Using Activity-Based Costing and a Cost Breakdown Structure

Activity-based costing is seen as the most accurate way to build a project budget. While top-down estimation has its advantages, it is not as accurate as starting at the bottom of your project’s WBS and aggregating project costs upward.  Activity-based costing requires that the folks involved in the estimating activities have some expertise in the work areas being estimated as well as costing expertise.  The desired outcome is a cost estimate of the individual’s or functional area’s assigned tasks.  The project’s individual or functional estimates are then aggregated to form a Cost Breakdown Structure for the project.

A Cost Breakdown Structure organizes your project costs according to category, aligning these costs with the company’s accounting system.  A Cost Breakdown Structure is used to track the budget performance of your project.  In many organizations, the Cost Breakdown Structure includes cost accounting codes that indicate several things:

  • Where the money came from (the source of the cost budget)
  • What the money can be spent on  
  • Whether individual team members, functional departments, and/or contractors are exceeding their activity-based budgets

Many times folks ask me how you can tell when your Cost Breakdown Structure is detailed enough.  I have a short list of recommendations for how you might be able to tell.  They include having your Cost Breakdown Structure be able to:  

  • Account for all of the work required to complete the project
  • Emulate an earlier project’s level of detail, where the actual budget performance closely matched the project’s budget baseline
  • Get your budget approved by senior management
  • Track your project’s spending and team performance closely enough to recognize and correct poor performance quickly
  • Allow your individual team members to identify the basis of their cost estimates

Be sure you know if your organization has specific policies about the cost granularity required for your project budget, including such things as achieving budget approval, cost accounting practices during the project and your cost performance reporting requirements for outside the organization.  These things will need to be accounted for in your project planning and your Cost Breakdown Structure as they may impact your project budget and costs to some degree.

Learning Tree’s course entitled Project Budgeting and Estimating: Taking Control of Your Projects can help you learn valuable skills and techniques for skills to estimating realistic project budgets for completing your planned project scope. You will also learn how to leverage your approved baseline budget to support the organization’s strategic objectives and get the job done right.

Happy project budgeting!

Susan Weese

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