The allocation of overheads in the construction industry in southern Africa: traditional costing or activity based costing?

Abstract

Recent literature suggests that many companies are moving away from traditional costing (TC) systems in favour of activity based costing (ABC) systems which provide more accurate cost information among other benefits. The literature also reports low assimilation and abandonment of the ABC system by the companies which had adopted it owing to several weaknesses of the ABC system. These conflicting findings of high adoption of the ABC system on one hand and low assimilation on the other hand, formed the basis of this paper. The paper sought to clarify the applicability of the ABC system to the construction industry in Southern Africa. It tests whether or not the ABC system is a viable alternative to the TC systems. METHODOLOGY: A literature survey and primary data obtained from two questionnaires; one addressed to construction companies and the other to the consultants, were used. The sample of the respondents was obtained from the register of contractors and construction industry companies. The researcher sent the links to the Lime survey by email to all the respondents. FINDINGS: According to the respondents the use of traditional costing (TC) systems produces distorted project cost results while the ABC system produces more accurate project cost results when used in the construction industry. However, contractors had not fully adopted the ABC system but used TC systems despite producing distorted project costs. VALUE OF THE RESEARCH: Contrary to the widely held view that TC systems have no place in modern management accounting, this research found that TC systems are still popular in the construction industry in Southern Africa, and that users of TC systems were generally satisfied with their system’s performance. However, this finding has implications in the light of the current view that TC systems are dysfunctional. The study revealed the benefits of TC systems reported by their users, such as the fact that they produce accurate costs, are simple to use, and allow real time reporting. TC systems may have been improved by computer systems to the point where they are able to provide reliable cost data and efficient reporting. This study has furthermore established that continued calls by advocates of the ABC system to implement this system because of its ability to provide more accurate product costs than TC systems may be misplaced and may not in fact increase the assimilation of ABC.