Aggregating production costs and evaluating unit cost

pany 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, 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 indices because they reflect level quality of production operation. They effect directly to the whole business operation and take the major to enterprise’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 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. 1. Production cost and classification of production costs in construction company: 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. 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. 2. 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 Using equipment cost Factory overhead costs 2.2. Classification: Normed profit Cost to finish the estimation volume of construction Estimation of cost At first, in order to classify unit cost, accountants have to compute estimation of cost of construction product. + = 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. Estimation of cost Cost price of construction work = - Normed profit Unit price is announced by Government for each construction area and other normed costs Volume of works following the economic and technique norms are determined by Goverment Cost price of construction work Or : = x Cost price of construction work is formed and existed in a given time. It’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 unit cost management. Difference from estimate Profit base on decreasing unit cost Cost price Planned unit cost - = +(-) 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 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. 3. 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 + Costs create in progress - Costs create in process Costs in process at the ending = Total of unit cost of finished products Costs in process at the ending Costs in progress at the beginning Total of unit cost of finished products 4. 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. 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 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. General criterion of allocation of object i 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: Total costs to be allocated Costs allocate to object i = General criterion of allocation of all objects x 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. The unused materials distributed for manufacturing are returned and stored Value of received spent materials Raw materials are used directly for producing process Actual direct raw materials costs - - = 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. Chart 01: Direct raw materials costs accounting A/C 152(611) Transferring actual direct raw materials costs Raw materials are not stored and used immediately for producing products A/C 111,112,331 The unused materials distributed for manufacturing are returned and stored Raw materials are used directly for producing process A/C 621 A/C 152(611) A/C 154(631) 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 Payable expenses for labour costs on day’ leave A/C 335 Transferring direct labour costs to cost objects Salaries and allowances payable to direct employees A/C 334 A/C154(631) A/C 622 No ending balance in A/C 622 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: x General criterion of allocation of each object Total factory overhead costs must be allocated General criterion of allocation of all objects = Volume of factory overhead costs are allocated to each cost objective 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/QD-BTC 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 Decreased depreciation of intangible fixed assets is different from a certain amount that presets aside because fluctuation of time or method A/C 241(3) Fixed factory overhead costs are not allocated in case that actual level of production is less than normal capacity A/C 632 Allocating and transferring fixed factory overhead costs to each unit ‘s fabricating cost following normal capacity A/C 627 A/C 154(631) A/C 334,338 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 The first allocation Tools with high value A/C 111,141,331 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: Estimated recoverable value of spent materials - Estimated disassembling temporary construction costs + Actual costs to build temporary constructions Volume of temporary cost monthly allocation 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) Allocating equipment costs to objects Transferring costs to evaluate unit cost Aggregating actual costs A/C154 A/C621,622,627 A/C 623 A/C 111,152 ... b. If company practice by method of purchase equipment services among internal sections: A/C 632 A/C 154 A/C 621,622,627 A/C 111,152 ,... Actual price of purchased Machines shift Taxes deducted A/C 133(1) Taxes payable to state budget Computing to equipment cost Purchased price A/C 623 A/C 333(1) A/C 512 4.2.4.2. Company has not organized separate equipment brigade or organzied but not graded them: Other expenses for construction machines A/C 133(1) A/C 111,112,331... Materials, tools are used for construction machines A/C 152,153 Depreciation of construction equipment A/C 214 Salaries pay to workers A/C 623 A/C 334 * Equipment costs are allocated to reasonable construction objects basing on volume of machines shift or actual served work. In case that using equipment cost are particularly accounted to each kind of machines be allocated to each object : Equipment costs are allocated to each object Volume of actual machines shift or volume of work are served for each object by machine x = Total equipment costs must be allocated Total actual machines shift or implementation volume of building If company does not account specific to each kind of machine, accountants have to evaluate standard machines shift through reduction factor: Planned price of lowest one machines shift H = Planned price of one machines shift Standard machines shift of each operated kind = Reducted