Journal of Quality in Maintenance Engineering

Maintenance cost estimation: application of activity-based costing as a fair

estimate method
Ahmed E. Haroun
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To cite this document:
Ahmed E. Haroun , (2015),"Maintenance cost estimation: application of activity-based costing as a
fair estimate method", Journal of Quality in Maintenance Engineering, Vol. 21 Iss 3 pp. 258 - 270
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Wen-Hsien Tsai, (1998),"Quality cost measurement under activity-based costing", International
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dx.doi.org/10.1108/02656719810218202
Amir H. Khataie, Akif A. Bulgak, (2013),"A cost of quality decision support model for lean
manufacturing: activity-based costing application", International Journal of Quality & Reliability
Management, Vol. 30 Iss 7 pp. 751-764 http://dx.doi.org/10.1108/IJQRM-Jan-2011-0016
Lorella Cannavacciuolo, Maddalena Illario, Adelaide Ippolito, Cristina Ponsiglione, (2015),"An activity-
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JQME
21,3
258
Received 25 June 2015
Revised 25 June 2015
Accepted 25 June 2015
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Journal of Quality in Maintenance
Engineering
Vol. 21 No. 3, 2015
pp. 258-270
Emerald Group Publishing Limited
1355-2511
DOI 10.1108/JQME-04-2015-0015
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1355-2511.htm
Maintenance cost estimation:
application of activity-based
costing as a fair estimate method
Ahmed E. Haroun
Department of Systems Engineering,
King Fahd University of Petroleum & Minerals, Dhahran, Saudi Arabia
Abstract
Purpose The purpose of this paper is to present the use of activity-based costing (ABC) approach as
an alternative option to the traditional cost accounting system. The contribution of this study is to
demonstrate, through a simple example, the application of that costing system in a service (maintenance)
industry, i.e. the paper intended to develop a procedure for a cost model that help in calculating any
maintenance job cost, to a reasonable degree of accuracy, based on the actual activities performed.
Design/methodology/approach This research uses a simple example whereby hypothetical
activities and cost data of maintaining an injector and a pump, of an internal combustion engine, are
used, presented and analyzed based on the use of the developed procedure.
Findings ABC system provides more accurate cost estimates rather than the traditional order
costing methods that uses unit-level costs which are variable in relation to change in service volume.
Traditional cost methods distort the costs by applying overhead uniformly over different jobs of varied
complexities and activities scope. On the other hand, ABC is a useful means to distribute the overhead
costs in proportion (fairly) to the actual activities performed in a specific job and, hence, enhance the
rationality of decision making, i.e. will not distort the accounting information used for cost reduction,
pricing, and evaluation matters. The results obtained from the analysis showed that allocating costs to
the maintained injector decreased from $83.55 to $71.95 and, finally, to $67.57 when using the
workshop-wide, two-stage and ABC overhead allocation methods, respectively; while that of the pump
increased from $298.90 to $340.34 and, finally, to $359.48 when using the same three methods, in the
same order, respectively. The result is quite fair when considering the complexity of the fuel pump,
in terms of design and maintenance, when compared with the injector. Notice that using volume to
allocate overhead costs results in over costing high-volume products, e.g. injectors (simple in terms
of design and operation) and under costing low-volume products, e.g. pumps (more complex in terms of
design and operation). The paper recommends to use ABC as a more accurate and fair method when
charging maintenance job orders based on the analysis of costing two maintained items in the same
premise while consuming different overhead resources.
Practical implications This study attempts to analyze different methods to calculate a specific
corrective maintenance job order. It strives to remedy the drawbacks of the traditional overhead
costing of a job order when using principles related to the size of service, such as the direct labor cost/
hours, as an allocation base. Consequently, the study proposed a new costing method, i.e. application of
ABC. The traditional costing approach is considered by many firms as the best costing method.
Nevertheless, it allocates overhead cost over job performed uniformly (equally) not differentiating
between the complexity of the job and variety of the activities performed, e.g. using the same allocation
base for oil change and fuel pump adjustment activities. So, ABC prevents cost distortions
(unfairness) that could not be prevented by traditional cost accounting system. The author believes
that the method presented in this paper will provide a useful management tool for costing maintenance
jobs based on the appropriate selected activity drivers in maintenance workshops. The method could
be applied for costing maintenance activities in maintenance of all industrial sectors.
Originality/value The use of traditional costing method has proven to be distorted by applying
overhead uniformly over different jobs of varied complexities and activities scope. In this paper the
authors strive to present an effective costing alternative that outperforms the traditional ones with
regard to overhead allocation. The paper aims to find reliable and fair maintenance costing method, i.e. to
find out the relationships between maintenance activities and cost drivers. Although, ABC is widely used
 in manufacturing industry, no application or current research has presented an applicable thorough Application of
worked-out example, with the exception, to the authors knowledge, of one in the aeronautical industry, to
implement ABC method in maintenance industry. The importance of using this method comes from the ABC as a fair
fact that it provides, relatively, accurate and fair maintenance bills that provide customer satisfaction and estimate
firm good image. Hence, the paper is relevant in this respect and intended to contribute to the practice of
maintenance management.
Keywords Overhead, Activity-based costing (ABC), Maintenance job, Cost driver,
Traditional cost accounting system, Workshop-wide 259
Paper type Research paper

