Costing methods in an Infrastructure company


For any company that is related to the infrastructure sector, it is highly essential to know the value of inputs and outputs that are involved in course of the projects undertaken. This is where the role of costing methods becomes important. A rigorous application of accounting method can help in determining the cost of production and also other ratios that are responsible in analysing the financial situation of the respective company. In fact the accuracy of costing information is highly dependent on the type of accounting method used at a particular time. There are other very significant areas as well where the accounting methods can be of extreme importance. Some of them can be with respect to the production levels. This suggests that the herculean task of inventory management is based on the costing methods used. If one moves further, even the budgeting of a company is dependent largely on the costing methods that are used. Many projects seem to give very ambiguous results. Under the conditions it becomes very difficult for a company to decide the pricing strategies with respect to the market. This can also be because of the dynamically changing environment. Under the conditions, a proper costing method becomes very significant. Moreover, the biggest threat that exists in corporate is that from the competitors. The costing methods are even responsible for helping the company to build its competitive strategy. One can also make these competitive strategies in accordance with the future plans of investment. So, one can see that there exists various dimensions under which a proper costing method is essential for a company. It must also be understood at this point in time that the bigger a company is the larger are the requirements of a proper costing method. The reason for the same is that the diversities of the segments selected by the company increase, and therefore, the need to do be more accurate with respect to accounts in different regions also gets higher. As far as the utility of the costing methods are concerned, it is generally of internal use but then it is also true that this helps in preventing a number of external deficiencies from taking effect.

The Company

Emaar is a joint stock company that has now become a forever stop for the best lifestyle living in the country. The company is not only listed on the Dubai Financial Market but also is a part of the Dow Jones Arabia Titans Index. The company has been responsible for changing the economy of the place from not being recognized once upon a time to be amongst the most prosperous in the world. The company has records of maintaining the most authentic accounting policies in the country in spite of being amongst the most diversified. Talking about the real estate expansion of the country, Emaar not only has a major role to play, but it also controls the entire industry. In Dubai itself, the company has constructed more than 14,000 homes. Formed back in 1997, the company has never looked back from what it was. The company has now advanced to such an extent that its deals are now of the order of some billion dollars. This has been explicit in examples like Burj Khalifa downtown and also others like the recently made Gold and Diamond Park in the commercial capital of the country, Dubai. Talking about 2009 itself, the year that was not so far, the company has come up with projects like the largest mall in the world, Dubai Mall and Burj Khalifa Boulevard. There are also many hotels in the surroundings like Armani and Burj Khalifa which are owned by the company. The company has expanded to countries like USA and Canada in the far west as well. To whatever extent it might go, Emaar has the reputation of maintaining the requisite costing methods because it employs people for different needs at different periods. There are many occasions where the company employs on a contract basis and there are others where the company fulfils its projects with the employees working for it consistently. The different strategies based on the type of requirement of the company have helped it a lot in the past to get the reputation that it holds today. These costing methods differ with sectors as well. From the perspective of Emaar, they are of the following types:

  • Hospitality Sector
  • Leisure Sector
  • Education
  • Malls
  • Healthcare
  • Financial Services

By virtue of these services, the company has evolved into an integrated service provider that has a large domain to cater to. The sole aim of the company in all that it does with any costing method that it applies to maintain its accounts, remains the same. This is in the form of property development in all the countries that it provides service to. Some of them also include the other Middle East countries like Saudi Arabia, Jordan, Syria, and even towards more northern Africa in Egypt and Morocco. The company has also made its advancements in the Asian countries like India and Pakistan. No to forget the expansions of the country also include China and UK.

There are various ways through which Emaar has been able to manage this diversity in its services and also in the countries that it targets. They have been mentioned in the subsequent sections.

Problem of Research

The vast character of the business that Emaar does in UAE, suggests the fact that the costing methods of the company need to be intact. From small to large scale business, Emaar has to see that amongst the many costing methods, which method would best satisfy the purpose.


  • To determine the different costing methods
  • To determine the suitability of the best method for a particular project
  • To estimate the cost involved in each of the project by applying the correct costing method
  • To determine the advantages that a proper costing method would have in the financial stability of the firm
  • The conformity of the costing method with the size of the company
  • Importance of the Research

    Every step in costing methods moves forward to better the managerial accounting process. There are different companies that follow different costing methods at different times. It always depends on the amount of production or service and the quality of the same. Here we are taking the infrastructure giants of the Arab World, Emaar to analyse the costing methods. Because the company operates at such a large level, all the ways of costing are applicable to the same. This is also because of the fact that the company has had the opportunity to take small projects from the residential purpose and also be a part of some of the biggest projects in the world that include building the tallest tower and also the largest mall. Both being from the suitability of tourism, the company has always prospered in the past with its operations in a number of countries. ( Cost Accounting, 2010)

    Lecture Review

    When the various employees of Emaar were surveyed with respect to the importance of costing methods and their utilities they were of the following view:

    It is often easy to allocate the direct labour and direct materials but as far as the allocation of indirect costs is concerned, it is rather a very tedious task. This becomes all the more complicated when two processes or activities in the company have a common utility of resources. Hence, when the cost allocation is being done for the application of a proper costing method, one would have to provide weight age to each and every resource to be used in the common activities. The measure of this sharing of resources is termed as cost driver. This is done at the different customer service help lines of the company. One can determine the cost of activity of a particular help line by recording the actual time consumption of each query that the customers have and also the number of customers that are into using this activity of Emaar. This can also be done for the service sector of the company. All the services that the company carries so earnestly, that include hospitality and education to the maximum content, require such costing system.