machines shift serving for each object x Total reducted standard machines shift of all machines Total equipment costs must be allocated Equipment costs are allocated to each object Volume of actual operated machines shift of each machine x = H 4.2.5. Aggregating production costs accounting: Production costs are needed to transfer in order to aggregate the whole operation expenses and detailed in each object after particularly accounting for each component such as: direct raw materials costs, direct labour costs, using equipment costs, factory overhead costs. Accountants depend on aggregating production costs by using perpetual inventory method or periodical inventory method to use accounts. If company applies perpetual inventory method, accountants use account 154 – “Work in progress” to aggregate production costs. Chart 05.1 : Aggregating production costs Actual price of finished construction products hand over to customer A/C 632 Actual price of finished construction products stored A/C 336(2) A/C 155) Actual price of finished construction products hand over to main contractor Reiceivable reimburse A/C 138 Unused raw materials are returned and stored A/C 152 Transferring equipment costs Transferring factory overhead costs Transferring direct labour costs A/C 622 Transferring direct raw materials costs A/C 623 A/C 627 A/C 621 A/C 154 ( Perpetual inventory method ) If company applies periodical inventory method, accountants use account 631 to aggregate production costs, account 154 is only used to reflect the value of work in progress at the end of the period. Chart 05.2: Aggregating production costs Transferring direct raw materials costs , direct labour costs , factory overhead costs , equipment costs A/C 621,622,623,627 Transferring the value of work in progress at the beginning of the period A/C 154 Total value of finished products A/C 632 Scraps and other reiceivables A/C 152,138 Transferring the value of work in progress at the ending of the period A/C 154 A/C 631 (Periodical inventory method ) 5. Estimation of work in progress: Work in progress of construction company include construction are in building, volume of work are not accepted to pay by contractor. Accountants have to evaluate actual unit cost of finished product in accounting period following formula: Actual unit cost of finished product Value of work in progress at the beginning of the period Production costs arising in accounting period Value of work in progress at the ending = - + In order to evaluate value of work in progress at the ending, we must estimate exactly the volume of work in progress, determine the finished level and use the reasonable to evaluate. There are many ways to evaluate work in progress on the basis of handing over method between contractor and construction brigades. 5.1. In case that handing over when construction is whole finished: Under this case, the sum of production costs from the beginning of building to the time of estimate are actual costs of work in progress. It always applies for correction and finishing work, low value constructions building, short construction period following the contract that are accepted to pay when whole finishing by contractor. 5.2. In case that handing over as each finished stage: Work in progress are unfinished construction stages. Evaluating costs of work in progress at the ending of the accounting period by allocating actual costs. It is on the basis of cost price and degree of finishing. = Cost price of each stage Cost price of work in progress of eacs stage at the ending x Percentage finished of each stage Allocation coefficient actual costs for unfinished stage Allocation coefficient x Cost price of work in progress at the ending = Actual costs of work in progress of each stage Costs in the period + Total cost price of all stage unfinished products Cost price of volume of finished product handing over in period + Costs of work in progress at the beginning = 5.3. In case that handing over as periodical finished product of each work or each structural part: Calculating actual costs of volume of unfinished products at the ending by formula as follows: Cost price of unfinished product at the ending x + + Total cost price of volume of unfinished products Cost price of volume of finished product handing over in the period Costs in the period Costs of work in progress at the beginning = Actual costs of volume of unfinished products Cost price of each unfinished product x = Volume of unfinished products Estimated unit cost x Percentage finished 6. The objects and the method of evaluating unit cost. 6.1. The objects of evaluating unit cost: The objects of evaluating unit cost are products, works which are manufactured by enterprise. In construction activity, because each product has its own estimation and design, so the objects of evaluating construction unit cost are construction, or volume of finished product. * The objects of aggregating production costs are usually equal to the objects of evaluating unit cost, in capital construction. The costs objective are the constructions followed customer’s order, and the objects of evaluating unit cost are finished products. 6.2. Evaluating unit cost period in capital construction: Due to products of construction are manufactured following each order with long cycle, construction is only finished when ending a production cycle, so evaluating unit cost period usually choosed is the time of handing over finished constructions to use. Therefore, evaluating unit cost period may be not suitable with accounting period , it is suitable with production cycle. 