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Management Accounting in The Construction Industry

Management Accounting in The Construction Industry – The Application of TC and ABC Systems in the Construction Industry

Before 1950, the international federation of accountants (1998) definition of management accounting is that it is an essential activity that is needed in dealing with organizational objective. (Ashton et al., 1995) Beginning from the 1990s, industries worldwide began to be faced with uncertainty and unprecedented advances when it comes to the issue of accountability. But, from the 1990s onward, management and cost accounting were redefined on the bases of business process, quality function deployment, outsourcing, time-based competition, core competencies, and learning organization (Ashton et al., 1995) and due to major and recent development, cost and management accounting are being defined on the platform of Activity Based Accounting (ABC); activity Management (AM), activity based management (ABM); local information system (LS); balanced scorecard (BS); life cycle costing (LCC) and target (TC); strategic management accounting (SMA) (Bjornenak & Olson, 1999) which enables construction industry to give account of major shares in economic activities and always serve as catalysts for other sectors. According to Kim & Ballard, (2001) construction project accounting is very essential and must be put into consideration and Job costing system is very important and central to construction system accounting.  Project expenses are always captured and allocated to a project element through a job costing system

Construction industry now fully applies ABC system and the TC system in preparing their costing activities (Kim & Ballard, 2001) These systems are distinct and each system is different from one another. The ABC always measures the cost and performance of cost objective and activities (Akyol, Tuncel, and Bayhan, 2005). ABC is an accounting framework that relates the cost of activities to the total cost objective, such as customer or product. ABC is believed to be a modern accounting system that measures resources using activities, (Zawawi and Hoque, 2010) while,  Horngren et al (2002), views it as an accounting system that can measure the usage of resources by activities.  According to Akyol et al., (2005)  they examine it as an economic model that shows the cost pools or activity center in the company and it also assigns costs to cost drivers on the basis of each activity used. Akyol et al., (2005) are of the view that the ABC system replaces the accounting system, but contrary to the views, Cokin (2002) argues that the ABC system does not replace the accounting system. ABC is viewed as a method for managing industry or company efficiently and effectively and not as costing system (CIMA, 2001).  While the TC system is based on the assumption that all resources are consumed by products.

The TC system, on the other hand directly allocates costs to work packages or project sections that are defined in the work contact of bill quality, making it look like the incurred cost in the project or work production reflect the work or project (Kim $ Ballard, 2001).

ABC system is believed to be an alternative system to TC system (Akyol et al., 2005) and (Reeve et al., 2012). While, in contrary to this view, Cokin (2002) believes that both ABC and TC system have their roles and functions in accounting, Cokin regards the both systems as complementary. The TC system is always used to process data into general ledger accounts, but they are not considered in operation or strategic decision. However, the ABC system always process TC system account for useful strategic information and operational decision-making.   However, both the ABC system and TC system are very similar to each other as they both involve two stages of their procedures and they include; the change of overhead costs to ABC pools and the driving and the usage of a series of cost driver activity to trace the pooled costs to the product. The both systems are always applied in the construction industry. Researchers like Johnson and Klapan (1987) and Vigario (2007) view the TC system as absolute modern day management system. Cokins (2002), believes that the Construction Company needs to use both systems for decision making and reporting.

Also Study:

Construction Risk Management

Construction Technology And Services Research Paper Example

  • Akyol, D. E., Tuncel, G., & Bayham, G. M. (2011)“A comparative analysis of activity based costing and traditional costing.” World Academy of Science, Engineering and Technology (WASET). Retrieved from <https://www.waset.org/journals/waset/v3/v3-98.pdf>
  • Ashton, D., Hopper, T., & Scapens, R. (1995)  “The changing nature of issues in management accounting, in Issues in Management Accounting”.
  • Bjornenak, T. & Olson, O. (1999). “Unbundling management accounting innovations”. Management Accounting Research. https://doi.org/10, 325-338
  • CIMA Technical Briefing (2001). “Activity-based Management-An Overview”.
  • Cokins, G. (2002). “Activity Based Costing: Optional or Required?” AACE International Transactions. Morgantown, W.V.: American Association of CostEngineers. R131–R137.
  • Johnson, H., & Kaplan, R. (1987). Relevance Lost: The rise and fall of Management Accounting.
  • Kim, Y. W., & Ballard, G. “Activity-Based Costing and its application to Lean Construction.” Proceedings 9th Annual Conference of the International Group for Lean Construction.
  • Vigario, F. A. A. (2007). Managerial Accounting. 4thedition.
  • Zawawi, N.H.M. & Hoque, Z. (2010). “Research in management accounting innovations: An overview of its recent development”. Journal of Qualitative research in accounting and management. 7(4):505–568.

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