Activity-Based Costing as a Tool for Process Improvement Evaluations

Abstract

Many corporate processes common to the design and construction of major engineered projects are composed of individual activities that are variable by nature. Additionally, the process itself may have a high degree of variability, meaning that certain activities may or may not actually be performed in a given pass through the process. We may ascribe to such activities a “probability of occurrence.” True modeling of real world processes will often require that we describe the process as having activities with stochastic durations, each linked together in a precedence logic that itself is variable and subject to uncertainty or chance. If corporate resources, such as labor, material, and equipment, are required to perform the individual activities, then an activity-based costing technique must be developed that can accommodate the inherent variability in a process if actual costs are to be accurately predicted. If process cycle time and process cost per cycle can be accurately predicted for complex, highly variable processes, companies are in a much better position to determine how proposed corporate initiatives for process improvement might actually impact overall process performance. This technique has application across a wide number of disciplines including design, construction, and administrative processes.