ACTIVITY-BASED COSTING (ABC) ANALYSIS IN DESIGN PROCESSES

Transcription

1 ACTIVITY-BASED COSTING (ABC) ANALYSIS IN DESIGN PROCESSES Abdulsalam A. Al-Sudairi King Faisal University, College of Architecture and Planning P O Box: 2397, Dammam, 31451, Saudi Arabia aalsudairi@kfu.edu.sa. Abstract The nature of the design process is iterative and contains many disciplines. These issues contributed to the complexity of the process and may lead to long cycle time and cost overruns. One way to better understand such process and reveal the main factors that have negative impact is to perform Activity Based Costing (ABC), which is a method for accumulating product cost by determining all costs associated with the activities required to produce the output. To do so, a discrete-event simulation model for architectural design processes was utilized to investigate these factors and identify their sources. In other words, the simulation model became like an experimentation tool to answer many questions such as: What are the resources that contributed more to the cost and why? What are the activities that required more time and why? And so forth. Indeed, ABC is essential in understanding and evaluating design processes. This does not mean that ABC is enough in evaluating processes. Incorporating other process metrics such cycle time is vital for evaluation and improvement. Key Words: ABC, Design, Process, Model, Simulation INTRODUCTION Focusing on processes is a key issue in improving any system. In fact, theories like lean production and reengineering are all process oriented. Applications of these theories enhanced performance enormously where project duration reduced by 20% to 50% and productivity increased by 10% to 37% (Al-Sudairi 2004). However, measuring performance is not

2 straightforward and requires careful examination to all process metrics. For instance, reducing cycle time does not necessarily mean cost saving. This study evaluates design process in terms of cost and cycle time and how these two metrics are interrelated. According to Hansen (1997) process metrics includes: (1) cycle time, (2) throughput, (3) utilization, (4) productivity, (5) waiting time, and (6) cost. The cost metric, in this study, refers to the cost of activities and processes, which is known as activity-based-costing (ABC). Activity-based costing can be considered the mathematics used to reassign cost accurately to cost objects, that is, outputs, products, services, customers (Cokins 1996). This study applies ABC to architectural design process by utilizing discrete-event simulation, which is the main objective. ABC can be defined as (Qian and Ben-Arieh, 2008): a method for accumulating product cost by determining all costs associated with the activities required to produce the output. Activitybased costing was developed and has been advocated as a means of overcoming the systematic distortion of traditional cost accounting (Kim and Ballard 2001). In traditional cost systems, direct materials and labor are the only costs traced directly to the product (Ben-Arieh and Qian, 2003). With activity accounting, one can follow the path of a business process. In doing so, it is possible to quantify the business process across the organization and highlights where the limitations or potentialities are located (Cokins 1996). The advantages of ABC include the following: Improve the accuracy of product costing (Raz and Elnathan, 1999), provide timely cost information suitable for decision making and allowing more tracking of indirect cost (Qian and Ben-Arieh, 2008), and lead to classifying activities as value-added and non-value-added (Ben-Arieh and Qian, 2003). On the other hand, ABC may be accompanied by certain disadvantages that include the following: cost estimation of design activities is nebulous and hard to implement (Ben-Arieh and Qian, 2003) and the efforts required in obtaining accurate information to clarify all relationships among activities and the criteria for allocating resource pools are time consuming (Chen and Wang, 2007 and Qian and Ben-Arieh, 2008 ) There are two purposes of ABC. The first purpose is to prevent cost distortion; cost distortion occurs because traditional costing combines all indirect costs into a single cost pool not cost pools, which are activities (Raz and Elnathan, 1999 and Kim and Ballard 2001). That is, ABC gives visibility to work, to content of work, and to work that is important to customers (Cokins 1996). The second purpose is to minimize waste or non-value-adding activities by providing a process view (Kim and Ballard 2001). These two purposes of ABC serve the main principles of lean construction that mainly focuses on flow and waste elimination. Thus, utilizing this metric could significantly help in diagnosing construction processes. ABC process is carried out through three sequential steps (Chen and Wang, 2007): 1. determine how much the organization is spending on each resource;

