 880.48 99.44 257.58
Variance -166.28 443.78 46.6 -406.18
Summary of cost for town ditch
1 Actual cost 355.18 615.78 35.64 693.25
2 Estimated cost 307.96 880.48 99.44 257.58
Variance -47.22 264.7 63.8 -435.67
Summary of cost for curb stone construction
1 Actual cost 39.07 185.32 179.29 278.02
2 Estimated cost 21.39 251.09 4.44 55.38
Variance -17.68 65.77 -174.85 -222.64

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4.6.3 Summary
This section presented about the summary of proposed system of cost accounting for the
company. The survey and desk study analysis revealed that the current system is unable
to ascertain the cost which is the primary aim of implementing the system. This incorrect
presentation of cost data will expose the managers to face unexpected cost overrun of the
project without any chance to take corrective measures. Therefore proposing of the
modified costing system is necessary to overcome those problems. The proposed system
was focused on avoiding inconsideration of cost data and proper allocation of the cost to
the eligible cost objects. The implementation of the proposed system is tested in three
ongoing projects of the organization named as, Dulecha-Awash Arba, Dimma-Rad, and
Jinka Mender road construction project. These three projects are similar as they are
asphalt concrete road construction projects. However, their location, climate condition
and contract delivery system are different. Dulecha –Awash Arba and Dimma-Rad
projects are located in Afar and Gambella Regional state respectively and has a design
bid build contract delivery system. Whereas, Jinka Mender road construction project are
located in South nation and nationalities regional state which has a high rainy weather
condition and use design build delivery system. The result from the proposed system
revealed that Dulecha –Awash Arba road project has incurred 3,236,488.35birr loss
during the reporting period. However, the result from the current system indicates only
611,230.87 birr loss. For Dimma-Rad road project has incurred 1,074,760.49birr loss
while the current system indicates 190,177.73birr profit. This distorted system result will
let the mangers to think that the project financial status is safe. For Jinka- Mender road
project the current system indicates the project has incurred 3,234,628.57 birr loss but the
result from the proposed system indicates the project loss is 4,692,897.20 birr. This high
difference of the result between the current and proposed system arises from the lack of
current system in considering head office overhead cost and computing and allocating of
actual project overhead costs of the specified period.

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5. CONCLUSION AND RECOMMENDATION

5.1 Conclusion
This research set out to study the construction cost accounting system of state-owned
road contractors taking ECWC TICS as a case study. It sought to answer the following
research questions,

 What is the knowledge of the company's professional staffs about cost

accounting?
 Which costing system does the company use to determine the cost?
 How they implement the costing system?
 What are the problems encountered in implementing the costing system?
 Does the costing system provide relevant information to management for future
planning and decision making?
Therefore, based on the data analysis result this chapter concludes the research finding as
follows:

 The research established that professional staffs don‟t have adequate knowledge
about cost accounting. There was a different answer from the respondent about
the company's current costing system. 24% and 30% of the respondent from
decision-makers and implementers responded that they don‟t know about which
costing system is they currently use in the company.
 The finding indicates that the company doesn‟t have a structured and typical cost
accounting system. 78% of the respondent responded that they allocate project
overhead and the remaining 22% didn‟t allocate the project overhead cost when
determining the cost of the project cost object. Most of the respondents, 59%
don‟t allocate head office overhead to the project and 41% allocate. This result
indicates the company has a lack of an organized cost accounting system in all
projects. Also, the desk study findings revealed that the company uses the wrong
overhead allocation bases. Therefore, the findings indicate that the company is not
properly implementing an activity-based costing system.

