Proposal for Apportioning of Overheads/Indirect Costs to Project Cost Overhead/Indirect Costs are incurred across the company as under,

Overhead/Indirect Costs

Project/Site

Zone/Region

Head Office

It is imperative that we build an Activity Based Costing System for the following reasons, To ensure that the true cost of service provided gets reflected in the project cost. To build financial efficiency in the company across the board. To build a system of responsibility accounting: this leads to better controllability and performance measurement. To motivate staff for improved monitoring of costs, expenditure and management information on profitability. Finally switch over to management accounting based on the concept of cost centers, profit centers, revenue centers and investment centers. With the above ultimate objective in view the following proposal is made (based on undersigneds limited subject knowledge) for further modifications etc that maybe required. 01. Overhead/Indirect Costs incurred at project sites can be allocated to the project cost directly without any ambiguity. 02. Zone/Region overheads/indirect costs can be apportioned equally among all projects being handled by the respective zone or region. This can be fine-tuned further later on. In fact in some companies costs such as travelling expenses of officers/staff to project site for meetings/reviews etc are debited directly to the respective project account. 03. Head office overheads/indirect costs can be apportioned as under, Overheads of Directors & HODs can be allocated equally among all the four zones. Interest and Financing charges, insurance, HO staff travel expenses and all such expenses which are incurred specifically for that project can be allocated directly to the respective project. All other overheads of the respective departments shall be apportioned based on the cost activity drivers. This shall require that the costs of each department are accounted separately without clubbing under one ledger account. Individual department budgets shall also be prepared and had approved for monitoring of costs & performance.

The proposed tentative cost drivers for apportioning are as under, Sl.No Department 01 Finance 02 03 05 Purchase HR Business Development Activity Driver for Apportioning Amount of Working Capital Provided to Project Value of Purchases done for the Project Staff Salaries at Site Value of Orders Booked for the Zone/Region Remarks Both Fund & Non Fund based Shall include site purchases also Shall include NMR also For expenses that may be incurred for BD beyond the four zones a separate cost entity may be created which may show a negative flow to be offset against future business execution Alternatively this department costs shall be met by charging rent for P & M provided to project A suitable formula with weightage can be worked out

06

Plant & Machinery

Book Value of Own P & M provided to Project

07

Projects

A combination of Sl.no. 1 to 6.

Conclusion The above suggested methodology shall bring about financial discipline across the company. A separate costing section may have to be established in the long run to capture the cost data accurately. Every department shall be required to have their individual budgets and control costs. Performance monitoring shall become quantified and easier. The contemplated performance based reward system shall have a sound foundation for implementation. Put up for further discussions to management. N G Jayaram Sr Vice President-WZO.