Introduction
The existence of an efficient authentic cost information system is essential to improve
organizations performance (profitability) and competitiveness in a barrier-less dynamic
global market. Conventional costing methods were used, extensively, in both industries
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(manufacturing and service) for hundreds of years. However, new methods

were introduced in the manufacturing industries in the late 1970s and early 1980s.
Activity-based costing (ABC) is one of these new methods. Its primary advantage is that
it allocates the overhead costs with direct causal link with the real resources consumed
(Rchid et al., 2013). Although, ABC application has become a mature cost estimation
method in manufacturing industry, it is rather new for costing maintenance jobs.
Maintenance, in its broad definition, is concerned with restoring the condition of
equipment, adjusting and lubricating- repair, and overhaul, i.e. preserving assets to
operate effectively and efficiently. Maintenance importance can be judged by the fact that
it constitutes typically 10-15 percent of an airlines operating cost. In 2003 it is estimated
to be US$36.1 billion, in the commercial airlines sector, and with inventory holding
of, approximately, US$50 billion (Al-Kaabi et al., 2007). The maintenance costs of earth
moving equipment (breakdowns and downtime) constitute a significant component of
the operating cost, and hence, have remarkable impact on the overall companys cost
(Haroun et al., 2013).
US industry spent over $300 billion on plant maintenance and operations in order to
correct the chronic failure of machines systems. It is estimated that the maintenance
cost of a military jet aircraft is, approximately, 11 percent of the total operating cost
(Bloch and Geitner, 2005).
Due to the increasing complexity of manufacturing technologies, maintenance-related
costs have been progressively increasing (Parida and Kumar, 2006). In manufacturing
organizations, maintenance-related costs are estimated to be 25 percent of the overall
operating cost (Haroun et al., 2013).
In some industries, the Figure 1 could go up to 40 percent of a typical
operating budget (Mehmet et al., 2007). In petrochemical, electrical power, and
mining, maintenance-related costs might surpass operational cost (Parida and
Kumar, 2006).
Cost estimation is an indispensable component in maintenance services. It has a
direct effect on enterprises economic performance. Overestimation or underestimation of
services could be reflected negatively on the business performance, i.e., overestimation
distorts the firms image in the market and consequently loses a competitive edge, while
underestimation will subject the firm to financial losses. Cost estimation has been
the focal point for design in the manufacturing industry. Its importance is clearly
evident when reviewing business strategic issues and policies in many reputable
organizations, since, reliable/fair estimations are important for competitive pricing and
 JQME bidding (Hmidaa et al., 2006). In the aeronautical industry the traditional costing method
21,3 used a single-volume unit, the flight time, to calculate the overhead. This method
can persuade a subsidizing effect between various organizations services offered. Rchid
et al. (2013) presented a new method based on ABC to handle aircraft maintenance that
helps the decision makers to offer the price of each service based on accurate overheads
allocation. This method enabled the airlines companies to diversify their revenues by
260 selling extra maintenance capacity to third parties for competitive prices.
For many years the literature has been flooded with papers on maintenance
planning and control to restore designed specifications. The research during recent
years continued on the same path while injecting new trends, i.e., reliability-centered
maintenance, total productive maintenance, etc. The costing and cost performance
issues of maintenance activities received negligible attention.
The cost of an object or a service is the accumulation of the direct traceable
consumed resources (materials and labor) and allocation of the support services costs
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(Mirghani, 2001).
There are many different approaches and methods for estimating or assessing costs,
all of which have no dispute regarding the estimation of the prime cost, i.e., the two
directs, materials and labor, respectively. However, allocation of the overheads, the
in-directs, make the difference in costing a service or a product. Different cost allocation
methods result in different service costs. So, selection of the cost allocation method
makes the difference. Traditional cost methods apply a workshop-wide allocation
method for similar services that use the same resources. However, if multiple services
use resources differently, a two-stage allocation method is appropriate. Unfortunately
those traditional allocation methods do not consider the complexity of the unit to be
costed. Ultimately, they do not enable the service provider to render a cheaper job
maintenance order for less complex parts/components relative to a complex one of the
same system, e.g. injectors and pumps of a fuel system of the same vehicle. This point
triggered the justification of this paper. Furthermore, the importance of this issue is
reinforced by the fact of the paramount growth of indirect activities (i.e. overhead costs)
as a result of, now a days, assets complexity/advancement, and hence investment
costs, of production/processing and state of the art diagnostic equipment and
machines. Thus, the product cost structure includes gradually a more important part of
indirect costs, materialized by the support activities, than before. In addition, the causal
relationships between cost objects (products or services) and the resource
consumptions are difficult to assess through traditional methods. Their traceability
is more difficult to achieve with the traditional approaches for cost estimation (Maher
et al., 2011; Raiborn, 2013).