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 This research found that the implementation of cost accounting in the company is
weak. The respondents were asked to evaluate the effectiveness of the company
current system based on the different requirements of the costing system. The
implementer rate the current system as poor in providing relevant data for
decision-makers, performance evaluation, efficiency controlling, profit
ascertainment, and forecasting ability. And also the response from 97% of the
decision-makers revealed that they are not satisfied by the current. This poor
implementation will make the system unfit for the intended purpose.
 The result from questionnaires confirms the findings of Nangan 2012, about
different common problems which can occur in the implementation of cost
accounting. The respondent identified several problems encountered during the
implementation. The top three problems selected by cost accounting implementers
are lack of training on updated cost accounting techniques, difficulties in data
collecting and gathering and lack of implantation software. Decision-makers
responded that most three problems as lack of adequate information about cost
data, late reporting and incorrect perception about cost accounting. As Sartorius
(2007) state the lack of implantation software and difficulties in identifying and
defining cost drivers are selected as a problem by 78% and 74% respectively.
 The research revealed the ability of the current system in providing relevant
information to the decision-makers for future planning and decision making was
poor. The literature indicates that the costing system should provide cost data in a
systematic manner and actual information about the cost to the management for
the evaluating, future planning and decision making. Also IFAC, 2009 selects as
one of the requirements of a good costing system. However, 44% and 41% of
respondents from implementers and decision-makers rated the current costing
system as poor in assisting the management or decision-makers for planning and
decision making by providing relevant cost data.

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5.2 Recommendations
Based on the findings of the study the following recommendations are made;

 The company should train the staffs about the different cost accounting systems
and its different techniques to get certain cost results which will help the decision-
makers to make decisions and corrective measures based on reliable data.
 An independent cost accounting team should be organized at the project level to
execute clear and detailed costing reports to present for management staffs to take
corrective measures on time.
 The cost accounting implementer team should include accountants in order to
solve the problem of overhead cost computation and allocation.
 The company should use a structured and typical costing system for all projects.
The lack of a standardized costing system will lead the decision-makers to
evaluate the performance of the project based on unequal bases.
 The reporting period should be reduced to 15day in order to enable the decision-
makers to take corrective measures timely.
 The project managers have to be the primary user of the cost accounting report
and immediate corrective measures have to be done at the site level in order to
ascertain the healthiness of the project's financial status.
 The feedback system should get more attention to use the cost accounting results
for a better profit.
 The cost data acquires from the cost accounting reports should be used in project
pricing and bidding to fix rates based on the actual performance.
 The company should create a proper and uniform cost sheet format for all
projects.
 The company should avoid using a predetermined overhead rate. The updated
actual overheads rate should be allocated to the cost objects by using the correct
allocation bases.
 The company should use the proposed cost accounting system in this study which
tries to overcome the problems with the current system.

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5.3 Recommendation for Future Research

 Studies about an alternative site cost data recording method shall be carried out to
avoid the problem occur in data gathering.
 Research on the cost predicting model shall be carried out based on the recorded
actual cost data.
 Factors for direct cost variance shall be studied in order to prevent the project
from the occurrence of loss.

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Takim, R., Akintoye , A., & Kelly, J. (2003). Performance measurnment system in
construction. Greenwood,D 19th Annual ARCOM conference.

Tunji-Olayeni, Timothy, O. M., Olabosipo, I. F., Ignatius, O. O., & Opeyemi, J. (2016).
Evaluating construction project perfromance.

V.V Morajkar, & Suhas, M. (2015). Advanced cost accounting. Dr. Prakash Atkare,
Registrar, Y.C.M.Open University, Nashik - 422 222.

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Wessels, S., & Shotter, M. (2000). Organizational problems in respect of the

implementation of activity- based costing in South Africa. Meditari Accountancy
Research.

Yamane, T. (1967). An Introductory analysis. New York: Harper and row.

Yogesh, K. S. (2006). Fundamental of research methodology and statstics. New Delhi:

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Yong, W. K., & Glenn, B. (2001). Activity based costing and its application to lean
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International journal of buisness and economics research, 180-191.

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Appendices A: Covering letter

Dear Participant:

My name is Tigist Tsegaye Molla and I am a graduate student at Addis Ababa University
School of civil and Environmental Engineering doing a research entitled „A study on the
cost accounting system of state owned Road contractors a case study on Ethiopian
construction works Corporation Transport infrastructure construction sector in fulfillment
of Msc. Program in construction technology and management. I have designed this
questionnaire which I request you kindly take a time to complete.

Please note that you do not need to divulge your name to this questionnaire and your
response to this question shall be treated confidentially. Please be assured that the
information you give will be used for this research and will not be passed to any parties.

