project cost accounting

project cost accounting

The Importance of Project Cost Accounting in Business Operations

1. Introduction to Project Cost Accounting

Project Cost Accounting, a specialty in the field of Cost Accounting, is concerned with financially recording costs and creating useful information for project management and financial management purposes. These financial details are recorded in the ledger accounts of the project. The ledger accounts for a project are not mingled with those of daily operations. The organization will have a separate binder of accounts (memory) for each project with those binders functioning as the equivalents of a human’s memory. The individual binders of accounts, developed by an organization throughout time, are acquired for future retrieval in the event an accountant or manager wants to recall specific financial details. Accurate records need to exist and be maintained if a project is to accomplish its intended goals. Providing information to project management and financial management individuals is a means of cause and effect. In providing useful and reliable project information, the business of Project Cost Accounting can help assure that the finance phase of the project is planned, initiated and carried out competently and in accordance with association by-laws.

In the conduct of business affairs, as in any other field of human endeavor, it is essential to have an organized framework for the implementation of its strategies and tactics. Business operation, as an activity common to every member of the human business affairs, merge into the economy as a whole. In today’s complex world of business management, projects of a price exceeding approximately $1,500 are usually handled separately through the use of project planning, control and accounting techniques. Activities involved in a project often are dissimilar from the activities in daily operations. However, the basic financial questions: What is the total implementation cost of the project? What are the individual costs of the different components of the project? What financial incentives accrue from the completion of the project? are of prime importance to the owner of the project at any phase of its lifetime.

2. Key Concepts and Principles of Project Cost Accounting

The essence of project accounting might be summarized in two formulation sentences: To understand how one accounting project motivates and mobilizes company stakeholders to efficiently create value in the company. Furthermore, to understand how these parts are accounted to justify initiatives and projects, and in accordance with the actions taken and the decisions made to respect the obligation of rendering accounts associated with the project.’

Findings – A project, apart from representing what the company’s business really is, must be judged as a financial responsibility center that aims to create economic value for the business. The legislation, the accounting system, management, and control mechanisms provide the business with a set of rules and practices that associate the costs of the resources consumed with its objectives and results.

Approach – This is a conceptual paper that comes from the authors’ professional experiences and aspirations.

Purpose – Most company managers, including financial managers, look at the company’s business activities as a succession of projects. Being so, the paper intends to present basic principles and concepts of project accounting that might be considered in the specific analysis and management of profit-oriented companies.

‘Abstraction – Project cost accounting is an important tool in the management strategy of the company as a whole. The paper presents part of the basic principles and concepts of project cost accounting that are also applicable when managing projects or any other forms of business activities.

3. Methods and Techniques for Project Cost Accounting

Accounting torque is used to separate, identify, and account for costs associated with creating products and services. Its development occurred long ago with primary emphasis on manufacturing products such as clothing, automobiles, and appliances, farming, and construction, and providing services such as medical treatments, education, and transportation. Then, with the declining importance of agriculture, manufacturing, and traditional services, Industrial and Systems Service Companies came into the spotlight. However, cost accounting was not designed to cope with the management demands imposed by our rapidly changing ISSC-based world of today. Summarizing various types of costs at a particular level of an organization is not always appropriate. Costs that, when added together, make a product unprofitable are often unidentifiable. Focusing only on operational internal costs while ignoring the external costs brought about by particular product decisions encourages making unprofitable decisions, which do not contribute to the generation of net income but merely keeping employees and functions busy.

The purpose of this section is to understand the financial challenges of ISSC firms and to examine methods and techniques used for project cost accounting in managing cost during project planning and project execution such as activity-based costing, earned value management, budgeting, and cash flow estimation. Cost accounting is an important part of project management. It is instrumental in identifying and maintaining the expected level of cost for a project. There are methods and techniques in project cost accounting, which when applied appropriately, are used to attain the highest level of return on the money invested in executing the project. The aim of project contractors is to accurately predict project costs and make necessary adjustments when needed, and that all clients and investors expect received results to be within project costs.

4. Benefits and Challenges of Implementing Project Cost Accounting

Implementing project cost accounting may bring about certain benefits. Putting attention to project cost data surely has its perks. First and foremost, the information allows better management of business. Appropriate business decisions are of course critical if businesses were to prosper. Making the wrong decisions is not just costly, sometimes, decisions can be too costly for the business to bear. In addition, information from project cost data which assist in the productive capacity and resources of the business can reduce unnecessary resource consumption and production stagnancy. By managing costs directly attributable to projects, and in particular understanding project costs usefulness, project contribution and the correlation between these two areas, can a business reap the benefits that project cost accounting potentially brings.

Implementing project cost accounting obviously has its challenges which businesses expect to face. Inadequate systems, processes, and more importantly, the lack of understanding and accountability among contributors are commonly reported reasons. However, the benefits one enjoys from implementing project cost accounting should surely be expected to be higher than the cost. As a result, more businesses are now aware and thus keen of the why and the how about project cost accounting.

5. Case Studies and Real-World Applications

Projects entail costs – costs of land, buildings, days of labor, shock-responsive aluminum, energizing rest and recreation, hours of expertise, material for advertising. When the project is repaid its costs over the years, these costs translate reasonably well into revenue, profit, tax benefit of interest. Costs matter in that equation. Reflective of this fundamental mutual project cost-versus-wealth value between the project creator and the financial stakeholders, accounting practice has always recognized profit as the notional source of friction within a single timeframe in reconciling the wealth value. Accolades aside, this recognition can sometimes appear single-minded in that the accounting of wealth measures cash flows, not benefits, and foremost in the thought of project creators is the creation of benefit, which accounts also for the actual spending effect of project costs.

Given the pervasive importance of cost data for so many aspects of a firm, it is surprising that accounting methods to measure the direct and indirect costs of projects – spanning a physical building, science research, advertising, software development, a consulting proposal – have received so little attention in the literature. Our project cost accounting method includes the cost of debt, risk, and time. It represents project costs in perpetuity and satisfies standard accounting principles. The method is essential in two contexts. First, the costs maximize the net worth of a project owner and reflect costs incurred in exchange for the funding of the project. To this extent, the costs affect how the project owner finances the project and, as a result, investor decisions. Second, the costs reflect the costs foregone by employees working on firm-sponsored projects, affecting the sustainability of the firm’s operations.