Workshop Cost Pool Overhead

Department Maintaining Packaging-Dispatching

Overhead Cost
Figure 1.
Overhead cost flow
diagram-fuel doctor
workshop: two-stage
allocation
Cost Allocation Method Machine Hours Direct Labor Cost
 To face this dilemma, we have to replace the traditional analytical-based costing methods Application of
commonly used in manufacturing process costing to a method that provide the total ABC as a fair
cost of the product/service according to some of its distinguished characteristics.
Fortunately, ABC method, as mentioned before, remedy the traditional costing
estimate
drawbacks. It handles the causal relationships through considering the consumed
resources as a result of the activities performed to produce a product or render a service.
Nevertheless, few studies initiated modest steps in analyzing the activities involved in 261
maintenance management. Mirghani (2001) proposed a framework, based on ABC, to
allocate support services (overhead) costs to planned maintenance. He tries to enable
management to manage maintenance function in a way that it turns the organizations
into successful profit centers. He supplemented that framework by a case study of
application and implementation (Mirghani, 2003). Mehmet et al. (2007) presented a first
step in using ABC through analysis of maintenance activities, and hence, attaching
costs to those activities, i.e., pin pointing what derives costs. So, he provided a basis for a
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further analysis.
This paper demonstrates the differences between applying traditional and activity-
based overhead costs allocation systems. Based on an analytical comparison between
the different methods the paper tries to find out the better alternative for maintenance
service costing. Moreover, presenting a thorough designed example, the paper could be
considered as a more accurate illustration of the other expenses levels, rather than the
volume-level, associated with maintenance job orders. Most important, the paper
strives to encourage and enhance research in maintenance costing area. The scope of
this paper is limited to job orders of corrective maintenance. Corrective maintenance is
known as the process of restoration of the specifications of an asset to its designed state
in order to operate effectively and efficiently. This type of maintenance requires
specific activities to be performed and, hence, costed as an indispensable component of
the operation cost.

Problem definition
In rendering a service (maintenance) setting a realistic profitable service price, that caters
for all operational and investment (overhead) costs, constitutes a problem to most service
providers. This is clear from the fact that seeking the same service from different
providers shows a remarkable billing differences. Reset of the service tariff (fee) for a new
product (new car model) of a specific job may occur more than once in the first year.
Hence, the stabilization of services prices need a period that could be extended to more
than one year. This destabilization period may frustrate the customer and may trigger
some sort of distrust in the provider (maintainer) integrity and creditability that could not
be tolerated in todays fierce competitive market. This, clearly, shows that the service
providers have a problem of estimating the right fair costs the first time.

