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Project accounting is a type of managerial accounting oriented toward the goals of project management and delivery. It involves tracking, reporting, and analyzing financial results and implications, [1] and sometimes the creation of financial reports designed to track the financial progress of projects; the information generated by this analysis is used to aid project management. [2]
While project accounting was traditionally used for large construction, engineering, and government projects, it has now expanded into several other sectors.[ citation needed ] It is commonly used by government contractors, where the ability to account for costs by contract (and sometimes contract line item [CLIN]) can be a requirement for interim payments. [3] A specialized form of project accounting, production accounting, is used by production studios to track an individual movie or television episode's costs. [3]
The capital budget processes of large corporations and governmental entities are chiefly concerned with major investment projects, which typically have significant upfront costs and benefits realized over the long term. Investment "go/no-go" decisions are largely based on net present value assessments; project accounting and cost/benefit analyses provide vital feedback on the quality of those decisions. [3]
Projects (which may be independent undertakings or occur as part of a larger program) differ from a company's routine activities in a number of ways: they frequently involve efforts across departmental boundaries, and their budgets may be revised many times over the course of their execution (which can range from days to years). [4] Accordingly, in a project accounting paradigm, certain projects are considered separate entities in the course of working on products which require separate financial management, a task for which existing management accounting and financial accounting techniques are often insufficient. [1]
Project accounting (which involves elements of management accounting and financial accounting) is differentiated by a number of unique practices:
The role of a project accountant depends on a project's needs. They often monitor the financial progress of projects, investigate variance, and approve expenses, while ensuring that project billings are issued to customers and payments are collected. [5] Project accountants play a dual role of gatekeeper (reporting a view of how the project is tracking financially) and advisor (advising the project team on the financial treatment and implications of decisions). The project accountant can also act as a liaison between the project itself and the business's financial or accounting departments. [6]
Where labor costs are a significant portion of the overall project cost, it is usually necessary for employees to fill out timesheets in order to generate the data to allocate project costs. [7] [8]
Percentage-of-completion is frequently independently assessed by a project manager, program management officer (PMO), or project accountant. This measurement includes the continuous recognition of revenue related to longer-term projects; by doing this, the seller is able to identify gains or losses relevant to a project in every active accounting period. Funding advances, and budget-to-actual-cost variances, are calculated using the project budget adjusted to percent-of-completion. [7] [9]
While the percentage-of-completion method permits companies to track profits while progress is made toward completing projects, this method cannot be used effectively when uncertainties exist about the percentage of completion or remaining costs. [9] The percentage-of-completion may be measured in any of the resulting ways: [9]
In the cost-to-cost method, a project's cost to date is compared to the total expected cost of the project. The costs of products already bought for a contract, but not installed, should not be added in calculating the percentage of completion (unless they were specifically obtained for that contract). Furthermore, the cost of equipment is assigned over the course of the contract, rather than directly, unless title to the supplies is being transported to the customer. [9]
In the efforts-expended method, the share of effort consumed to date is compared to the total effort expected for the project. For example, the completion percentage may be established on direct work hours, machine hours, or quantities of material. [9]
In the units-of-delivery method, the portion of units delivered to the buyer is compared to the overall number of units to be delivered under the terms of a contract. [10] This method, obviously, can only be used on projects consisting of the delivery of multiple units. The calculations involve revenue (the contract price of units delivered) and expenses (the costs that can be reasonably allocated to the units delivered). [9]
Production accounting is used to manage finances and financial records in the film industry and television production. Production accountants work in close association with the producer and the production office. [11]
Cost accounting is defined as "a systematic set of procedures for recording and reporting measurements of the cost of manufacturing goods and performing services in the aggregate and in detail. It includes methods for recognizing, classifying, allocating, aggregating and reporting such costs and comparing them with standard costs." (IMA) Often considered a subset of managerial accounting, its end goal is to advise the management on how to optimize business practices and processes based on cost efficiency and capability. Cost accounting provides the detailed cost information that management needs to control current operations and plan for the future.
In management accounting or managerial accounting, managers use accounting information in decision-making and to assist in the management and performance of their control functions.
Inventory or stock refers to the goods and materials that a business holds for the ultimate goal of resale, production or utilisation.
Cost of goods sold (COGS) is the carrying value of goods sold during a particular period.
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used.