    This response is highly authentic as it was unanimous in the entire financial section of the company. This nature of the employees has kept the company amongst the leaders. Also, based on this unanimous view, the further importance of costing methods can be better studied.

    The Basics of Costing Methods

    Fixed Costs

    Amongst the key issues in all the costing methods is to be able to make a distinction between the types of costs. One of the basic factors of distinguishing is whether it is a fixed cost or a variable cost. This costs that remain invariant even though there may be changes in the output are termed as the fixed costs. Some of the basic fixed costs have been mentioned as follows:

    • Interest of the fixed assets like machinery and plant
    • Rent
    • Taxes
    • Executive Salaries

    A fixed cost is a term that is valid for a short term. The reason for the same is that over a longer period of time, fixed costs are likely to change with the change in situation as the case may be. This is possible in the case of Emaar. Let's say that Emaar feels that in course of constructing a residential apartment, the requirement increases because of the increase in the demands of the company. Under the conditions, the company would have to increase the level of its expenditure on both the machinery and the plant that it has laid for the completion of the residential apartment.

    Variable Costs

    Unlike the fixed costs, the variable costs are those that change with the change in output. In case of the activities that Emaar undergoes, a major variable cost is the cost of materials. So, one can say that as the output increases, the fixed costs remain the same but at the same time, the variable costs increase at a constant rate. As far as the unit costs are concerned, with an increase in the level of output, the fixed costs start to decline but the variable costs in this situation remain a constant. This is of vital concern for Emaar. The reason for the same is that it determines the per unit profit at a given level of price. So, one can say that as per the characteristics of fixed costs and variable costs, with an increase in the output, the unit costs tend to decline because the variable cost is constant but at the same time the fixed costs are lesser for each unit. So, it lies totally in the hands of Emaar whether to run at the high capacity levels or not. (COSTING METHODS, 2010)

    Direct Costs

    The costing methods require a clear distinction between the direct and indirect costs just as they require a distinction between fixed costs and variable costs. Those costs which the company can easily trace are termed as the direct costs and those that are not are termed as the indirect costs. As far as the direct costs are concerned, they form a major part of the components of any service provided. For example, the amount of cement, clay, bricks and others. The labour that is directly associated with the same is also a part of the direct costs. These costs are therefore sub divided in the form of direct labour costs and direct material cost. On account of its vast significance in the costing methods, it is also referred to as prime cost.

    Indirect Costs

    All the other costs that are associated in the plant that are a result of the fixed capital and the use of energy associated with the plant are termed as the indirect costs. Every minor material like even the soldering material or the sticking materials form a part of the indirect costs. For any object, generally the costs are conceivable but their inclusion depends on the cost-effectiveness of including. One can also say that the variable costs associated with the services are sometimes referred to as the overheads and in this manner, the overheads are distinguishable from the defined prime costs.

    Estimation of Total Costs

    There are a number of ways through which the total cost can be determined. They are done as a function of the fixed costs on a time basis, variable costs on the basis of units and also the level of output. The various methods that are used for the same are as follows:

    Accounting Analysis

    In this form of analysis, there are only two types of costs that are involved. They are either fixed or variable. This makes it easy for computation. But in reality there are a number of costs that have the components of both fixed and variable costs. These costs are semi variable costs and step costs. Semi variable costs necessarily contain both fixed and variable components. Even step costs are those that increase discretionally with the increase in outputs. Under such circumstances, the accounting analysis takes into account that cost which is predominant among the two. Thus, in order to have an accurate result from the accounting analysis, the proportion of the fixed and variable costs matters a lot. There are many occasions in Emaar where only cost is used for the entire service or process where accounting analysis is used extensively.

    Engineering Approach

    All the costs that are specific to a particular service are highly resolvable in the engineering approach. So, the direct material costs are best resolved by this method but not quite for the direct labour costs that are associated or the direct overhead costs that are there for a service. So, this method is more often used for prediction. Even without the actual layout of a project has been done in practical, one can estimate the costs that would be incurred for the same. The advantage is that all other methods firstly require actual service to be delivered after which they would be able to draw out a conclusion.