Research objective
The objective of this research work is to find a more accurate and fair cost estimate
system for maintenance job orders. The paper strives to reach its objective through the
demonstration, discussion, and comparison of traditional overhead (cost) allocation
systems, and a non-traditional one, i.e., ABC, as an alternative cost estimate method.

ABC
The manufacturing cost of a part can be estimated using one or more of four
basic methods: intuitive, analogous, parametric, and analytical (Hmidaa et al., 2006).
 JQME The intuitive method relies on the experience of the estimator to predict the cost.
21,3 The analogous methods are based on cost extrapolation from previous estimates
made for similar or analogous parts, often retrieved using a group technology code.
Parametric estimating methods classically entails the linking of cost to technical
parameters bound in mathematical relations to build cost-estimating models. Finally,
the analytical methods rely on a cost summation related to the steps in the product
262 production process; and as such can only occur late in the engineering process. ABC is
a recent trend, related to the analytical cost relation methods.
ABC concept advocates that products or services consume activities, and activities
consume resources that generate costs. The problem is to identify cost drivers for each
activity. Elements of these methods are more or less applicable at various stages of the
product life cycle. The ABC method has been, almost inclusively, handled the cost
estimates in design and manufacturing and not in the service industry (Hmidaa et al.,
2006). The case of operational activities in service industry, i.e., maintenance, could be a
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little bit different. Maintenance is provided directly to a customer, which means the pricing
method should be convincing. So, it is important to use a costing method that shows the
efforts and real activities performed to execute the required job, e.g., brake replacement
or oil change. Hence, charging a maintenance service necessitate the application of
non-traditional costing method. Traditional order costing methods does not focus on
activities that improve the value received by customers. On the other hand ABC provides
a more accurate cost determination and effective performance evaluation method.
Traditional (order costing) uses unit-level costs which are variable in relation to change
in service volume, i.e. time consumed to perform the job, while ABC uses other levels,
i.e., organizational level costs that are variable for reasons other than changes in service
volume. So, ABC system focusses on calculating the costs incurred on performing the
activities to manufacture a product or render a service. The ABC system is a useful means
to distribute the overhead costs in proportion to the activities performed in a specific job.
It proved to be a good alternative to traditional techniques since it provide more accurate
service/manufacturing cost estimates based on the actual activities performed. It helps the
products designers and service providers to estimate the effects of different production
processes and service methods, respectively, on product/service costs.
Nevertheless, factors determining the most appropriate cost allocation method will
include the nature of the activity to be costed or assessed, the degree of familiarity of
the service provider with the item or activity to be costed, and the extent to which
reference can be made to previous experience (i.e. Predetermined Time Standard/
Predetermined Motion Time Systems[1] PTS and PMTS, respectively), the availability
of reliable costing data and the time available to prepare the estimate. Other important
aspects are the specific customer requirements in terms of presentation of cost details,
and the degree of accuracy required.
The use of traditional costing method has proven to be distorted by applying
overhead uniformly over different jobs of varied complexities and activities scope.
It breaks down the cost into the prime cost, the two directs, which are easily traced to
the specific product/service, and the indirects (overhead), as termed by Hmidaa et al.
(2006) as economical classification standpoint. The overhead cost in traditional
methods is based on a predetermined (volume level based, i.e. direct labor hours (DLH),
direct labor cost (DL$), or machine hours) overhead rate. Hmida et al. (2006) also
identified a second classification, morphological, which separates the costs into three
components: material consumption costs; labor (human utilization) costs; and overhead
costs (consumption cost of elements other than the above two).
 Besides the volume level (unit-level), ABC identified other three more levels of costs. Application of
These are batch-level, product/service- or process-level, and organizational or facility ABC as a fair
costs. Unit-level costs include direct material, direct labor, and some traceable machine
costs. These are incurred once for each item produced/maintained and are considered
estimate
part of total product/service cost. Batch-level costs include machine setup, inspection,
material handling-dispatching spare parts and consumables purchasing or ordering
costs. They are incurred once for each batch of items produced/serviced and are 263
allocated over the total number of units in the batch. These are also considered part
of total product/service cost. Product/service- or process-level costs include engineering
changes, equipment (e.g. pump and injectors testing and adjustment equipment)
maintenance design, and development costs. These are allocated to the total number of
units produced/served in the queue line and are considered part of total product/service
cost. Organizational or facility costs include building depreciation, insurance,
administrative salaries, and organizational advertising. These costs are not product/
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service-related and should be deducted from net product/service revenue. So, ABC
recognizes several levels of costs, accumulates costs into related cost pools, and uses
multiple cost drivers to assign costs to products and services (Maher et al., 2011;
Raiborn, 2013).
Considering the case of a service industry, i.e., maintenance works, the ABC
method provides a more detailed breakdown of the costs. This additional information
should enable maintenance managers to make better decisions, i.e., reducing costs
through enlisting activities on which management should focus its cost reduction
efforts.
The fast growing nuclear medicines (NM) tremendous expenses impose an
emerging challenge to balance the impact of the resource scarcity and its optimal
utilization. Moreover, vulnerability of the patients to the risk of radiation exposure
raised the question of economics of machines maintenance and consequently patients
safety. Using ABC costing in a routine basis in the NM Department provided precise
maintenance cost of various diagnostic machines and safety procedures. Moreover,
managerial strategies toward maximizing efficiency, optimizing resources, and
minimizing waste were achieved (Hada et al., 2014).
Some costs may have no relationship to any volume or activity base.
Blanchard asserts that in traditional costing the major cost, i.e., the overhead, is
hardly traceable. The overhead, or indirect costs constitute more than 50 percent of
the total, costs. It includes supporting organization costs, and other costs that are
not volume-identified costs. However, to allocate these costs artificially would distort
the accounting information used for pricing, evaluation, etc. A preferable method to
handle such costs might be the contribution margin method. He further states that
traditional costing allocates overheads across the board that it makes it difficult
to identify the actual contributors of the cost components. So, by identifying the
activities (exerted efforts) and cost drivers a relatively accurate cost allocation could be
achieved (Kayrbekova, 2011).