6.3. The method of evaluating unit cost: The method of evaluating unit cost is method of using aggregated production costs data and other relating data to calculate total unit cost and unit cost of finished product on the basis of determined objects. In construction company, methods are usually applied such as follows: 6.3.1. Evaluating unit cost by simple method : This method is applied in case that the objects of evaluating unit cost and costs objective are the same, the evaluating unit cost period is suitable with accounting period. According to this method, unit cost is evaluated by formula: Costs of work in progress at the ending - Production costs incurred in the period + Costs of work in progress at the beginning Unit cost = 6.3.2. Evaluating unit cost by grand total costs: This method is applied in case that company builds high value constructions, production costs are aggregated following each brigade and unit cost is evaluated to each finished product. Unit cost is evaluated by formula: Costs of work in progress at the ending - The sum of production costs of brigades that construct a building + Costs of work in progress at the beginning = Unit cost 6.3.3. Estimating unit cost in comformity with customer’s order: It is the popular method. According to this method, costs objective and the objects of evaluating unit cost are customer’s orders. However, in order to satisfy the requirements of work and because they have their different own estimation so actual unit cost of each construction is calculated by formula: Actual unit cost = Total cost price of constructions Total production costs aggregated in the period x Cost price of construction 6.3.4. Evaluating unit cost by assessment method: This method is applied when company had computed assessed unit cost of each construction following each component of unit cost. Accountants aggregate actual production costs by each component to compare with assessed costs and to evaluate unit cost by formula: Justified differences +(-) Differences from assessment +(-) = Assessed total unit cost Actual total unit cost 6.3.5. Evaluating unit cost by coefficient and percentage method: This method is applied when costs objective are group of same kind products or the whole production process. Object of evaluating unit cost is each finished product made by this process. = Reduction factor of each kind x Unit cost of standard product Total of reducted standard product Unit cost of standard product Total unit cost of all kind of products = The sum of Reduction factor of product i x Volume of product i = Total of reducted standard product Unit cost of each kind of product Chapter II Accounting practices on aggregating production costs And evaluating unit cost in Huong Giang construction company. In this section, we are going to look at the following issues related to the Huong Giang company: Foundation history. Production and management organization. Accounting work and accounting mechanism organization. 1. Production and business management organization: 1.1. Foundation history of Huong Giang construction company: Huong Giang construction company – Ministry of National Defense was established under the decision 501/QD-QP dated 18/04/1996 by the Minister of National Defense, on the basis of incorporation of two enterprises: Construction enterprise 17/5 and Coal exploit enterprises 30/4.The headquarter of company is located at A7, Tan Mai – Hai Ba Trung – Ha Noi. Huong Giang company is a State owned enterprise. It has a number of capital as follows: 7.315.116.041 VND . It devides into: - Fixed capital : 5.323.330.443 VND . - Current capital : 1.991.785.598 VND . And includes: - Amounts granted by the Ministry of National Defense : 2.069.076.220 VND. - Amounts granted by the National budget : 1.200.000.000 VND . - Amounts undistributed earnings : 950.423.721 VND . Over the past years, company has tried its best to complete the duties. Company has achieved high produc._.tion results, increase business surplus and step by step expand its capital. At present, the company’s market is all over the nationwide. The company’s growth and development in recent years are presented in following table: Some indexes reflect practices for producing and business of company. Index Unit Year 2000 Year 2001 1. Gross product VND 35.678.000.000 37.360.000.000 2. Revenue VND 26.818.432.331 33.856.604.557 3. Distribution in State budget VND 1.729.453.340 2.308.766.381 4. Employees Person 524 554 5. Salary per person VND 790.000 916.000 1.2. Production and management organization: 1.2.1. Feature of technology production process: The major products of Huong Giang construction company are constructions, construction items such as: civil works, industrial buildings, water communication works, bridgeworks... The construction scale is not the same, products are specific, and long constructional duration. Besides, the construction procedures of company are taken at different places and they are delivered to the location of products. Because of the feature of construction capital, so the company’s brigades are independent and distributed to many provinces and cities in all over the country. It effect directly to the company’s production management work. Next to the influence of construction product characters, it also is effected by technology production process. Construction practices of company may be devided into six stages as follows: Building bidding Making construction estimate Raw materials, labour, machines Building Handing over finished works Making balance sheet of finished works Contract closing 1.2.2. Production and business machanism organization: At present, Huong Giang company has twelve construction brigades, they are under the controlling of company. Management mechanism of company is organized in accordance withf join - direct line function model. Director Board: The head of the company is the general director. He is responsible for all the company operation. Vice – director is responsible for construction, technical control construction practices, controlling production plan. Organization and Administration division: This division is in charge of labour selection, labour organization for brigades. Besides, it is also responsible for adminitrative work, establish the labour documents and the standard of salaries, allowances. Technical – planning division: This division is in charge of technical management in construction, in detailed as follows: They make the construction schedule, the estimate, technical supervison when the company bids a construction. And they have to be responsible for constructional work quality. Managing tools and making bills of price of tools. Accounting and Financial division: This division is responsible for recording, analyzing and communicating the accounting information to Director Board in making economical decisions. Materials and machines division: This division is in charge of ensuring materials, machines, equipment for the construction requirements of each brigades. Building brigades: The main duties of construction brigades are construction, assuring the schedule and quality of works. 