    High-Low Approach

    As far as the application of this method is used, a company must be able to realize the total costs that were involved during the initial high and low level of output. Total costs as a function of output can be plotted as a straight line by having the total costs points as high mark and the level of output as a low mark. If one can determine a change in the total costs as a linear function of the output, then the slope would indicate the change in variable costs. The disadvantage is that two points that are considered here might not be good enough to be give an accurate representation of data. So, it is required to modify this approach where more number of total cost output points are plotted. Hence this stands as the drawback of this approach

    Standard Costs

    If one has to find the relation between the total costs and the level of output produces, he would have to go for standard costs. These costs include the direct material costs, direct labour costs and also indirect costs. Before the costing methods are applied, the standard costs are essential as they aid in making a budget of the activities of the firm. Hence in order to determine the standard costs, the company needs to determine the separate costs for direct materials, direct labour and also overhead. (referenceforbusiness, 2010)

    Direct Materials

    This type of standard costs stands as the easiest to compute. The costs of the same are determined by the prices of the inputs. Over this, the firm also adds the sales tax, transportation cost and costs if similar concern as well. There are times when some unanticipated costs do have complications but overall it is of straight forward nature. As it also a unit cost, so one must know the quantitative aspects of the service which cn be calculated using the engineering approach.

    Direct Labour

    This is slightly more difficult to evaluate as compared to the direct materials. This cost takes into account the wages that are paid to the workers. But as the wages change at different stages, the complication increase and at times the weighted average method has to be used to come to a viable conclusion. This also includes all the costs that are related to incentives given to workers, taxes on employment and also overtime. Here, again the quantitative aspect of labour requirement can be estimated using the engineering approach. It should also include the set-up time and the downtown time as well for the same. As far as Emaar is concerned, the company has been into a regular practice of making codes of the labour time standards so as to make the budgeting procedure simple.


    This is amongst the most difficult of the estimations, so they are generally approximated. As it has been said, one can't trace the indirect costs easily, so this is the reason that calculation off overheads has become a tedious task. The problems regarding overheads are even more for Emaar as the company has a centralized system and there are multiple services that it provides. One can have a standard overhead by making a typical estimation of the total cost of overheads and henceforth making a comparison with the direct labour cost in terms of hours and money and also in terms of the machine hours that have been used. Initially, the company used the direct labour hours as the standard overhead but as Emaar has now started to get advanced with the incorporation of technology in the system, the pedagogy of machine hours has come to the picture in this respect.

    Determination of Profitability through CVP Analysis

    In order to know the amount of profitability of the company in all the costing methods that would be discussed in the subsequent sections, one must make a combination of the revenue and cost equations so as to determine the profitability as per as the level of outputs. This evaluation of profitability is also known as cost-volume-profit or CVP analysis. It can be equated as net income which is equal to the difference of the total revenue collected and the total cost incurred. As far as calculation of total cost is concerned, it is equal to the product of the variable costs and the quantity of output that is produced and then summed with the fixed cost incurred. The total revenue if the product of price of service into the quantity of output that has been sold.

    This is amongst the highly significant accounting tools used in Emaar. Emaar has used the CVP analysis to determine the beak-even point of almost all the projects or the services that it provides. This is to find the level of output when the revenue equals the cost calculated. It is assumed in this method that at some point in time or at a particular level of output, the total cost would equalize the total revenue collected. This would certainly be a non-zero level of output. At the zero level, the value of fixed costs would be a non-zero number and the revenue collected would be zero. This indicates the fact the unit price for which the services are rendered to the customers is definitely more than the unit cost that is incurred for the same. Emaar has used the CVP to check whether the projects undertaken have the capability to bring revenue beyond the break-even point or not. As for example; Emaar has very recently made Burj Dubai tower. The company must have calculated the break-even point for the same. Now, as the company has also performed the break-even analysis of the same, it knows that the tower would certainly add value to the firm even after it has equalled the total cost incurred. As the service delivered changes its level, it is also obvious that the costs would change accordingly. This is like the slope of the curve made by accountants and is also termed as the marginal costs. So, one must understand at this point in time that the costing methods that would be used subsequently would be decided on the basis of the accounting procedure used as it is concerned with the needs of the managers and also the top level management people so as to access the allocation of resources to the projects. In this context, it is also required that the people of Emaar must know that the marginal cost decrease at lower outputs, it is almost the same at a normal level and at the higher end of outputs, it is assumed to be increasing at an accelerated rate. As these things have been used predominantly by Emaar, the company has based all the costing calculations in all the different projects undertaken on the very real assumption that the cost of the services would change at a constant rate as per as the output. ( Cost-Volume-Profit (CVP) Analysis, 2010)

    Job Costing Methods

    There are many cases where the work is done on the basis of the work orders that are given. These are the cases where Job Costing method can be applicable. One has to find the cost of each of the jobs on the basis of the work orders. These are generally performed for those customers who seek customization in the service delivered to them. There are many cases where the customers buy the residential availed by Emaar. When they feel that the kind of renovation they want can't be managed by them. They move on to the company to get the desired service. As this is a part of the project that does not come under the primary strategic alignment of the company, there are separate job sheets that are made. These job sheets are required separately so as to ensure that the financial transactions made in process are presented into the profit-loss statement. The company ensures that if the classification of this activity is based on the job then the profit and loss is calculated for each job and if it is based on the work orders, then the profit and loss is accordingly calculated on the basis of the work orders. This is done so as to ascertain the fact that the company is perfect in maintaining the accounts. There have been various cases of unethical auditing in UAE in the past. The inability of a company or the deliberate desire not to show the job costing in the accounting have both left the culprits into serious legal situations. Emaar believes that just to prevent certain small taxes, the company would not put up a question mark on the reputation that it has made of itself in so little time. The analysis of Job costing method of costing can be done as follows:

    Material Costs

    The total amount of cost that is incurred with respect to the parts and also supplies with respect to the job are included in the material costs. All the processes that are involved in laying down an infrastructure require materials. For example, the heating of substances or cooling for that matter is included in the cost of materials. Even the processes like carrying, plumbing, etc involve materials which are included in the material cost. These are some very basic and minimal costs as well that are associated with the same. These costs need to be put into account. As we all know, corporate is about mutual benefit, if these costs are put into the income statements of the company, they might cost them a little more of compensation to be paid but finally, in the long run it would only cumulate as the benefits of the company.

    Labour Costs

    One of the major reasons of failure for a number of companies has been the inability to track the labour costs that are associated with the company. When a proper accounting method is deployed, the company would always track the current cost of labour rather than estimating the cost of production as it was in the past. Here, in UAE, the costs of labour were not as much a few years ago. Now, that the demand of infrastructure has gone to such large extents, the cost of labour has also gone up many folds. This is the reason that much of the past predictions have given false results and subsequently resulted into losses for the other companies. Even the effect of recession has been of some magnitude in the past few years. This is the reason that cost of labour is not the same. So, if Emaar feels that the cost of labour to make the Dubai Mall would be the same in making a new project of similar magnitude, there are very few reasons to believe it. The company would actually need to calculate the presented price which can be done by the help of job-costing method. Any confrontation whatsoever with the present; should be eliminated.

    Other Direct Job Costs

    As far as the processes of doing certain jobs are concerned, the costs related are also different. This is because, these processes are not as per as the plans of the company. So, any cost that is particular with respect to the project or the job has to be taken into account. Some of these costs that are incurred by Emaar are gas used for lighting purposes for iron using activities or also the rent of the equipments that are specifically required for a particular job. All the costs that are also related to the sales of the infrastructure as a result should also be included in the labour costs for which the job-costing method should be applied.

    Overhead Costs

    There are some overheads as well that the company needs to encounter when the job costing method is applied. These are either general or administrative in nature. They can be of many types in the same category. Some of the most often used overhead costs include administrative salaries, insurance costs, rent for the different facilities, other utilities, officers' salaries etc. As far as the facilities are concerned, they can also be of various natures when it comes to a single project. For example, if Emaar uses the facility of helipads which are only a part of the project, it would have to undergo a special costs associated with the same. The company would have to pay for the rents of using it. There are also many other areas where the company has to face costs which are not a part of the ones that are planned by the company.

    Completed Bid Net Profit

    The total amount of money that the company desires at the end of the project is termed as the completed bid net profit. As this is a specific amount that the company always wants, all the above mentioned costs must definitely be mentioned. There are certain occasions, when companies in a spree to make maximum profits, do not spend as much as they should be spending on the above mentioned activities. Certainly the cost of production comes down, but as the job costs are for special purposes, such policies bring the reputation of the company down by a large extent. Hence, the complete bid net profit must be calculated with optimality in costs so as to make profits without doing away with the reputation. It can be expressed in percentage of the total amount of costs that is incurred in making these special jobs a practicality. (Job Costing, 2010)

    Contract Costing Methods


    It is not possible for Emaar to be able to do all the processes that are involved in a certain contract. Hence, the company often sub-contracts certain tasks of the type of electrical, carpentry, flooring of a special kind and also many more of similar kinds. This is called as sub-contracting. Emaar had done a considerable bit of sub-contracting in the making of Dubai Mall. As the mall is the largest of its kind in the world, the electrical and flooring facilities of the mall were all sub-contracted so that the experts of the respective field is able to take care of the work and come with the best results. Another property of a sub-contract is that the sub-contractor is not paid directly paid by the customers. The payment is done by the main contractor. So, in case of the projects taken by Emaar, the subcontractors are paid by the company. The company has a separate account that is called as the contact account. So, this is the costing method that is used in this case.

    Retention Money

    Retention money is kept from a security purpose. Under any form of sub-contracting, Emaar ensures that that a part of the contract price is kept safe and is paid at a later stage when the project is completed. So, costing method is applied especially for the same. This ensures that the person, to whom the sub-contract has been given, performs all the work related to the contract in a perfect manner. This means that there is no requirement of any repair work post-submission of the project. This form of costing also ensures that the sub-contracts are finished within the time had been stipulated for the same. The amount which the company withholds, to be given at a later stage, is termed as retention money. So, one can say that this form of working is basically required so that sub-standardization of work is prevented. This is done in the best of interests of the company.