Methods evaluation
The implementation and evaluation of ABC method will be demonstrated through
a hypothetical example of a service provider (maintenance workshop). Two test stands
(machines) were used for testing and calibration of injectors and pumps of vehicles fuel
systems. A comparison method is used to evaluate the effect of different allocation
methods on maintenance cost.
 JQME The example of Fuel Doctor Workshop
21,3 Lets look at the cost allocation example. Consider Fuel Doctor Workshop is specialized in
vehicles fuel injection system. It tests, maintains and adjusts fuel systems. Fuel Doctor
Workshop maintains two subsystems, the fuel pump and the individual injectors.
Maintenance service takes place in two departments, Maintenance (testing, maintaining,
and assembly) and Packaging-Dispatching Department. The workshop taking contracts
264 from transport companies. Some of these companies maintained their own fuel injectors,
in-house, but all of them send their pumps to Fuel Doctor Workshop. For the year 2014,
12,500 injectors were repaired requiring 3,000 machine hours and 5,000 fuel pumps were
repaired requiring 15,000 machine hours. Two test stands are used to test and calibrate
injectors and pumps (Table I).

Overhead allocation using traditional method (single workshop-wide

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allocation base)
Here, we used a cost system that allocates service overhead to units maintained based
on direct labor costs, i.e., a workshop-wide allocation method.
Allocating overhead based on the workshop-wide method (direct labor costs) will
provide a predetermined overhead rate (POHR) of 105 per cent ($1,020,000/$972,000).
So, $32.55 of overhead costs are allocated to each unit of Injectors resulting in a per-unit
cost of $83.55, and $107.00 of overhead costs are allocated to each unit of fuel pumps
resulting in a per-unit cost of $298.90, however, it is worth to mention that allocating
the overhead cost to the two fuel systems items (fuel pump and injector) equally is
unfair for the simple reason that the two items consume unequal indirect
maintenance resources (overheads). The maintenance of the injectors is quite simple
compared to that of the fuel pump, which has a relatively complex design, so, it is clear
that the maintenance cost of the injectors is quite high. Ultimately, the service provider
has to consider that, otherwise, the customer may seek the service of an alternative
provider. The remaining of this paper will demonstrate the consequence of applying
other allocation alternatives (Table II).

