Aggregating production cost and evaluating unit cost in huong giang construction company 1

Graduation thesis Aggregating production costs and evaluating unit cost Acknowledgment As this is the first time I have written this piece of academic writing, this paper would not have been completed without the assistance of several people I would like to take this opportunity to acknowledge their contribution My most heartfelt thanks must go to Prof Dr Dang Van Thanh who supervised me in writing this thesis I wish to express my special thanks to Mr Huyen – Chief accountant and all other members in the accounting department of Huong Giang construction company for providing me information, material that makes up this thesis My sincere thanks go to all the teachers at Accounting and Finance at Phuong Dong University for their encouragement and reviewing the thesis Finally, I am also deeply grateful to my family and friends for their support and suggestions Ha noi, 2003 Dang Thi Lan Anh Introduction Capital construction is one of the national economy ’s material production branch, s material production branch, that takes an important position in building infrastructure process for our country to come toward socialism So each business must find out a management method that suits its characters of production and makes the highest economic effectiveness as well In market economy, almost the business trade for the profit goals For management of company, production costs and unit cost are important economical dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost indices because they reflect level quality of production operation They effect directly to the whole business operation and take the major to enterprise ’s material production branch, s existence and development Therefore, the managers always try to find out the solution to reduce production and unit cost to the minimum Only by aggregating production cost and evaluating unit cost adequate, exact that help the managers analyze the operation results Finally, they make suitable decisions on management in order to enhance the production and management mechanism organization Realizing the importance of operation production cost and unit cost in general, specially in Huong Giang construction company where I did my graduation training, I have come to decision to make the scope of this thesis: “Aggregating production cost and evaluating unit cost in Huong Giang construction company” The thesis includes three main chapters as follows: Chapter one: General theory of aggregating production cost and evaluating unit cost in construction companies Chapter two: Huong Giang company ‘s accounting practices on aggregatings accounting practices on aggregating production cost and evaluating product of construction unit cost Chapter three: Solutions to perfect the quality of operation production cost and unit cost accounting in Huong Giang company Chapter one General theories of aggregating production costs and evaluating unit cost in construction companies In this chapter, theory on accounting for aggregating production costs and evaluating unit cost will be discussed It includes major issues as follows:  Concept of production costs and unit cost, classification and relationship between production costs and unit cost  The tenor of aggregating production costs  Estimation of work in progress  Method of evaluating unit cost Production cost and construction company: classification of production costs in 1.1 Definition: Production costs represent the moneytary value of resourses used such as labour materials, overhead incurred in production process that form the product of construction unit cost in a given period of time 1.2 Classification: Production costs can be classified in many ways depending on goals and requirements of management dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost In calculating, there are some ways to classify production costs on the basis of: 1.2.1 Classification of production costs on the basis of economic content and nature of costs According to this classification, production costs in construction company are futher divided into these components:  Raw materials cost  Tools and supplies cost  Fuel and oil cost  Labour cost  Depreciation of fixed assets  Render – services  Other expenses in cash This classification shows the structure and percentage of each cost component It is the basis of making production costs statements following elements and the plan of production costs for next period 1.2.2 Classification of production costs on the basis of purpose and utility of costs According to this classification, the same goal and utility costs are gathered in one component, it does not distinguish economic content of costs Production costs include these categories as follows:  Direct raw – materials cost  Direct labour cost  Equipment cost  Overhead costs This classification is useful for the company to communicate the data to evaluate unit cost, analyze the implementation of planned unit cost and making production costs estimation for next period 1.2.3 Classification of production costs on the basis of method of aggregating production costs: Under this classification, production costs are divided into two categories:  Unique costs can be traced directly to specific product  General costs are expenses that relating to many products They are need to separately aggregate to periodical allocate for costs center This classification helps the managers realize position of each costs in making products to set up suitable method of aggregating production costs Unit cost of construction product and classification of unit cost: 2.1 Definition: Unit cost includes all the production costs that a company has to pay to build a finished construction Unit cost of construction product includes four components such as:  Direct raw – materials cost  Direct labour cost dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost Using equipment cost Factory overhead costs   2.2 Classification: At first, in order to classify unit cost, accountants have to compute estimation of cost of construction product Estimation of cost = Cost to finish the estimation volume of construction + Normed profit Unit cost is a part of estimation cost that rounds up direct costs and indirect costs following the finished volume of construction In accounting and management, unit cost of construction product can be classified as follows: 2.2.1 Cost price of construction work: Cost price of construction work includes all the production costs to finish volume of construction following the estimate Cost price of construction work = Estimation of cost Normed profit - Or : Cost price of construction