5.4.1 Steps in Activity-Based Costing

Activity-based costing consists of four steps (Maher, 1997):

1. Begin by identifying the activities that make use of resources and assign costs to them. This step involves using the WBS to break the project down into its elemental activities, or tasks. Based on the resource requirements to complete each identified activity costs is then assigned to that activity.

2. Identify the cost drivers associated with the activity. “Cost drivers” are those elements that cause, or “drive,” an activity's costs. For example, the principle cost driver for many project activities are resources in the form labor assigned to those activities. Similarly material is another project cost driver.

3. Calculate a cost rate per unit of the cost driver. For most projects, human resources are key cost drivers and therefore their values can be stated as cost of labor per hour. Obviously, in addition to labor, project activities will have other cost drivers such as materials.

4. Multiply the cost driver rate per unit by the total number of cost driver units consumed to assign costs to the project that utilized this cost driver. For example, if the cost rate for designer is $50/hour and assuming 100 hours of this designer's time is used on the project, then the cost assigned to the project for this designer is:

$50/hr * 100 hours = $5,000.00