Two-stage (department) overhead allocation method

Using a two-stage cost allocation method, trace overhead cost to the intermediate
cost pools, i.e., Maintenance and Packaging-Dispatching. Here, we allocate maintaining-

Injector Fuel pump Total

Number of units 12,500 5,000 17,500

Machine-hours 3,000 15,000 18,000
Direct material (replaced parts) $250,000 400,000 $650,000
Direct labor
Maintaining 187,500 459,500 $647,000
Packaging-dispatching 225,000 100,000 $325,000
Direct labor total 412,500 559,500 $972,000
Total direct cost $662,500 $959,500 $1,622,000
Overhead costs
Table I. Maintaining $815,000
Fuel doctor Packaging-dispatching $205,000
workshop: service Total overhead cost $1,020,000
and cost data Total costs $2,642,000
 assembly overhead costs based on machine hours and packaging-dispatching Application of
overhead costs based on direct labor cost. ABC as a fair
Allocating overhead using a two-stage allocation process, $20.95 of overhead costs
are allocated to each unit of injector resulting in a per-unit cost of $71.95, while $148.44
estimate
of overhead costs are allocated to each unit of fuel pump resulting in a per-unit cost of
$340.34 (Table III).
265
ABC-based cost allocation
Developing an ABC system consists of four steps. First, identify activities that consume
resources and assign costs to them. Second, identify the cost drivers associated with each
activity. Third, compute a cost rate per cost driver unit or transaction. And finally, fourth,
allocate the cost of the activities to products by multiplying the cost driver rate by
the volume of cost driver units consumed by the product. So, ABC is a two-stage
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allocation method that first assigns overhead costs to activities rather than departments,
and then allocates the cost of those activities to products based on the use of each activity
(Maher et al., 2011).
The maintenance function (corrective maintenance) is similar to any operating
process. It has outputs (activities) that include work orders, work permits, actual
performed maintenance work, and closing work orders (reports and costs). So, as a cost
driver, the work order is used as a base allocation mechanism similar to others, e.g., actual

Injector Fuel pump

Units maintained 12,500 5,000

Direct material (replaced parts) $20.00 $80.00
Direct labor
Maintaining $15.00 $91.90
Packaging-dispatching 16.00 20.00
Direct labor total $31.00 $111.90 Table II.
Total direct costs $51.00 $191.90 Service price using
Applied overhead costs (at 105% of DL cost) 32.55 107.00 workshop-wide
Unit cost $83.55 $298.90 overhead allocation

Injector Fuel pump

Units maintained 12,500 5,000

Machine-hours/unit 0.24 3.00
Direct material (replaced parts) $20.00 $80.00
Direct labor
Maintaining $15.00 $91.90
Packaging-dispatching 16.00 20.00
Direct labor total $31.00 $111.90
Total direct costs $51.00 $191.90
Applied overhead
Maintaining-assembly (at $45.28 per machine hour) 10.87 135.84
Maintaining-assembly (at 63% of DL cost) 10.08 12.60 Table III.
Total overhead $20.95 $148.44 Two-stage overhead
Unit cost $71.95 $340.34 cost allocation
 JQME labor hours. Finding the average number of work orders and the direct hours for
21,3 the corrective maintenance performed provides the basis for cost allocation, however, the
values associated with each cost driver must be found (Mehmet et al., 2007).
The first step in ABC is to identify the activities. Activities in the Maintenance
Department include machine-set up, material handling and product maintenance and
assembly. Activities in the Packaging-Dispatching Department include inspection,
266 packaging, and shipping.
The second step is to identify the cost drivers and the expected volume of each cost
driver. Maintenance costs, including disassembly and assembly, are driven by machine
hours and the expected volume of machine hours is 18,000 hours. The cost driver for
machine set-up costs is set-up hours. Fuel Doctor Workshop expects 1,750 set-up hours.
The cost driver for material handling is processed orders and the expected processed
orders are 750 orders. In the Packaging-Dispatching Department inspection and
packaging costs are driven by the number of direct labor hours. Total direct labor
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hours expected are 6,875. And finally, shipping cost are driven by the number of
shipments: expected number of shipments are 1,250 (Tables IV and V).
Third step computes the cost driver rates. For product maintenance and assembly we
charge $23.20 per machine hour. If costs assigned to machine set-up equals $262,500 and
the expected volume of set-up hours is 1,750, the overhead rate is $90 and $180 per set-up
hour for injectors and pumps machines, respectively. Computing the cost driver rate for
material handling gives us $140 per processed order. In the Packaging-Dispatching
Department, we assume overhead rates of $8 per direct labor hour for inspection and
packaging and $120 per shipment for dispatching (Table VI).
Using ABC, overhead costs are assigned first to departments (Maintenance-
Assembly and Packaging-Dispatching). Then the department overhead are assigned
to activities. Costs are allocated to the serviced (maintained) products based on an
allocation rate per cost driver of each individual activity (Figure 2). The service