work Volume of works following Unit price is announced the economic and x by Government for each technique norms are construction area and determined by Goverment other normed costs Cost price of construction work is formed and existed in a given time It ’s material production branch, s evaluated in medium conditions of construction production, management organization, materials and labour expenses for each kind of work or for a specific work Cost price of construction work is sequently stability 2.2.2 Planned unit cost: Planned unit cost is evaluated on the basis of specific conditions features of one construction company in a given planned period Therefore, planned unit cost is an index that business try to reach in order to achieve the profit level thanks to decreasing unit cost in planned period It reflects the standard of company ‘s accounting practices on aggregatings unit cost management Planned unit cost = = Cost price - Profit base on decreasing unit cost +(-) Difference from estimate 2.2.3 Assessed unit cost: Assessed unit cost is the total expenses that cost to end a volume of construction It is calculated on the basis of structural feature, method of building organization dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost and management following costs norms that achieved at the beginning of construction Thus, assessed unit cost will changed following fluctuation method of management and organization of construction or fluctuation structural feature So, it is recomputed to be suitable 2.2.4 Actual unit cost: Actual unit cost is the total costs incurred in construction process that is aggregated by accountant The basic difference between actual unit cost with the above unit cost: Structure of these above unit cost only include normed costs but actual unit cost includes all costs incurred that means covering normed costs and extra costs In short, in order to determine accurately the quality of construction operation, it is need to compare those unit costs  Comparing actual unit cost with planned unit cost shows the decreasing level of planned unit cost  Comparing actual unit cost with estimation of unit cost reflects the accumulation index to expect the company ability in next period  Comparing actual unit cost with assessed unit cost shows the finished norms level of each specific volume of construction The relationship between production costs and unit cost Production costs and unit cost are two different terms of production process Production costs reflect the moneytary value that company cost in process and unit cost reflects the results of production All the expenses create (on this period or transferred from previous period) and precalculating costs that relate to volume of finished work will form the unit cost of construction product Thus, production costs and unit cost have closed relationship Production costs are the base to evaluate unit cost of finished products Saving or wasting of production costs effect directly to increasing or decreasing of unit cost Finally, management of unit cost must be linked to production costs management The scheme of relationship between production costs and unit cost: Costs in progress at the beginning Total of unit cost of finished products Total of unit cost of finished products = Costs create in process Costs in process at the ending Costs in progress Costs create at the beginning + in progress - Costs in process at the ending The objects and method of aggregating production costs: 4.1 The objects of aggregating production costs in accounting: The objects of aggregating production costs are defined as scale and scope of costs which accountant has to aggregate to satisfy the requirements of checking and supervising the costs in building process dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost In order to accurately determine costs objective, accountant has to base on features of production costs and the use of cost in production  The objects of aggregating production costs may be the whole technological process or each specific stage fluctuation to production mechanism organization, requirement and standard of economic management and internal accounting requirements  Following production process, product characters, the requirement of evaluating unit cost, the costs objective may be each group of products or each kind of products, or each component or details group, detail of product In construction, product is specific so that the objects of aggregating production costs may be the customer ’s material production branch, s order, each construction, part of building or group of buildings, as usual Aggregating production costs to adequate objects gives a good assistance to production costs and manufacture administration, to internal and the whole accounting of company Besides, it helps timely and accurately evaluating unit cost 4.2 Aggregating production costs method: 4.2.1 Aggregating and allocating direct raw materials cost: Direct raw materials costs are costs of major materials, semi – finished product, auxiliary materials, fuel oil used directly in manufacturing products Direct raw materials costs are usually aggregated following direct method It is applied for direct raw materials costs that are only concerned in only one cost objective If direct raw materials costs are concerned in many objects of aggregating production costs, accountant has to use indirect method That means accountant has to determine the reasonable bases to allocate direct raw materials costs by following formula: Costs Total costs to be allocated General allocate to criterion of = x object i allocation General criterion of allocation of all objects of object i To accurately aggregate direct raw materials costs, accountant has to pay attention to checking and evaluating the received materials but not using up and value of received spent materials to minus them out of direct raw materials costs Actual direct raw = materials costs Raw materials are used directly for producing process - The unused materials distributed for manufacturing are returned and stored - Value of received spent materials According to Financial Regulation issued by Ministry of Finance, in order to aggregate and allocate direct raw materials costs, account 621- “Direct raw materials ” is used dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost Chart 01: Direct raw materials costs accounting A/C 152(611) A/C 152(611) A/C 621 Raw materials are used The unused materials directly for producing process distributed for manufacturing are returned and stored A/C 154(631) A/C 111,112,331 Raw materials are not stored Transferring actual direct and used immediately for producing products