1.3. Accounting mechanism organization: In order to meet the production and business features and make full advantages of ability accountants, the accounting apparatus is organized to follow model of both concentration and division. Statistic accountants at construction brigades: They specialize in orginal counting, treating and checking accounting vouches and then periodical sending them to Accounting division of company. Company’s accountants make records of transactions performed by company and brigades, sums – up statements of brigades to make the company’s general statements of account. At present, each accountants is responsible for his / her task: Chief – accountant is responsible for the whole work of accounting, economic information and system of the company. He is also an assistant to the director in the business activities and responsible for all of the accounting organizations in the company. Accountant of general works and fixed assets is responsible for aggregating the whole operation costs, recording the movement of fixed assets and make its allocation table, open the detailed books and making statements to company’s regulations. Accountant of banking and materials is responsible for recording transactions of materials movement and the balance, the movement of cash in banks. Besides, he is also in charge of opening “Book for recording materials” and making the statements determined by Bank. Accountant of salary and insurance is responsible for calculating bonuses, social insurance, health insurance and payable to the employee. Cashier is in charge of paying cash and making daily cash balance table as well as keeping cash fund of company. Chart of accounting mechanism organization at Huong Giang company. Chief accountant Accountant of general works and fixed assets Cashier Accountant of salary and insurance Accountant of banking and materials Accountants of construction brigades 1.4. Accounting policy applied in company: 1.4.1. Accounting work: At present, company uses “system of account for enterprises” issued under the decision No.1141 TC/CDKT dated October 1st 1995 of Minister of Finance. Accounting method on inventories is perpetual method. 1.4.2 . The accounting book system: In order to suit small – scale production, few accountants and specialization of accounting mechanism, Journal Ledger is the form of book used in the accounting division of Huong Giang company. Accounting books is applied at company: The general accounting book: Journal Ledger. The subsidiary ledger cards. Procedures for recording transactions into journal ledger. Original documents Cash book Subsidiary Ledger Cards Original documents listing Journal Ledger General detailed reports Financial Statements Note : Daily recording Month end recording Reconciling, checking 2. Aggregating production costs and evaluating unit cost in Huong Giang construction company. 2.1. The objects and the method of aggregating production costs: At company present, company has bided and then giving to construction brigades to build. Company applies two types of task – work: Straight task – work. Three elements task – work: Raw materials costs, labour costs, factory overhead costs. The objects of aggregating production costs of company are constructions , construction items or customer’s orders. For products of construction, aggregating production costs are on the basis of production costs of each construction incurred are traced to this construction. For customer’s orders, the whole costs relating to construction are aggregated for each order. Company uses the direct aggregation production costs method, that means production costs relating to which object are aggregated to this object. For the costs are not direct aggregated because they involve in many costs objective, at the end of accounting period, accountants must allocate production costs followed the reasonable bases such as: assessed materials, assessed direct labour costs, output percentage, value estimate... 2.2. The objects of evaluating unit cost: The objects of evaluating unit cost of Huong Giang company are finished products. So actual unit cost of finished product is the whole costs incurred that relating directly to this construction or this construction item during the construction period. For work parts need to calculate the actual unit cost, the objects of computing unit cost are each specific structure part with its own estimation and it reaches to the reasonable stop point followed the contract’s regulations. In order to evaluate unit cost of this object, we must determine the work in progress. Huong Giang company determines the value of work in progress are the whole costs for parts that don’t reach to the stop point. 2.3. Classification and management of production costs: In order to manage effectively production costs and calculate accurately unit cost, analyzing the influence of each element cost in unit cost is so important. Before building, any construction must be made the estimation of technical design in order to examine by the leaders. Besides, this estimation is the base of making economic contract. The estimates are made for each construction and analyzed following each costs component. So it is able to compare and check the implementation of costs components with the estimate and it make advantages on analyzing the production results. Production costs of company are classified on the basis of purpose ans utility of costs. They includes: Direct raw – materials costs. Direct labour costs. Equipment costs. Factory overhead costs. 