    Escalation Clause

    There are also chances where in course of a particular project, the prices start to fluctuate. This can be due to the inflation effect that is predominant in UAE these days or some other reason for that matter that may relate to demand or supply rise or even vice versa. Under the conditions, the prices that relate to material or labour can fluctuate. SO, the contract price is also altered so that the effect is not borne by the person who has been given the sub-contract. The accounting is maintained considering this rise in price or fall as the case may be. So, under the contract costing, the person who has been given the responsibility to take care of the sub-contract inserts a clause. This clause with the fact that the contractee would have to pay for the price rise if any in terms of labour, material or even the other costs for that matter. The clause for doing the same is called as the 'escalation clause'. There are also chances that the fluctuation in price brings down the cost of material, labour or the other costs as well. SO, the contractor would now have to pay the excessive amount to the contractee. This clause is called 'descalation clause'. But it also be understood, that the terms and conditions of the clause are also clear. They have been stated as follows:

    • One must specify the elements on which the quotation is based.
    • All the elements which are likely to cause escalation also need to be specified.
    • This escalation should be for those factors which are not under the control of the person who has given the contract.
    • The clause should also mention the date with effect from which the rise in the price would follow.
    • The person who gets the contract should always keep a record with Emaar so that it can be inspected any time.
    • The contract price can also be altered under conditions like change in price but under conditions like defects.

    After the above essentials are maintained, the contract based costing would be perfect as desired by the company.

    Profit on Uncompleted Contract

    There are four different rules which decide the profit for the uncompleted work. Even though there does not exist any hard and fast rule for doing the same but the following are the five rules that Emaar generally uses in the costing method in this respect:

    The first of the rule stands for the work which is less than or equal to 25% of the entire contract. Under the conditions, there is no profit that is transferred to the income statements. Whatever the amount of money is, it is carried forward. This is done in a reserve mode.

    The second form is for the completion of work between 25 and 50%. In this case, one-thirds of the profit is transferred to the income statements and costing methods are applied accordingly. Whatever is the remaining amount, it is carried over as reserve. The formula use here is as follows:

    (Notional Profit* Cash Received) / 3*Work Certified</p>

    The third rule is for more than half done but still not towards completion. Under the situations, two-thirds of the profit is transferred to the income statements and the rest of the amount is transferred to the work-in-progress account.

    The fourth rule is for the time when the contracts near completion. Here, the company is in a position to estimate the cost of the project. The profit can thus be estimated which is the difference between the contract price and the total estimated cost. The profit that goes into the profit and loss statement can be calculated as:

    (Estimated Profit*Work Certified) / Contract Price (Contract Costing, 2010)

    Process Costing

    There are a number of projects that are undertaken by Emaar where the entire project is completed in stages, before it is finally presentable to the customers. In this case the process based costing method is used. The costs in this case are also determined as per as the stages or the processes that for the entire project. The major feature of this form of costing is that the output of one process becomes the input for the subsequent process. The reason for the same is that it is on the basis of the success or the failure of a particular process that the processes that follow depend. So, this is a highly linked form of costing which has to be handled with care throughout. It is generally undertaken for very large projects that Emaar takes up. For example, in the recently completed project of the tallest tower in the world, Burj Dubai, the process costing method was involved. The company ensured that there is no fallacy left in between for the dream to become a reality. So, Emaar kept milestones at every step which were even called as the processes. It is actually against the type of costing method used in Emaar. Generally, process based costing is used in industries like textile and oil refinery but in this case Emaar is also using it being an infrastructural company. This determines the seriousness with which the company takes every process or small step. This is the reason that the company has been able to complete such big projects in the past and has also been planning for the same in the future. Even the recent Palm Island which has been completed under the guidance of Emaar, was made under the process based costing. So, Emaar has given enough reasons to prove itself as a pioneer in the industry. The company maintains separate accounts for every process involved in making such a huge processes a success.

    The following are the specific characteristics that are seen in the process based costing that is used by Emaar in its operations:

    The outputs at each of the process are homogenous in nature.

    The processes should be carried in different stages. All these processes are of a continuous nature. Much of the switching time in the industry is wasted in circumstances where there is a huge pause between two processes. The relaxation time in Emaar is minimized which does not only save time but also brings the costing level down to a considerable extent.

    The continuation at Emaar is generally given a pause when the machinery required for the subsequent processes need to be shut down from maintenance purposes. For example, the flooring machinery used in the Dubai mall had to be shut down for maintenance at the end of each of the stages which the company now calls as processes. This sort of pauses do not cause the production cost to rise. In fact they make it even more economical to work because the machine gives a better output for the subsequent processes which compensates the cost involved in doing the same.

    The company ensures that even if the project might not be as large as some of its other projects, there have to be at least a couple of processes through which the early stage input would have to pass through before the final project is completed. The reason for Emaar to adapt to this strategy is that it increases the efficiency of the entire system as a result. With two different milestones set, the chances for failure would definitely be lowered. The control measures would be taken at both the processes which are responsible for decreasing the chances of any failure in the making.

    There are also chances that the output that comes from a certain process which is not the last one becomes saleable. This has happened to some of the villas that the company has made. Much of them have been made from the customized perspective. But before it is done, there can be customers who would settle for the condition of the villa before the final touches are given. The Company has laid a provision of generating customers from this motive as well. This has also lifted the villa business of the company by a large extent.