3 2. determine what and how many resources the organization is spending on each activity; and 3. determine what and how many activities the organization is spending on each cost object. Fortunately, recent simulation packages, such as Extend, linked process modeling and simulation with ABC. Previous studies (e.g., Ben-Arieh and Qian 2003 and Lea 2007) utilized simulation to evaluate ABC and traditional costing methods. This study describes the development of a simulation model of the information flows among the design tasks with their associated costs involved in the total building design process in architectural/engineering consulting offices in Saudi Arabia. THE DESIGN PROCESS SIMULATION MODEL To build valid simulation model, several interviews were made with design professionals who work for design/engineering consulting offices located in Dammam metropolitan area, Eastern Saudi Arabia. According the Saudi Engineering Society, there are 66 design/engineering consulting offices registered in Dammam metropolitan area; i.e., cities of Dammam, Alkhobar, and Dhahran. A total of 30 in-depth interviews were carried out with design professionals who work for 20 design/engineering consulting offices and are involved in the design process. The interviewees were randomly selected based on two criteria. First, they should have at least five years of experience. The second criterion is that they should have some sort of process documentation in the design/engineering office that they work for. The questions aimed at understanding the logic and the structure of the design process that are necessary for simulation inputs. The remaining sections explain the research methodology and findings in detail. Scope and modeling environment The simulation model aimed at mimicking the whole design process of residential buildings located in Dammam Metropolitan Area. That is, this model focused on the design from the beginning as information that reflects the client s needs until the end as a complete design document. This process was further divided into five sub-processes reflecting the main deliverables of the design process, which are: (1) pre-design, (2) conceptual design, (3) architectural design development, (4) engineering and technical design development, and (5) final design (Figure 1). The main purpose of developing the simulation model was to transform a static model, process flow chart, to a dynamic model by allocating durations and resources to tasks and decisions within the design process. A survey, using structured interviews, was conducted with design professionals with variety of organizational, disciplinary, and managerial backgrounds. These design professionals are architects and structural, building services, and mechanical engineers. The dynamic model was built using Extend, which is a simulation package. Extend is an object-oriented modeling tool that is based on a graphical environment (Imagine That, Inc. 2002). Extend was selected because of its simplicity of use and its adaptability in modeling

4 lengthy complex processes (Al-Sudairi 2007). It, also, provides programming language interface that allow a user to broaden his/her modeling needs (Shi et al. 2005). Pre-Design no Start OK yes Initial meeting with client no Conceptual no Meeting with designing team OK yes Project acceptance Architectural development yes Site visit no OK Identify scope of work yes Engineering & Technical development Perform soil test no OK Issuing initial building permit yes Proceed to Conceptual phase Final Design (a) Figure 1: Showing process flow charts at different levels. (a) A generic process flow chart for the main sub-processes of the design process. (b) A detailed process flow chart for the pre-design sub-process. Extend models are constructed with library-based iconic blocks; each block describes a calculation or a step in a process (Krahl 2002). Almost all blocks in Extend have input and output connectors. Information comes into the block and is processed by the program that is embodied in the block. The block then transmits information to the next block in the simulation through connectors (Figure 2). Connection lines are used to hook blocks together; they show the flow of information from one block to another through the model (Imagine That, Inc. 2002). (b) Process map and data input for the model Figure 1 (a) presents a generic process flow chart showing all five sub-processes of the design process. Establishing a process flow chart is essential in carrying out ABC (Chen and Wang 2007, Lea 2007 and Qian and Ben-Arieh 2008). It is apparent from the generic process flow

5 chart that the whole process goes through several iterations, which is one of the main characteristics of the design process (Austin et al. 1999). In the first sub-process, pre-design, a client meets with a designing office representative who is usually an architect to identify and set project scope. The main output in this sub-process is an agreement that identifies the amount of work, payments, and expected time in submitting design deliverables. With this agreement the consulting office can proceed to next sub-process by producing a schematic design in a form of architectural drawings. This schematic design goes through several iterations because it involves transforming client s needs and expectations into two dimensional drawings, which is usually not straightforward. Therefore, the time needed to meet clients needs vary enormously. In some case, it could take up to five weeks to finish schematic design. input T U Activ ity D first meeting T U Activ ity D internal meetin block Connection line output Uniform distribution block Get Attribute A Decision Approv al iteration-1 Information Figure 2: Presents a small portion in the pre-design sub-process of the simulation model. Once a schematic design is complete, a consulting office can proceed with all architectural requirements that include all plans, sections, and elevations. After client s approval to architectural production, the consulting office performs other engineering and technical services that include structural, electrical, and mechanical design. At this sub-process all designing disciples are involved which contributed a lot to the total cost. Finally, organizing all design services performed in the previous two sub-processes in one package is the purpose of the fifth sub-process. On the other hand, figure 1 (b) shows a detailed process flow chart of the pre-design sub-process. The same thing applies to the rest four sub-processes where detailed process flow charts are mapped, which is an essential step to dynamic modeling. Both the generic and the detailed process flow charts presented in figure 1 were established and validated through several interviews. In other words, process flow charts were mapped at a higher level, generic, and then went through detailing by interviewing design experts. After completing detailed process chart for the whole design processes, it went through validation by interviewing key experts, design team leaders, in the design process. Moreover, tasks (rectangular shapes in figure 1-b) and decisions (diamond shapes in figure 1-b) require quantitative data that is essential in building valid dynamic model. The required input data to run the simulation model included (where 1 and 2 are adapted from Baldwin et al. 1998): (1) information about design tasks (their durations and whether iterative or non iterative); (2) the resources requirements for each task; (3) the required inputs (e.g., number and type of resources and their associated costs) for each task; and (4) the conditions that govern the decisions that

