Project Managers - Job Costing and accounting knowledge

How a Project Managers should manage job costings. 

All organisations need to develop some type of cross-referencing system to allow managers or owners to trace specific cost allocations to their source documents. The overhead has been applied directly to the job cost sheet based upon the predetermined overhead application rate of $44 per direct labour hour.

The cross-checking that is enabled by the use of the job sheet, materials requisition form and the job costs form is central to the undertaking of job costing.

Project managers should be aware that Job costing has at its core three concepts:

Job costing uses items. Items are the products and services that your business supplies. You might have many items for each of the revenue/ expense account categories in your chart of accounts. Using items, you enter the details about what you buy and sell, then link the detailed items to the more generalised accounts in the chart of accounts. Therefore whenever purchasing as well as supplying items the coding should be specific to the item type and not to an expense code on invoices, cheques or credit card charges.

Item coding must be set up correctly. In the records it must be clear that when an item is purchased or sold the transaction is accurately recorded and standard costs applied if using standard costs such as the overhead application rate.

The purchase, supply and receipt of payment for direct materials illustrate the attribution of costs to a job and its recording for entry into the general ledger.

What a project manager needs to know about double entry accounting

To understand how the purchase, supply and receipt of payment are recorded you need to understand the principles of double entry accounting. A double entry accounting system requires two entries—a debit and a credit, for each transaction. For a system to be balanced, the total debits and credits must be the same.

Sometimes the debit and credit transaction are in different account types. For example, a sale will affect the sales and cash accounts. The sales account is a revenue type account and has a credit nature, so to increase it requires a credit transaction. The cash account is an asset account (debit in nature), so to show an increase in cash we need to enter a debit transaction. If we make an account sale, we debit the accounts receivable account instead of the cash account.

The debit and credit can be in the same account type as well. If you make an account sale, you debit the accounts receivable account. When you receive payment, you credit the accounts receivable account and debit the cash account. After learning about all the different accounting and bookkeeping terms you realise you actually would prefer to study accounting or bookkeeping click on this link on the other hand if you still love project manager and want to learn more you can study a Diploma of Project Management

T accounts

T accounts are one method of recording transactions to make them easier to understand.

A page is divided in half, the left half for debits and the right for credits.

The purchase of raw materials for a job occurs in these steps:

The materials are purchased and placed in the inventory.

The materials are transferred to the production phase.

On completion of the job the materials are transferred to the finished goods inventory.

The client accepts (acknowledges receipt of work completed), the job and the materials are removed from the finished goods inventory.

The flow of costs for a new installation of PVC sewer pipe would be recorded in the T accounts in this fashion.