    Emaar has also given a privilege to the intra organizational members that the inputs for a particular process can be outsourced. This in some of the cases refers to as the sub-contracting case that had been discussed in the previous section. But, this obviously can't be for the first process.

    Generally, the output that comes from a particular process is transferred to the subsequent process at the cost of making that process a success. At times, this can also be done at the rate at which the process would be sold at the market. This is done so as to check the total cost of production of the processes is all hired from elsewhere. Then it is compared to the actual cost that went behind making the set of processes. This way the company can understand the amount of savings it makes by an integral processes approach. This is then conveyed to the entire intra-organizational members. They realize the savings and it serves as a motivation to help them perform even better in the future. This way we can see that even the costing methods can be responsible for generating an employee motivation technique.

    The company is always ready to face the normal and also the abnormal losses that are associated with the company. This can be in terms of the incompatibility between the two processes. Though these cases are very rare, Emaar has one of the best risk management facilities to take care of them. So, we also see that the costing methods of the company have a close link with the risk management measures as in this case. (Process Costing, 2010)

    Service (Operating) Costing

    Amongst the costing methods that Emaar takes into account to carry out the diversified lot of projects, major emphasis is given to services costing. In this form of costing, the company does not provide any tangible structure or types for that matter but it only includes providing services to the customers. As Emaar has been associated with providing infrastructure to construct more than 14,000 homes and also developed its interests in other fields, it becomes a necessity for the company to provide services for the same. This is the reason that the company undergoes a number of renovation programs after every year so as to suit the likings of all the customers. The costs are borne by the customers themselves after a few years of service. Similar is the case with the commercial malls, hotels, offices and buildings of other interest as well. The company maintains its perfectionist image by maintaining accounts for even these activities that it performs. Apart from this property renovation service that the company provides, it also takes care of serving the sub-contracted part. As for example, the lifts used in huge buildings, the flooring used for generating distinguishable finesse and others are also included as the services of the company. The company certainly gives an option to the users to take care of the same on their own but the authenticity that the company provides in this respect is always appreciated by the customers. This is the reason that the company has to maintain the services accounting with a huge concern.

    One of the most significant areas that Emaar serves is the education sector as we have already seen. The company has blessed the country with the very famous Raffles International School opened in UAE. The company provides services in the form of nurseries, international schools and also universities so as to ensure the fact that the people of the country are given the correct form of education at the correct time. The company serves the people by an integrated approach so as to provide the best quality education all around the global campus or network that it boasts of. Emaar understands the fact that no form of education is complete without a suitable amount of training. So, the company has kept a separate entity of training in its costing method so as to realize the significance of the same. The company uses separate costing to make long-term strategic agreements with institutions like Australian Box Hill Institute TAFE, so as to provide the best that is possible.

    The company incurs separate costing for the services that it provides in the education sector. The reason for the same is that this categorization of services would make it more authentic and justifiable for the users in the future. As for example, the company has made a mark in the curriculum and also the hands-on approach. This ensures that the students get the opportunity to have the best of practical experience. The company is very particular about letting the students know about the type of industry they would be working in the future. This is the reason that Emaar has separate costing method for even training in this regard so that the students get the industry-specific knowledge that would be ever useful for them in the future. The company has also been generous enough to provide educational programs in the area of hospitality management and business management as well. Here again, the company has ensured that the costing methods are kept for these entities as well. This is the reason that for every bit of service that the company provides, the acceptability in the market. If the costing methods are applied to the service sector as well, the returns are likely to be greater.

    It would be incomplete at this point of time not to address the way the company provides service to the Montessori school that it manages. The costing of the services deliverable here are kept optimum enough so that the parents do not have to worry about the whereabouts of the children throughout the tenure at school The staff at the schools are also paid heavily as the costing of the company suggests. This is the reason that the staff here are highly experienced and qualified and live in a very well equipped atmosphere. Other than this, the schools run by Emaar are considered to produce all-round developed students whose concepts are absolutely concrete in nature. Even the study material offered as a service is mentioned in the costing for the services. This reflects the importance that the company gives to the way children in the school are nurtured. The basic attributes that the school develops in the children are in the form of independence, self esteem and also confidence. The company feels that every attribute that the students develop are a form of intangible profit to the company. This is because next time that the company issues a re-opening, the number of students would increase and the profits would hence enhance. This way the costing of the company would be compensated through the increased profits which would almost be available at the same cost. So, this is the reason that the company keeps the costing of all the small services that it provides in the income statements. By doing this, the company can also make a common size analysis of the performance. This helps in making other financial analysis like horizontal analysis and trend analysis in the future for making a comparison between more numbers of years. These analyses are only helpful in improving the costing of the company in a manner optimum with respect to the profit.