A budget is a calculation plan, usually but not always financial, for a defined period, often one year or a month. A budget may include anticipated sales volumes and revenues, resource quantities including time, costs and expenses, environmental impacts such as greenhouse gas emissions, other impacts, assets, liabilities and cash flows. Companies, governments, families, and other organizations use budgets to express strategic plans of activities in measurable terms.
Activity-based costing (ABC) is a costing method that identifies activities in an organization and assigns the cost of each activity to all products and services according to the actual consumption by each. Therefore this model assigns more indirect costs (overhead) into direct costs compared to conventional costing.
Throughput accounting (TA) is a principle-based and simplified management accounting approach that provides managers with decision support information for enterprise profitability improvement. TA is relatively new in management accounting. It is an approach that identifies factors that limit an organization from reaching its goal, and then focuses on simple measures that drive behavior in key areas towards reaching organizational goals. TA was proposed by Eliyahu M. Goldratt as an alternative to traditional cost accounting. As such, Throughput Accounting is neither cost accounting nor costing because it is cash focused and does not allocate all costs to products and services sold or provided by an enterprise. Considering the laws of variation, only costs that vary totally with units of output e.g. raw materials, are allocated to products and services which are deducted from sales to determine Throughput. Throughput Accounting is a management accounting technique used as the performance measure in the Theory of Constraints (TOC). It is the business intelligence used for maximizing profits, however, unlike cost accounting that primarily focuses on 'cutting costs' and reducing expenses to make a profit, Throughput Accounting primarily focuses on generating more throughput. Conceptually, Throughput Accounting seeks to increase the speed or rate at which throughput is generated by products and services with respect to an organization's constraint, whether the constraint is internal or external to the organization. Throughput Accounting is the only management accounting methodology that considers constraints as factors limiting the performance of organizations.
In business and accounting, net income is an entity's income minus cost of goods sold, expenses, depreciation and amortization, interest, and taxes for an accounting period.
The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are recognized when they are realized or realizable, and are earned, no matter when cash is received. In cash accounting – in contrast – revenues are recognized when cash is received no matter when goods or services are sold.
Construction accounting is a form of project accounting applied to construction projects. See also production accounting. Construction accounting is a vitally necessary form of accounting, especially when multiple contracts come into play. The construction field uses many terms not used in other forms of accounting, such as "draw" and progress billing. Construction accounting may also need to account for vehicles and equipment, which may or may not be owned by the company as a fixed asset. Construction accounting requires invoicing and vendor payment, more or less as to the amount of business done.
A cost overrun, also known as a cost increase or budget overrun, involves unexpected incurred costs. When these costs are in excess of budgeted amounts due to a value engineering underestimation of the actual cost during budgeting, they are known by these terms.
In business, overhead or overhead expense refers to an ongoing expense of operating a business. Overheads are the expenditure which cannot be conveniently traced to or identified with any particular revenue unit, unlike operating expenses such as raw material and labor. Therefore, overheads cannot be immediately associated with the products or services being offered, thus do not directly generate profits. However, overheads are still vital to business operations as they provide critical support for the business to carry out profit making activities. For example, overhead costs such as the rent for a factory allows workers to manufacture products which can then be sold for a profit. Such expenses are incurred for output generally and not for particular work order; e.g., wages paid to watch and ward staff, heating and lighting expenses of factory, etc. Overheads are also a very important cost element along with direct materials and direct labor.
Job costing is accounting which tracks the costs and revenues by "job" and enables standardized reporting of profitability by job. For an accounting system to support job costing, it must allow job numbers to be assigned to individual items of expenses and revenues. A job can be defined to be a specific project done for one customer, or a single unit of product manufactured, or a batch of units of the same type that are produced together.
Percentage of completion (PoC) is an accounting method of work-in-progress evaluation, for recording long-term contracts. GAAP allows another method of revenue recognition for long-term construction contracts, the completed-contract method.
A glossary of terms relating to project management and consulting.
The following outline is provided as an overview of and topical guide to project management:
The following is a glossary of terms relating to construction cost estimating.
Standard cost accounting is a traditional cost accounting method introduced in the 1920s, as an alternative for the traditional cost accounting method based on historical costs.
Udom Gabriel Emmanuel//(listen) is a Nigerian politician who is currently the Governor of Akwa Ibom State, in office since 29 May 2015. He contested for the office of governor in the April 2015 elections on the platform of People's Democratic Party. He was re-elected as the governor of Akwa Ibom State on 29 May 2019.