Identified activitya Identified cost driver

Setting up machines Number of labor hours need to prepare and adjust the injectors and pumps
machines (calibration)
Handling material Number of orders processed
Items test and Number of labor and machine hours needed to test and calibrate the injectors
calibration and fuel pumps
Packaging and Number of shipments
dispatching
Notes: aMore other activities such as maintenance of the Testing and Adjustment Stands
(machines) and machines depreciation can be included.; their cost drivers could be the number of
machines installed and operating machine hours, respectively. The depreciation can be calculated
through finding the equivalent annual investment cost (Cost Recovery) while considering the interest


rate i
(Minimum Attractive

 Rate of Return, MARR): A CRi% P A=P; i; N S 
N N
A=S; i; N P i1 i = 1 i 1 we assume S, the salvage value 0; where: P or I, initial/
capital cost, i.e., purchasing and putting a machine on

operation,
 including
 transportation, insurance
and any applicable relevant costs; and P i1 iN = 1 iN 1 , the Recovery Factor; then the
depreciation
 value
 to be recovered through assets (machines) operation per hour is equal to:
Table IV. A= Hours=year (Haroun et al., 2012); the maintenance cost of the testing stands depends on their
Identified activities number and the quantity (number of job orders) of the items (injectors and pumps) to be served (tested
and cost drivers and calibrated) by each stand
 Units maintained 12,500 (Injectors) 5,000 (Pumps)
Application of
Cost driver volume ABC as a fair
Activity Cost driver Injector Fuel pump Total estimate
Maintenance Department
Items test and calibration Machine hours 3,000 15,000 18,000
Material handling No. of orders processed 250 500 750
Machine set-up Set-up hours 250 1,500 1,750 267
Packaging-Dispatching Department
Inspection and packaging Direct labor hours 3,125 3,750 $6,875
Dispatching Number of shipments 250 1,000 1,250
Notes: Every 50 injectors constitute one processed order, while ten pumps constitute one processed
order; every processed order for the Injectors machine requires one hour, while it requires three hours Table V.
for the Pumps machine set-ups; expected DLH s for both departments are 6,875 (15 and 45 minutes for Activities, cost
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each injector and fuel pump, respectively). Expected number of shipments are 1,000 (the shipment drivers, expected
contains either one order of injectors or five fuel pumps) volumes and rates

Department/activity Overhead cost Cost driver volume Cost driver rate

Maintenance Department
Items test and calibration $417,500 18,000 m/c hour $23.20 per m/c hour
Materials handling $105,000 750 orders $140 per ordera
Machine set-up $292,500 1,750 hours $90/180 per set-up hourb
Total maintenance $815,000
Packaging-Dispatching Department
Inspection and packaging $55,000 6,875 DLH $8 per DL hour
Dispatching $150,000 1,250 shipments $120 per shipment
Total packaging-dispatching $205,000
Total overhead $1,020,000 Table VI.
Notes: m/c, Machine; DLH, direct labor hour. aIncluding the equipment depreciation; bthe overhead rate Computation of the
is $90 and 180 per set-up hour for injectors and pumps machines, respectively (including depreciation) cost drivers rates

