Week 4: Cost Control and Estimating Flashcards
What 2 areas are costs divided into for the client?
- Direct Costs
- Indirect Costs (could be in use of building)
Both can be fixed or variable
Define Direct Costs
Costs directly tied into the project
Define Fixed Costs
Costs that won’t change (materials, equipment)
Define Variable Costs
Costs that change due to use and productivity
Define Indirect Costs, what are they otherwise known as, and give some examples
Costs that need recovering
Otherwise known as ‘overheads’
E.g. running of building, support and supervisory staff
Define Costs in Use and give an example
Costs after construction
Bitumen 25% cheaper than concrete however requires more maintenance increasing overheads
What type of cost is labour?
Labour is a direct cost but can be fixed or variable
How can you reduce variability?
Lower the skill required in the construction process
This increases productivity
E.g. Use dry wall instead of brick
What type of cost are materials and how do you value them?
- Materials are direct costs
- They are priced by volume
- Contractor must decide whether to put spot or future value on materials
What are the five different ways of valuing materials inventory?
- Last in first out (LIFO)
- First in first out (FIFO)
- Average costs (common in construction)
- Just in time (JIT)
- Standard costing
What is Last in first out (LIFO) accounting and when is it used?
- The cost of the most recent materials purchased are the first to be sold/used/expensed
- LIFO reduces net income due to cost of materials used (COGS) being higher in high inflation environments.
- This reduces tax liability (lowers taxable income)
It is used in high inflation environments, as it increase business cash flow when expenses are rising.
What is First in first out (FIFO) accounting and what does it do to your inventory value?
- Most common accounting method, materials purchased or acquired first are sold/used first.
- FIFO reduces cost of materials sold/used therefore net income is higher under FIFO than LIFO, good for public companies.
- This increase tax liability
- Inventory value is also higher due to more expensive items (assuming inflation) being ‘stored’ unlike LIFO where they are ‘sold first.’
What is the same about LIFO and FIFO accounting?
- Company revenue is the same
- In theory, in a zero inflation environment, both accounting methods would produce the same results for net income as well.
What is the average cost inventory accounting method and when is it beneficial?
- Average cost method uses the weighted average of all inventory purchased in a period to assign value to the cost of materials used.
- Most common in the construction industry
- It is beneficial when there are large volumes of similar items moving through inventory, making it time-consuming to track each individual item.
Why is standard costing illegal in UK?
- Costs are set outside with industry input (NOT GOOD)
- Collusion and controlling of prices occurs
- This impacts floatation
What is Just In Time inventory valuation, what does it do, and what does it require?
- A management strategy that minimizes inventory and increases efficiency (Toyota adopted in 1970s)
- Eliminates storage costs
- Requires reliable suppliers and glitch free plant machinery.
What are 2 challenges when costing materials and what is an example of a modern change?
- Wastage (bricks breaking etc)
- Bricks used to be dumped due to low cost, now cost has increased, economically viable to be delivered on pallets
- Bribes and stealing materials
What is the most important factor when considering cost of equipment?
Resource efficiency
What ways can you pay labour?
- Management on salaries (fixed low risk)
- Time related (hours worked)
- Output related (contractor arbitrage)
- Bonus (for on time construction)
State some labour considerations?
- How do you measure productivity?
- How many gangs? (Use CESMM4 labour gang rates (gangs) as example!)
- What is the trade-off between completing the work early at higher labour costs?
- Price’s theory: SQRT(Workforce) responsible for 50% of output
State some overheads in construction and what must be done to these costs?
- Building heating and lights
- Admin staff supervisory staff
- These costs must be recovered
Why can Amazon undercut Waterstones prices at book selling?
- Wholesale price same
- Amazon have warehouse storage of books reducing their cost per m^2 overheads compared to Waterstones who have shops increasing their cost per m^2 overheads
What is absorption costing?
- Applies all direct costs and overheads to the cost of a product.
- Inventory value includes direct material, direct labour, and all overhead
Cost = Direct costs (Labour, Plant, Materials) + Overheads
What is variable costing?
- Only variable costs are applied to the cost of a product
- Fixed overhead costs are expensed in the period in which they occur
- Inventory value does not include fixed overhead
What are three common methods of absorption in construction?
- The number of employees.
- Divide by departments
- Activity (amount of service activity provided e.g. number of drawings produced)
What is a cost centre?
- A department that does not directly add to profit but still costs the organization money to operate.
What is the difference between a cost centre and a profit centre?
- Cost centres only contribute to a company’s profitability indirectly.
- Profit centres contribute to profitability directly through its actions.
How do we price in construction projects?
Price = Direct costs (Labour + Plant + Materials) + Overheads (Indirect costs) + Profit
When should you not use LIFO accounting for an inventory?
- Don’t use with perishable goods and bad for public companies!!
Give an example of a fixed direct cost, variable direct cost, fixed indirect cost and variable indirect cost
Bricks required to build a wall
Fuel required to run mixer (varies with time)
Taxes on a building
Heating and lighting bills
