An activity based costing approach to systems development and implementation

Many organizations are in the process of replacing legacy systems with large, integrated systems using new technological platforms. Accurate estimation of project resources required and appropriate allocation of actual development and implementation costs to users are two critical issues faced. This study proposes an activity based costing (ABC) approach to estimating and recovering system development and implementation costs. We develop the model in the context of a bank, using a two-stage approach. A prototype is first developed using two systems projects. Development of the prototype requires us to identify the resource pools and attendant costs, the major development activities, the consumption of resource costs by activities, the primary cost driver for each activity, and the driver rates for allocating activity costs to the system being implemented. The prototype model is then refined and validated using additional data collected from another 20 projects.