Introduction
Expenses incurred during the course of a project are recorded in specific job cost accounts. The entries in job cost accounts are made based on material issue slips, departmental labor utilizations sheets etc.
In addition to cost amounts, information on material quantities and labor inputs is recorded in each job account. With this information, actual materials usage and labor employed can be compared to the expected requirements.
The number of accounts associated with a particular project can vary considerably. For constructors, on the order of four hundred separate accounts might be used on a small project. Separate accounts might exist for different types of materials, equipment use, payroll, project office, etc. Both physical and non-physical resources are represented, including overhead items such as computer use or interest charges.
Table of project cost accounts summarizes a typical set of cost accounts that might be used in building construction. This set of accounts is organized hierarchically, with seven major divisions (accounts 201 to 207) and numerous sub-divisions under each division. This hierarchical structure facilitates aggregation of costs into pre-defined categories; for example, costs associated with the superstructure (account 204) would be the sum of the underlying subdivisions (ie. 204.1, 204.2, etc.) or finer levels of detail (204.61, 204.62, etc.). The sub-division accounts could be further divided into personnel, material and other resource costs.
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TABLE: Project Cost Accounts |
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201 |
Clearing and Preparing Site |
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202 202.1 202.31 |
Substructure Excavation and Shoring Mixing and Placing |
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203 |
Outside Utilities (water, gas, sewer, etc.) |
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204 204.1 204.61 204.7 204.71 |
Superstructure Masonry Construction Finish Flooring, Stairs, Doors, Trim Service Work Electrical Work |
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205 |
Paving, Curbs, Walks |
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206 |
Installed Equipment (elevators, revolving doors, mailchutes, etc.) |
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207 |
Fencing |
(Source: http://pmbook.ce.cmu.edu/12_Cost_Control,_Monitoring,_and_Accounting.html)
Financial Accounting System and Cost Accounting System
Project costs are always included in the system of financial accounts associated with an organization. All expense transactions are recorded in a general ledger. The general ledger of accounts forms the basis for reports on particular projects as well as the financial accounts for an entire organization.
In construction firms, particular problems arise in the treatment of uncompleted contracts in financial reports.
Under the "completed-contract" method, income is only reported for completed projects. Work on projects underway is only reported on the balance sheet, representing an asset if contract billings exceed costs or a liability if costs exceed billings. When a project is completed, the total net profit (or loss) is reported in the final period as income.
Under the "percentage-of-completion" method, actual costs are reported on the income statement plus a proportion of all project revenues (or billings) equal to the proportion of work completed during the period. The proportion of work completed is computed as the ratio of costs incurred to date and the total estimated cost of the project. Thus, if twenty five percent of a project was completed in a particular period at a direct cost of $180,000 and on a project with expected revenues of $1,000,000, then the contract revenues earned would be calculated as $1,000,000(0.25) = $250,000. This figure represents a profit and contribution to overhead of $250,000 - $180,000 = $70,000 for the period.
Note that billings and actual receipts might be in excess or less than the calculated revenues of $250,000. On the balance sheet of an organization using the percentage-of-completion method, an asset is usually reported to reflect billings and the estimated or calculated earnings in excess of actual billings.
The supervising architect determines the percent of completion.
The "percentage-of-completion" method of reporting period earnings has the advantage of representing the actual estimated earnings in each period. As a result, the income stream and resulting profits are less susceptible to violent swings on the completion of a project as can occur with the "completed contract method" of calculating income. However, the "percentage-of-completion" has the disadvantage of relying upon estimates which can be manipulated to obscure the actual position of a company . As a result, interpretation of the income statement and balance sheet of an organization is not always straightforward. There is tax disadvantage from using the "percentage-of-completion" method since corporate taxes on expected profits may become due during the project rather than being deferred until the project completion.
References
Index of articles on Cost Accounting, Costing and Cost Management
http://knol.google.com/k/narayana-rao/project-cost-accounting/ 2utb2lsm2k7a/ 577
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