Sincerely,

Researcher’s address
Name: Tigist Tsegaye
Phone: +251921402694
E-mail: [email protected]

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Appendices B: Questionnaires for management staffs

Please give your response for the following questions either by writing your answers in the
space provided or by putting X” or””marks at your choice rectangle shown for questions
having choice.

Career position: -----------------------------------

Educational back ground: Diploma � B.Sc. � MSc. � Ph.D. �

Year of Experience 0-5� 6-10 � Above10 �

1. Do you know about cost accounting?

Yes � No �
2. Do you think cost accounting system useful for your company?

Yes � No �
3. As a decision maker (management staff) what is your objective of implementing cost
accounting?
Please choose all your objectives.

�To determine the cost of an activity

�To control and reduction of cost
�To measure the performance
�To control efficiency
�To ascertainment of the profit

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�To use as an effective information system

�Other_______________________________________________________

4. Do you know about different method of costing system?

Yes � No �
5. Which costing system does your company use?

�Direct costing system

�Traditional costing system
�Activity based costing system
�I don‟t know
�Other ____________________________________________________
6. Do you use computer application software or tools in making decision depending on
the cost accounting reports?

Yes � No �
Only answer this question if the answer for question #6 was '„Yes'

7. Write type of computer software or tools used in making a decision.

Please write your answer here:

________________________________________________________________________
________________________________________________________________________
_______________________________________.

8. What are the common problems in cost accounting reports?

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� Lack of adequate information about the cost data

�Incorrect assigning and allocation of cost to each activity (cost object)

�Difficulties in identifying the actual project and head office overhead cost

�Using of approximated data rather than collecting the actual cost data

�Incorrect perception about cost accounting doing it just for the purpose of
reporting

�Late reporting which makes unable to make a decision on time.

�Absence of presenting easy and understandable cost accounting reports

�Absence of different decision making software or computer tools

� Lack of trainings on updated decision making techniques

�Other, Please write if there is other problem

__________________________________________________________________
_______________________________________________

9. Please rate the effectiveness of your company current cost accounting system based
on the following requirement.
Please choose the appropriate response by marking the appropriate box.

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 M.Sc. Thesis A.Y. 2019/2020

I. Satisfa Very Excelle

N Cost accounting system requirements Poor ctory Good good nt
Determining the costs of a product on per
unit basis or total cost, for example, cost
per kg, cost per meter, cost per liter, cost
1 per ton etc.
Assisting the management for planning
and decision making by providing relevant
data in a systematic manner and actual
information about the cost to the
management for the evaluating, future
2 panning and decision making.
Allows evaluating and analyzing the
3 performance.
Control the efficiency by locating
wastages, inefficiencies and other
loopholes in the production
4 processes/services offered.
Ascertainment of the profitability in
5 division wise, activity wise and unit wise.
Serving as an effective information of
system which enables to ascertain the cost
at every level of production process and
6 activity level
Identifying profitable and unprofitable
activities which help the management to
reduce or eliminate wastages and
inefficiencies such as underutilization, idle
7 time, spoilage of material etc.,

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 M.Sc. Thesis A.Y. 2019/2020

Ability to forecast from the past cause-and

8 –effect relation.

After rating your company costing system based on the above cost accounting system
requirement please answer the following question.

10. Are you satisfied with the current cost accounting system?

Yes � No �
Only answer this question if the answer for question #10 was '„Yes'

11. What do you need to add in the current costing system?

__________________________________________________________________
_______________________________________________.
Only answer this question if the answer for question #10 was '„No‟

12. What do you suggest to amend the current system?

__________________________________________________________________
____________________________________________.

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Appendices C: Questionnaires for implementers

QUESTIONNAIRE

Please give your response for the following questions either by writing your answers in the
space provided or by putting X” or””marks at your choice rectangle shown for questions
having choice.

Career position: -----------------------------------

Educational back ground: Diploma � B.Sc. � MSc. � Ph.D. �

Year of Experience 0-5� 6-10 � Above10 �

1. Do you know about cost accounting?

Yes � No �
2. Do you think cost accounting system useful for your company?

Yes � No �
3. What is your objective of implementing cost accounting?

Please choose all your objectives.