2.4. Aggregating production costs in Huong Giang company: 2.4.1. Accounting system used in the company: The major accounts used in aggregating production costs of Huong Giang company are A/C 621, A/C 622, A/C 623, A/C 627. These accounts are detailed according to each specific construction. 2.4.2. Aggregating production costs in Huong Giang construction company: The following object of aggregating production costs and evaluating unit cost is construction N18 – Political Institute. 2.4.2.1. Aggregating direct raw – materials costs: In Huong Giang company, raw – materials costs include all the value of materials needed to construct a finished construction. Huong Giang company is applied the task – work method to construction brigades and so the materials used for construction do. In order to savely and fully use materials, construction brigades make monthly the plan of buying materials on the basis of assessement and the volume of building. The staff of providing makes the “Advance request” (supplement 1) and transfer to the managers in order to examine and grant capital. Bases on the plan of buying materials, bill of materials price, and the advance request transferred by construction brigades, the manager signs to supply the advance for brigades. Accountant makes the payment voucher on the basis of advance request. When chief accountant and director had signed the payment voucher, cashier makes amount of money as the amount in voucher. The advance request is the base of recording in to detailed books of A/C 111, A/C 141. When inventory arrived, storekeeper with master and supplying staff examine the quantity and the quality of materials. After that, storekeeper makes “Goods receipt note” (supplement 2). Storekeeper makes “Goods delivery note” (supplement 3) when raw materials, tools and supplies are put in construction. Cost of inventory used for construction is computed by actual cost. The actual cost of inventory includes price on purchase invoice and transportation charges , handling expenses. On the basis of “Goods delivery note”, accountants of brigade record to the “Raw materials delivery voucher collection table” (supplement 4). At the end of month, brigade accountant compares the accounts on Goods delivery note with Raw materials delivery voucher collection table. Then he / she sends them and other relating vouchers to Accounting and Financial division. Accountant of production costs makes the “Raw materials cost collection table” (supplement 5) basing on received vouchers. These vouchers are the base of recording transactions into “Subsidiary ledger A/C 621” (supplement 6) and Journal Ledger. When the data of raw materials costs collection table and the data of subsidiary ledger A/C 621 are the same, accountant transferrers direct raw materials costs from A/C 621 to A/C 154. 2.4.2.2. Aggregating direct labour costs: In Huong Giang company, direct labour cost includes salary, bonuses, and allowances of employees who directly involve in construction process. Direct labour cost does not include social insurance, health insurance, trade union fees of direct employees and salary as well as social insurance, health insurance, trade union fees of machines operators. In addition, company also uses a lot of rent employees. Company gives this labour force to master of construction brigades whom are responsible for payment to them following the rental contract. Total of payment to the rent employees are credited to A/C 334 (detailed: Payable to rent employees) and the salary of company’s employees are credited to A/C 334 (detailed: Payable to employee). Huong Giang company applies two payment methods: Salary following product Actual volume of construction x Unit price of task work = Payment following product: This method is applied for the labour force who directly involve in construction. Payment following time: It is applied for the indirect staff in company, indirect management section at brigades and other employees at work camp. Salary per month = The basis salary level x Coefficient Daily salary = Salary per month / 26. ** After received construction from company, the master gives each part of work to each brigade through “Lump- sump contract” (supplement 20). The head of brigades record daily in the “Time – sheet” for each worker (supplement 7). When closing the lump – sump contract, technical staff and the head of work camp examine the quantity and the quality of works. If the contract is not closed untill the end of month, the technical staff will determine the finished works in this month and take it as the base of caculating salary for workers. Accountant makes the “Payroll” (supplement 21) on the basis of lump – sump contract and time sheet, at the end of month. Accountant calculates salary by following formula: Actual construction days of per person Total of received when closing contract Salary per person x The sum of construction days = ** For the rent workers: After aggreeing unit price, the master signs the “Rental contract” with the head of them (supplement 8). When finishing, the master and the technical staff examine and accept to pay followed the agreed volume and the unit price. ** At the end of month, brigades accountants gather the vouchers that relate to labour cost and send them to Accounting and Financial division in company. Accountant of company makes the “Salary allocation table” (supplement 9). Base on these vouchers, accountant record to “Subsidiary ledger A/C 622” (supplement 10), “Subsidiary ledger A/C 154” and Journal Ledger. After comparing, accountant transfers the direct labour cost of each construction to A/C 154. 