    Hence, we see that in spite of the fact that many companies feel that for a business as diverse as Emaar's such small costs really don't matter; Emaar makes sure that it maintains the costing of these services as well. We have already seen the profits both tangible and intangible in the case of Emaar. So, one can now get a clue for the incessant success that Emaar has undergone in the past. (Emaar Education, 2010)

    Multiple Costing

    This is one of the most commonly used types of costing method that is applicable in the company. Emaar has consistently been using multiple costing methods in order to make its entire projects involved simpler for cost evaluation. In this form of costing method, the company uses a combination of two or more of the above mentioned costing methods to manage its costs. The costs here are associated with the interim portion's cost and also an estimation of the total cost as a result. For example, if the company sub-contracts the flooring of Dubai Mall, it not only takes into account, the costs incurred in that particular section but also an estimate of the total cost as a result. Similarly, there are various sub contracts given to departments like electricity, plumbing, flooring, painting, information technology, carpentry and others. For all the sub contracts, the company evaluates an individual cost associated and also with the integration of all these costs, it can determine the entire cost of the project as well. This is one of the ways by which, the company can keep control over the costing of each of the contracts as well. The reason for the same is that based on the costing of the subcontracts and post estimation of total cost as a result, the company can determine whether there lies a feasibility as per as the company budget. If it is possible, the company continues with the same and if it is not, then the company would have to check for the costing method used in that particular sub-contract. If it permits, the company can make changes and if not then the subcontracting would have to shift elsewhere.

    There are many examples in the company where Emaar has used this multiple costing method approach. As the definition of multiple costing method suggest, the company can use a combination of two different costing methods in order to estimate the costs of different parts of a project, Emaar uses the service and process costing methods extensively. The reason for the same is that the company believes in the fact that if the services are rendered in a systematic manner, they would make more sense for the end users. In order to make this possible, service based costing is used integrated with the process based costing. A for example, the training programs of the company are a form of special services delivered by the company but their costing is done in processes. For the same lot of employees, the company believes that there should be phases or in costing terms processes of training. This is explicitly implemented in the Emiritization process. The employees are given first level training after which they are required to move on with a process of the project. Once the process seeks proximity towards completion, the company starts off with either on-job training or off-job training for the subsequent processes to take place. The costing that the company incurs is maintained as a part of the process but because it was that of a particular service of the company, it becomes a part of the multiple costing method. The company maintains an account of the multiple costing that is required and forms an integrated costing method for the same in the future.

    Continuing with the education sector which is an integral part of the service based costing method, there are many services here as well that are given in processes. For example, the special courses which the company provides to the university students are all unique in their own ways. These are given when the organization feels that the students require the knowledge in a specific sector so as to resolve the further cases in the infrastructure industry of the country. It is only a process that is in the form of a service. As the company does not extra for these courses, there has to be separate costing method for the same. This is the reason that here again, the multiple costing approach is used. The company has been using this method for a number of years now in the universities that it owns, and it has fetched it very good results. The infrastructure industry that Emaar rules in the country has a number of employees working from the universities of Emaar itself. These employees have actually done wonders not just for the company but also for the country as a whole. Once again we can take example of the largest mall and the tallest building for the same. So, we see that once the costing method for every activity that a company performs remains intact, things only better in the future.

    Activity Based Costing

    We have already talked of the various types of costing methods and the utilities of each of them. But as it is well known, all the activities in an organization require a pre-planned budgeting, one must ensure that the projects of the organization runs on time and within the stipulated amount that has been planned for the same. So, it is very important for any costing method that is applied to assign a particular cost in the initial stages itself to all the resources including materials and human resource as per as the actual usage of each of them. Rather than wasting on being on the optimistic side, the company should ensure that only the most optimum amount of any resource is invested for any activity no matter what costing method is being applied. Hence, one can say that more than the indirect costs, a company should rely on the direct costs that go into the making. The reason for the same is that it would certainly be better for any costing method that is involved in the making. There are many more advantages of the fact. At times a firm has to make decisions regarding the approval or the disapproval of a particular process using the process based costing method to evaluate its costing. The only other data that the company has is the past performance by applying a similar process and the likely market acceptance. With this information, the company can certainly estimate the processes that are likely to fetch lower returns because of wither being over priced or under quality. As far as Emaar is concerned; the company assigns the resource costs of each project (or a part of it as the case may be) through activities. So, before the costing method is applied, ABC method is used as a tool in order to understand the cost of products and hence determine the profitability from the same. Many of the company's decisions that have been useful in the long run have come from the activity based costing. These decisions are most likely to be of strategic nature including attributes like pricing, or hiring on contracts and also indentifying the ways by which the processes and other activities within the organization can be measured or improved as compared to the initial plans that were laid for the same. The original use of activity based costing has been in the field of manufacturing, but much to the benefit of the company, Emaar has been able to use it in its finance as well. As we are all aware of the fact that in spite of being in the property based sector, Emaar has diversified its business to a large extent in terms of types of services and the nations which it serves. As the headquarters of the company lies in UAE itself there are a number of subsidies that are cross product and cross customer as well. The company has to manage all these subsidies in United Arab Emirates itself. Because of these subsidies, the company has to incur a lot of personnel expenditure as well. Now, personal expenditure is amongst the largest non-interest expense in the company, Emaar has to attribute it adequately to all the products ad customers that are a part of the projects that the company deals with. So, one can see that in spite of having its originality in the manufacturing sector, activity based costing can be used elsewhere as well with a similar utility.