Overhead

Testing m/c Set-up Material Test and Calibration Pack -

Handling Dispatch

Allocate costs to
Set-up Order Maintenance Shipments
serviced items based on
the use of each activity
hours processed hours Figure 2.
ABC cost allocation
flow diagram
Serviced Products
 JQME provider (workshop) must be able to estimate the overheads before the period and track
21,3 their actual costs as they incurred during the period (Maher et al., 2011).
Finally, fourth step, allocate costs to the service provided using the POHR per activity
(Table VII).
The maintenance charge of the maintained product (injector/fuel pump) is used
to be $23.20 per machine hour. This results in an allocation of $69,600 and $347,400
268 to injectors and pumps, respectively. Material handling at $140,000 per processed
order allocates $35,000 and $70,000 to injectors and pumps, respectively. Machine
set-up at $90 and $180 per set-up hour allocate $22,500 and $270,000 to injectors and
fuel pumps, respectively. Inspecting and packing at $8 per direct labor hour allocates
$25,000 and $30,000 to injector and fuel pump, respectively. Finally, shipping
is allocated at $120 per shipment which attributed $30,000 and $120,000 to injectors
and pumps, respectively. Allocating costs to the maintained items using the POHR
per activity results in total overhead costs of $182,100 and $837,900, allocated
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to injectors and pumps, respectively. These allocations accumulate total costs of

$844,600 and $1,797,400 to injectors and pumps, respectively. Hence, the per unit
maintenance cost of the injector decreased to $67.57, while that of the pump
increased to $359.48 when compared to ones used the workshop-wide and two-stage
allocation methods (Table VIII).

Injector Pump

Direct costs
Direct material (replaced parts) $250,000 $400,000
Direct labor
Maintaining $187,500 $459,500
Packaging-dispatching $225,000 $100,000
Direct labor total $412,500 $559,500
Total direct cost $662,500 $959,500
Overhead
Maintenance Department
Items test and calibration at $23.20 per m/c hour $69,600 $347,400
Materials handling at $140 per order $35,000 $70,500
Machine set-up at $90 and $180 per set-up hour $22,500 $270,000
Packaging-Dispatching Department
Inspection and packaging at $8 per DL hour $25,000 $30,000
Dispatching $30,000 $120,000
Table VII. Total ABC overhead $182,100 $837,900
Computation of Total costs $844,600 $1,797,400
serviced Number of units 12,500 5,000
products costs Unit cost $67.57 $359.48

Table VIII. Injector Pump

Comparison of the
service costs based Workshop-wide rate $83.55 $298.90
on the allocation Department (two-stage) rate $71.95 $340.34
methods ABC rate $67.57 $359.48
 Conclusions Application of
The conclusions of the study show that applying ABC leads to better knowledge and ABC as a fair
ability to estimate the cost of maintenance jobs. Moreover, we can update costs data
(drivers) based on the activities performed, which could be saved to be used for similar
estimate
jobs, budgeting purposes and control. ABC helps in supervising and controlling the
maintenance activities that the company perform, and, hence, enhance the rationality of
decisions made (i.e. bidding to perform different maintenance activities to another 269
company, e.g., Airliners; Rchid et al., 2013).
Comparing the per-unit product cost using a workshop-wide rate, a department rate
(two-stage) and ABC for allocating overhead, we find that the injector maintenance cost is
$83.55 per unit when using a workshop-wide allocation rate, $71.95 using a department
rate, and decreased to $67.57 when using ABC. The fuel pump has a per-unit
maintenance cost of $298.90 using a workshop-wide allocation rate, $340.34 using a
department (two-stage) rate, and increased to $359.48 using ABC. Notice using volume
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to allocate overhead costs results in over costing high-volume products, e.g., injectors and
under costing low-volume products, e.g., pumps (more complex in terms of design
and operation). Ultimately, the paper recommends to use ABC as a more accurate and fair
method when charging maintenance job orders.

Note
1. Synthesizing operation times from standard time data for basic motion.

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Further reading
Dhillon, B.S. (2002), Engineering Maintenance: A Modern Approach, ISBN: 1-58716-142-7, CRC
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Press LLC, New York, NY.

Corresponding author
Dr Ahmed E. Haroun can be contacted at: aharoun@kfupm.edu.sa

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