2.4.2.3. Aggregating equipment costs: Equipment costs of company include depreciation of construction machinery cost, salary of machines operators, fuel oil cost, machines repair cost. This component is detailed in each construction. Company applies “Operation journal of construction machinery” to determine accurately the equipment cost to each object. Accountant at brigade makes the operation voucher of machines to each construction, and sends them to Accounting and Finance division at the end of month. As usual, company rends both of machines and operator. The whole costs are not reflected to equipment costs (A/C 623), but reflected to Render – services (A/C 627). Accountant of production costs of company makes the “Equipment costs allocation table” (supplement 11) on the basis of rental machinery contract and operation voucher of machines. Equipment costs are allocated by following formula: Total of actual A machine shift served for construction B x = Rental cost of A machine of month Total of actual A machine shift of month A machine cost allocated to B construction The construction machinery of N18 – Political Institute are belong to the company. So the whole costs of machines are recorded as follows: Fuel oil costs to operate machines: Brigades construction purchase fuel and oil by advance. And then recording following the principle of recording to direct object, that means costs created by any work camp or any machines are recorded to this work camp or this machine. Accountant of brigades making daily the “Fuel and oil delivery voucher collection table for machinery operation” (supplement 12) on the basis of original vouchers. At the end of month, brigade accountant gathers vouchers related to fuel and oil costs to transfer to Accounting and Financial division in order to record to subsidiary ledger A/C 623 and Journal Ledgers. Machinery operators cost: The initial vouchers are the time sheet, operation journal of construction machinery, and the lump – sump contracts. The master records daily in time sheet for each operator. Brigade accountant calculates salary for machinery operators when closing the lump – sump contract. Accountant of salary makes the “Payroll” for machinery operators on the basis of vouchers transferred by brigade accountant. Base on this table, accountant of production costs transfers the machinery operators cost to A/C 154 and records to Journal Ledgers. Depreciation of construction machinery cost: Depreciation of construction machinery of company are under the Decision 1062/TC/QD/CSTC. These costs are record directly one time into equipment costs for each construction (supplement 22). In order to estimate depreciation of fixed assets cost, the straight – line depreciation method is used for all fixed assets in the company. According to this method, depreciation cost of each month is estimated by following formula: Depreciation cost of each month x = Depreciation time Orginial price of fixed assets 1 12 Monthly, basing on the original vouchers , accountant at brigades make the “Equipment costs collection table” (supplement 13). And accountant at company makes the “Depreciation of fixed assets allocation table” for constructions on month and records to “Subsidiary ledger A/C 623” (supplement 14),”Subsidiary ledger A/C 154”, Journal Ledgers. 2.4.2.4. Aggregating factory overhead costs: In company, factory overhead costs are accumulated according to major items as follows: Salary of brigade’s management staffs and social insurance, health insurance of management staffs, direct labour, machinery operators. Daily, brigade’s accountant mark in the Time sheet and base on working time recording sheet to calculate management staffs cost. And then, he / she makes the “Payroll” for management staffs (supplement 15). Tools and supplies costs: In company, tools and supplies include protective clothes, picks, shovels, scaffoldings with low value ..., they are allocated one time into factory overhead cost. And high value scaffoldings are recorded to account fixed assets and determined depreciation following the time using for each construction. At the end of month, brigade’s accountant makes the “Tools delivery voucher collection table” (supplement 16) to transfer to Accounting and Financial division of company. Depreciation of fixed assets costs: It includes depreciation of houses, ware – house ... at brigades. Monthly, accountant of fixed assets calculates the depreciation as the above formula. According to “Fixed assets depreciation allocation table”, the depreciation of fixed assets of construction N18 in October – Year 2002 is: 4.233.000 VND. Services rendered costs and others paid in cash: Brigades accountant record daily to “Factory overhead costs collection table” (supplement 17) on the basis of invoice, payment voucher, and other vouchers. At the end of month, Accountant of production costs allocates the factory overhead cost to evaluate the unit cost of each construction on the basis of vouchers transferred by brigades. Factory overhead costs are allocated by following formula: Salary of direct labour of each construction Total of factory overhead costs x The major salary of direct labour of all constructions = Factory overhead cost allocated for each construction In October, brigade 8 only constructs the construction N18, so factory overhead costs are aggregated directly to this construction. After allocating factory overhead costs, company’s accountant records to “Subsidiary ledger A/C 627” (supplement 18), “Subsidiary ledger A/C 154”, Journal Ledger. 2.4.3. Aggregating production costs: In the company, accounting method is perpetual inventory one (described in chapter I). As a result, all costs which concern with production process are transferred to debit side of A/C 154 to evaluate unit cost (supplement 19). Then, accountant makes the “Production costs collection table of each construction” (supplement 23) and “Production costs collection table in October” (supplement 24). 