raw materials costs No ending balance exists in A/C 621 4.2.2 Aggregating and allocating direct labour cost: Direct labour costs are salaries payable to employees directly involved in manufacturing Salaries includes basic wages, allowances, not includes social insurance (15%), trade union fees (2%), health insurance (2%) Direct labour costs are usually computed directly to each relating costs objective If direct labour costs involve in many objects that are not calculated directly, they could be general aggregated and allocated to costs objective by reasonable bases, at the ending of accounting period The common allocation bases are used such as assessed salary (or planned), assessed hours wage or actual hours wage, volume of products following the concretely condition According to Financial Regulation issued by Ministry of Finance, in order to aggregate and allocate direct labour costs, A/C 622- “Direct labour costs ” is used It can be opened sub – accounts depending on the features of operating activities Chart 02 : Direct labour costs accounting A/C 334 A/C 622 A/C154(631) Salaries and allowances Transferring direct labour payable to direct employees costs to cost objects A/C 335 Payable expenses for labour costs on day ’s material production branch, leave No ending balance in A/C 622 dang thi lan anh accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost 4.2.3 Aggregating and allocating factory overhead costs: Factory overhead costs are general operating expenses supporting the process of producing created at construction brigades such as expenses for factory employees, the costs of tools, supplies utilised for factory, depreciation of fixed assets, expenses for services rendered and expenses paid in cash It also includes trade union fees, social insurance, health insurance deducted from wages of direct labour, construction machinery operator and management staff Factory overhead costs are aggregated at each place At the end of month, aggregated overhead costs are transferred to evaluate unit cost Factory overhead costs of which brigades will be transferred to that brigade to evaluate unit cost of its product If one brigade produces many products in the period, factory overhead costs will be allocated to each costs objective Factory overhead costs can be allocated on the basis of:  Actual hours wage of worker  Direct materials costs  Direct materials and labour costs  Assessment of factory overhead costs It can be allocated according to the formula: Volume of factory overhead costs are allocated to each cost objective General criterion of allocation of all objects = x Total factory overhead costs must be allocated General criterion of allocation of each object According to Financial Regulation issued by Ministry of Finance, in order to aggregate and allocate factory overhead costs, A/C 627 – “Factory overhead costs ” is used Accountants may open some sub- account to record specific expenses for their own operations In addition, upon the Directive 89/2002/TT-BTC: Guidung accountants to practice four Vietnamese accounting standards issued following Decision 149/2001/QDBTC dated December 31/2001 of Minister of Finance, Ministry of finance supplements account 242 – “Long term prepaid cost ” This account used to record expenses which relate to several fiscal periods and they therefore can not be charged wholly to the current period but should be allocated to the periods in which they relate Chart 03 : Factory overhead costs accounting A/C 334,338 dang thi lan anh A/C 627 A/C 154(631) Allocating and transferring fixed factory overhead costs to each unit ‘s accounting practices on aggregatingaccounting s fabricatingand cost auditing following normal capacity Graduation thesis Aggregating production costs and evaluating unit cost Salaries , allowances payable to factory employees and social insurance , health insurance , trade union fees for worker , machinery operator and factory employees A/C 152 Materials costs A/C 153 Tools are used with low value A/C 142,242 Tools with The first high value A/C 111,141,331 allocation Expenses rendered and others in cash A/C 241(3) Depreciation of fixed assets Increased depreciation level because of fluctuation of depreciation method or time A/C 241 Repairing and upgrading fixed assets with short value that not satisfied the condition of recording increased cost No ending balance in A/C 627 4.2.4 Aggregating and allocating machinery cost: Equipment costs includes two types:  Temporary costs are one time incurred costs that relating to assembling, removaling, carriage machines and others for temporary constructions supporting for using equipment This kind of costs are allocated following the using time of temporary constructions or construction period at building site (which is shorter will be choosed to be allocation base) Calculating the monthly volume of allocation as follows: Volume of temporary cost monthly dang thi lan anh allocation Actual costs to build temporary constructions + Estimated disassembling temporary construction costs - Estimated recoverable value of spent materials accounting and auditing Graduation thesis Aggregating production costs and evaluating unit cost = Using time of temporary constructions or construction period at work camp Temporary costs are also calculated by preseting aside into equipment costs When ended using temporary constructions, the differences between actual incurred cost with preset aside costs are recognized as regulations  Regular costs include daily incurred for using machines process such as: fuel , oil costs, other auxiliary materials costs, salaries of machinery operators, depreciation of fixed assets, rendered machines costs These expenses are computed one time to equipment costs in period 4.2.4.1 Company has organized separate equipment brigades with accounting classifications These brigades have their own accounting work a If company practice by method of supply equipment services among internal sections, the accounting chart as follows: (Chart 04) A/C 111,152 A/C621,622,627 A/C154 A/C 623 Aggregating Transferring costs to Allocating actual costs evaluate unit cost equipment costs to objects b If company practice by method of purchase equipment services among internal sections: A/C 111,152 , A/C 621,622,627 A/C 154 A/C 632 Actual price of purchased Machines shift A/C 512 A/C 623 Purchased price Computing to equipment cost A/C 333(1) A/C 133(1) Taxes payable to state budget Taxes deducted 4.2.4.2 Company has not organized separate equipment brigade or organzied but not graded them: A/C 334 A/C 623 Salaries pay to workers dang thi lan anh A/C 214 accounting and auditing Depreciation of construction equipment