    The company can use the activity based costing in all the costing method that it applies in the following ways:

    • Cost Allocation
    • Fixed Cost
    • Variable Cost
    • Cost Driver
    • Cost Driver Rate

    There are also a number of other uses of the activity based costing before we actually start the costing methods. They have been mentioned as follows:

    It helps in the identification of the products that are inefficient in nature and also point out the departments and activities that are involved in the same. Once a company can point this out, the various personnel associated with the same are out to pressure. As a result of this, they are bound to improve upon the conditions or the company could take strict actions against the same.

    Similarly, all those products, departments and activities for which the company predicts a huge amount of profit, extra resources are allocated because the company feels that they can be used in a better way. We must remember that here again, the company is not wasting on the resources. The extra allotment is only because Emaar feels that they have a better output generation possible.

    The other utility of the same is that the company can control the costs at both individual and also at the departmental level. So, we see that in the modern world, this is one of the best cost-optimization techniques. It certainly aids the discussed costing methods by making it more efficient and less voluminous.

    Finally, of all the concepts and ideas that are used, the company can analyze all the costs that are unnecessary to it. Once again, we see that activity based costing is more of an an elimination as compared to selection.

    After a brief outlook of the utility of activity based costing, it is now important to realize that this costing model is applicable on all the costing methods. It follows the very fundamental of economics that one has to make the most out of the scarcest resources available to the company.

    As it comes with every costing model that is used in the industry, ABC models also a set of limitations which Emaar has to keep a check upon in the future. We have seen that the basic aim of the ABC model is to ensure that the company can allocate suitable resources to all the activities in the system. But there are also a number of places where the company just can't allocate some of the overhead costs to any of the processes that follow For example, there are a number of people who are in paid in common for getting activities done. The cost that is incurred for the same does not fall into the application of any of the costing methods. Such cost are given the name of business sustaining costs. There is no meaningful method to assign such costs. So, these costs are to be included in the cost of services that the company provides. So, rather than being of help to any of the costing methods, it raises the cost of production to an extent that is more than when the ABC model was initially used. There can be arguments regarding the fact that all the costs that stand as arbitrary should be allocate to the services, but at the same time it must also be remembered, that ABC model is to give an information to the management before the application in any of the costing methods. There does not stand any reason to assign cost to a product arbitrarily. Under the conditions, it becomes a little difficult for Emaar to come up to a costing evaluation decision. Moreover, the ABC model is also amongst the more expensive models that are used in the system. So, in the more recent years, Emaar has also been using the Lean accounting model in order to prevent all the complexities that are caused by the Activity based costing model. This method can be used from the accounting, controlling and also measurement purposes. Emaar has used lean accounting model to support the costing methods by eliminating cost allocation rather than bringing more complicated methods for the same. For all the services that Emaar provides that range from healthcare to infrastructure, Lean manufacturing model is highly applicable.

    Real Estate Appraisal

    It is very important for Emaar that after having applied all the costing methods, the company can develop an opinion of the value of the property that it is trading. This is also known as the Market value. As the properties are of heterogeneous nature, it is required to develop an idea of the value of each of the property. Sometimes it so happens that the costing methods give positive indication about the services rendered but the problem but the Market value of the real estate might indicate negative. Market Value is generally governed by the location of the place. So, just in order to make a justifiable deal, the company has been using the following approaches to estimate the value of the real estate that it deals:

    The Cost Approach

    This approach initially called as the summation approach has been used by Emaar to suggest the value of a property as the sum of the value of the land and the depreciation of the improvements. This value is often termed as RCNLD (reproduction cost new less deprecation). Whenever this method is used for finding the value of the real estate, the company uses it as an integration of the cost and sales approach. As for example, in order to determine the replacement cost of Dubai Marina Mall, the company would have to add the cost of labour, materials and others and also find the extent of depreciation by making an analysis of the comparable data.

    The Sales Approach

    This approach is largely based on substitution. This suggests that no person would pay more for a property as he would pay to buy a similar property. The buyers are always in a spree to use the services of only those companies which can give then the most economical deal. This method has also become very common these days especially after the hike in real estate prices. So, before coming on to deciding the price of the real estate property that Emaar deals in, the company has to use a method of data collection. This can be done by doing a secondary research. The attributes that are required to be estimated in data collection include the location of the land, the style preferred by the customers, the civic amenities that are in its close proximities, the size of the land and some others depending on the location itself. Once this data collection is done, the company would have to research the market to know of the sales data of the place, make an investigation in the market so as to know whether the data collected is correct and accurate, make a standard value of comparison and make the necessary adjustments as and how required and form a single indicator from the heterogeneous data. This would make the analysis easier.

    So, we see that costing method can be applied for better financial analysis and feasibility study of Emaar but there are also a number of other factors as well that need to be taken into account for it to be more effective. (Real Estate Appraisal, 2010)

    Emaar Facts and Figures

    The following is an example of Emaar's success with respect to the application of costing methods as discussed earlier:


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