6 may lead to different paths or loops, which may cause iterative actions. Knowing these conditions is vital to building credible model. This is because the design process contains many decisions and more importantly such decisions are the source of iteration. For instance, the decision in figure 1 (b) may lead to either accepting a project or doing further adjustment. This loop could be attributed to miscommunication between the client and the designing team. Figure 2 shows how this decision is being modeled in Extend. The decision block in figure 2 leads to two paths: (1) design continues to the next sub-process, or (2) further work is needed in this subprocess. Modeling human decision is not easy and requires careful investigation. This accomplished by installing a control variable, which is one of the two rules developed by Shi et al. (2005) in modeling decisions. This control variable acts like a gate that directs the design deliverables to a specific path. For example, accepting or rejecting design proposal was simulated by tying the decision block to a uniform distribution (figure 2). The rejection/acceptance percentage was identified in the decision block that reads random values from a uniform distribution. This percentage and other similar information in the design process were established through an understanding that was developed through interviewing design experts. The if-statement below, which was embodied in the dialogue of decision block in figure 2, shows how this was accomplished: if (Approval<=80) Path = YesPath; else Path = NoPath; Where; Approval is a random variable that gets its values from a uniform distribution. According to these values that are produced by a random distribution, the result whether accept, which is YesPath, or reject, which is NoPath. Features of the simulation model The model includes the following features: 1. Information links to tasks and decisions can vary according to certain conditions in order to study the impact of certain issues that may negatively or positively contribute to the design process. For instance, the level of client s understanding to his/her project may increase or decrease the number of iteration. 2. The simulation model composed of five parts corresponding to the design sub-processes mentioned previously. This would allow the modeler to examine each sub-process individually. That is, one can answer vital questions such as: which sub-process costs more and why? How long did it take to complete each sub-process? And so forth. 3. The model can present certain data for each run or multiple runs. The coming section will discuss these results in more detail. Output of the model and Discussion Table (1) summarizes the model outputs. In terms of time the conceptual design, sub-process two, took the longest time (37 days). This is because of high subjectivity involved in this

7 process. Getting what s in client s mind is not straightforward. As a result, the design concept goes through many changes that increased cycle time. However, in terms of cost, the engineering and technical design sub-process costs more ($12700) because it requires the input of all different engineering disciplines. Table 1: Summary of model outputs for the five sub-processes. Sub-process Average ABC in US $ Average Time in days (1) Pre-design (2) Conceptual design (3) Architectural design (4) Eng. & Tech. design (5) Final design Total Figure 3 presents an output of 200 runs of the total cycle time to finish one design. Likewise, figure 4 presents an output of 200 runs of the total cost to finish one design. It is apparent that the design process is highly variable. Having said that, there are several variability factors associated with the design process which can influence the savings and profitability of consulting offices. Figure 3: Showing simulation output of total cycle time for 200 runs. The managerial skills of team leader, the technical performance of team members, the nature of the design process, and the client understanding and background are all critical factors that contribute to variability which is consistent with Rounce (1998). Completing one design may take as minimum as 87 days and may extend to as maximum as 203 days (figure 3). Likewise, the cost of one design may range between $22756 to $ Also, to emphasize the impact of client and team leader (i.e., the architect) to cycle time, 200 runs of the conceptual sub-process were presented in figure 5, which ranges between 25 days (as the minimum value) to 127 days (as the maximum value). The only two involved in this sub-process are the architect and the

8 client. That is, enhancing the managerial skills of the team leader and the awareness of the client could positively contribute to the whole process. Figure 4: Showing simulation output of ABC for the whole design process for 200 runs. Figure 5: Showing simulation output of cycle time for conceptual sub-process for 200 runs. More importantly, time and cost metrics are not proportional as shown in table (1) and figures 3 and 4. In other words, the engineering and technical sub-process took the least time (15.5 days) and cost the most ($12700). This shows another advantage of activity-based costing system where management can focus on processes that cost more. Thus, management can prioritize their improvement programs by orienting effort to what really add value to the project and eventually to the customer.