�To ascertain the cost of an activity

�To fix the unit rate of an activity
�To control and reduction of cost
�To assist the management for planning and decision making

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M.Sc. Thesis A.Y. 2019/2020

�To forecast the future cost

�To control efficiency
�To ascertainment of profit
�To measure the performance
�To use as an effective information system
�Other_______________________________________________________
4. Which costing system does your company use?

�Direct costing system

�Traditional costing system
�Activity based costing system
�I don‟t know
�Other ____________________________________________________.
5. Do you allocate head office overhead cost to the project?

Yes � No �
6. Do you allocate project overhead to the works (project) section?

Yes � No �
Only answer this question if the answer for question #6 was '„Yes'
7. What are basis of allocating project overheads to works

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� Value of section
�Direct labor
� ABC system
� Other ________________________________________________________

8. Does your organization have a cost accounting team?

Yes � No �
9. Does your organization have a standard cost sheet that used to provide the cost data of
the project?

Yes � No �
10. Are computer application software or tools used in implementing the cost accounting

system? Yes � No �
Only answer this question if the answer for question #10 was '„Yes'

11. Write type of computer software or tools used in applying the cost accounting
system?
Please write your answer here:

________________________________________________________________________
________________________________________________________________________
_______________________________________.

12. In which level of cost accounting system that you use computer application
software or tools?
Please choose all levels that you use the software or tools

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�In collecting of cost data

�In recording of cost data
�In allocating the cost to different activities (cost objects)
�In variance analysis
�In presenting relevant data or the statement to the decision makers
13. What are the common problems that are face during the implementing the cost
accounting?
The problems are listed from three perspectives. Please choose the entire problem that
you faced during implementing the cost accounting.

Top management support

� Lack of top management (head office) and internal project support

� Lack of trainings on updated cost accounting techniques

�Incorrect perception about cost accounting, doing it just for the purpose of reporting
Technical constraints

� Lack of basic knowledge and skill on cost accounting and its different techniques

� Lack of adequate information about the cost

� Difficulties in data collecting and gathering

� Difficulties in identifying and defining cost centers and cost drivers

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�Difficulties in identifying the actual project and head office overhead cost

�Inadequate knowledge about allocation of overhead cost to each activity

� Difficulties in the assigning and allocation of cost to each activity (cost object)

�Using approximate data rather than collecting the actual cost

Resource constraints

�Lack of adequate number of employee resource in the cost accounting team

�Lack of implementation software or computer tools

�Other, Please write if there is other problem

________________________________________________________________________
_________________________________________.

14. Pleases rate the effectiveness of your company current cost accounting system
based on the following requirement.
Please choose the appropriate response by marking the appropriate box.

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 M.Sc. Thesis A.Y. 2019/2020

I. Satisfa Very Excelle

N Cost accounting system requirements Poor ctory Good good nt
Determining the costs of a product on per
unit basis or total cost, for example, cost
per kg, cost per meter, cost per liter, cost
1 per ton etc.
Assisting the management for planning
and decision making by providing relevant
data in a systematic manner and actual
information about the cost to the
management for the evaluating, future
2 panning and decision making.
Allows evaluating and analyzing the
3 performance.
Control the efficiency by locating
wastages, inefficiencies and other
loopholes in the production
4 processes/services offered.
Ascertainment of the profitability in
5 division wise, activity wise and unit wise.
Serving as an effective information of
system which enables to ascertain the cost
at every level of production process and
6 activity level
Identifying profitable and unprofitable
activities which help the management to
reduce or eliminate wastages and
inefficiencies such as underutilization, idle
7 time, spoilage of material etc.,

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 M.Sc. Thesis A.Y. 2019/2020

Ability to forecast from the past cause-and

8 –effect relation.

After rating your company costing system based on the above cost accounting system
requirement please answer the following question.

15. Are you satisfied with the current cost accounting system?

Yes � No �
Only answer this question if the answer for question #15 was '„Yes'

16. What do you need to add in the current costing system?

__________________________________________________________________
_______________________________________________.
Only answer this question if the answer for question #15 was '„No‟

17. What do you suggest to amend the current system?

__________________________________________________________________
____________________________________________.

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