9 Furthermore, relying on one metric is not enough. This study utilized only two, which are cycle time and cost. There are other metrics such as utilization and throughput that could help in investigating design process potentialities and limitations. CONCLUSION Examining activities is vital especially in design processes. This would help design professionals understand how things are done, which in turn enables them to enhance design activities. Also, the root causes that drive activity cost can be identified and included in management thinking for improvement programs. Activity-based costing can easily offer these features that a traditional costing system fails to do so. ABC also computes the cost of the process output, for example, the total cost to process a schematic design or the total design for a residential building. Indeed, ABC system supports process view thinking and its associated improvement actions and programs, which is consistent with recent development in management such as reengineering and lean production theory. This does not mean that ABC system is enough in evaluating processes. Incorporating other process metrics such cycle time is vital for evaluation and improvement. The time and cost to complete one design vary enormously. Extended design time and hence increase in design cost are attributed to certain factors. One of the main factors that increased design time is the nature of the design process that contains several iterations. Enhancing managerial skills (e.g., negotiation, communication, and coordination) for design team leader and his/her members is one way in reducing iterations and hence improving the efficacy of design processes. Utilizing object-oriented simulation packages is also vital in evaluating design processes. It allows the modeler to focus on outputs (e.g., design deliverables) and how they are developed from one phase to another. In doing so, one can measure their costs, and cycle time including waiting times. This would give a clearer picture on the performance, potentiality and limitation of design processes. REFERENCES Al-Sudairi, A. (2004). Measuring Variability and Identifying Its Sources in Construction Processes: Application of MDPM. Journal of Engineering Sciences, Vol. 23, No. 1. Al-Sudairi, A. (2007). Evaluating the Effect of Construction Process Characteristics to the Applicability of Lean Principles. Journal of Construction Innovation, Vol. 7, No. 1.

10 Austin, S., Baldwin, A., Baizhan, L., and Waskett, P. (1999). Analytical Design Planning Technique: A Model of the Detailed Building Design Process. Journal of Design Studies, Vol. 20, pp Baldwin, A., Simon, A., Hassan, T., and Thorpe, A. (1998). Planning Building Design by Simulation Information Flow. Automation in Construction, Vol. 8, pp Ben-Arieh, D. and Qian, L. (2003). ABC Management for Design and Development Stage. International Journal of Production Economics, Vol. 83, Issue 2, pp Chen, Z. and Wang, L. (2007). A Generic Activity-Dictionary-Based Method for Product Costing in Mass Customization. Journal of Manufacturing Technology Management, Vol. 18, No. 6, pp Cokins, G. (1996). Activity-Based Costing: A Manager s Guide to Implementing and Sustaining and Effective ABC System. McGraw Hill, Boston, USA. Hansen, G (1997). Automating Business Process Reengineering: Using the Power of Visual Simulation Strategies to Improve Performance and Profit, Prentice Hall PTR, Upper Saddle River, New Jersey, USA. Imagine That, Inc. (2002). Extend User s Guide. San Jose, California, USA., Kim, Y. and Ballard, G. (2001). Activity-Based Costing and Its Application to Lean Construction. Proceedings of the 9 th Annual Conference of the International Group for Lean Construction, National University of Singapore. Krahl, D. (2002). The Extend Simulation Environment, Proceedings of the 2002 Winter Simulation Conference, Edited by, E. Yucesan, C. H. Chen, J. L. Snowdon, and J. M. Charnes, San Diego, California, USA. Lea, B. (2007). Management Accounting in ERP Integrated MRP and TOC Environments. Industrial Management and Data Systems, Vol. 107, No. 8, pp Qian, L. and Ben-Arieh, D. (2008). Parametric Cost Estimation Based on Activity-Based Costing: A Case Study for Design and Development of Rotational Parts. International Journal of Production Economics, Vol. 113, Issue 2, pp Raz, T. and Elnathan, D. (1999). Activity Based Costing for Projects. International Journal of Project Management, Vol. 17, No. 1, pp Rounce, G. (1998). Quality, Waste and Cost Considerations in Architectural Building Design Management. International Journal of Project Management, Vol. 16, No. 2, pp Shi, J., Li, H., and Zhang, H. (2005). Two Resource Dispatching Rules for Modeling Human Decisions in Simulation. International Journal of Project Management, Vol. 23,