2.5. Estimating of work in progress: In the company, the objects of work in progress estimate are constructions which are not handed over. At the end of year, the representative of Technical division, the construction’s technician and the construction manager estimate the work in progress. After receiving the “Work in progress physical count report” transferred by Technical division, the Accounting and Financial determine the actual cost of work in progress by following formula: Cost of work in progress at the ending + Cost of work in progress at the beginning Costs incurred in the period Volume of unfinished product at the beginning The volume of product incurred in the period + x = Volume of unfinished product at the ending The construction N18 – Political Institute has finished in year 2002, so it has not got work in progress. 2.6. Evaluating unit cost in Huong Giang construction company: In company, period of evaluating unit cost is the end of accounting period. If there is finished product in month, company will examine and hand over as usual. Accounting division compute the actual unit cost is the whole production costs incurred in construction procedure. At the end of year, accountants calculate the unit cost of each finished construction and determine the result of construction in this year. In order to keep with method of aggregating production costs, method of evaluating unit cost used is simple method (direct method). By this method, unit cost of construction product is determined by following formula: + - = Costs of work in progress at the beginning Actual unit cost of each construction Costs incurred in the period Costs of work in progress at the ending Chapter III Solutions to enhance performance of accounting division of the company in production cost aggregating and unit cost evaluating. During my training practice at the Huong Giang company, on the basis of theories and actual activities of aggregating and allocating production costs and evaluating unit cost, I would like to put forward comments and recommendations as follows: 1. Comments of aggregating production cost and evaluating unit cost accounting at Huong Giang company. 1.1. Good aspects of carrying out production costs aggregation and unit cost evaluation at Huong Giang construction company: Huong Giang company has developed either on scale or the qualify of production , since the establishing day. Company is going to be adjoining to the market in order to expand business size, attract the customers and sign the contracts. Company always invests the modern equipment and machines to satisfy the requirements of production. In addition, company pays more attention to elevate the labour force like: managers, staff and workers. Management mechanism of company is neatly arranged, the divisions have so effectively operated that give a good assistance to management board in checking the present management methods and making the more effective decisions on management. On the basis of theories and actual activities, I have realized that the company’ s accounting procedure has being complied with the accounting system set up by the Ministry of Finance. Over the past many years, the accounting devision has made considerable effort in improving internal accounting procedure, especially in the areas of aggregating production costs and evaluating unit cost. Firstly, the accounting mechanism is organzied in such fashion that it is convenient for deviding up the work. All the accountants have their own duties. Therefore, aggregating production costs, evaluating unit cost and making financial statement according to principles issued by State have been kept on time. Secondly, the initial documents of company have organized lawfully and completely. And the accounting book system of company are used so appropriately and properly that meets the requirements of works and standard of the accountants. Third, company has applied the task – work form to the construction brigades. It is the method of production organization that suitable with the features of construction company. Next, equipment costs of company have allocated on the basis of per – actual machine shift. So it reflects exactly the equipment costs that must be allocated to each object. Finally, over many accounting periods, the method of aggregating production costs and evaluating unit cost of company have kept stable. In addition, determining cost objective and objects of evaluating unit cost of company are fairly suitable, and they make advantages in evaluating unit costby simple method. As the result, it is easy to evaluating but the results are extremely accurate. 1.2. Several weaknesses of Huong Giang company: Besides these positive practices, the implementation of accounting practices in the Huong Giang company still have several weaknesses. First, the initial accounting is not properly carried out by the accountants in the company. It is carried out by the accountants of construction brigades under the guidance of accounting devision. Therefore, it restricts the company’s accountants checking to the real incurred transactions at work – camps. Second, because of either the bad rotation of initial documents or the areas of construction brigades far from the location of company, they effect to the making statement schedule that not timely provide the management with the accounting information. Third, because of building season, there is an interuption of using labour force. If company has not recorded the payable expense for labour costs on day’s leave and damage costs of production process, unit cost of construction will not reflect accurately the real costs. Next, due to construction machinery take a capable part in construction procedure, so company applies the straight – line depreciation method to construction machinery is not suitable. It effects to the accurate of net book assets and production costs to evaluate unit cost. Finally, factory overhead costs of company have been allocated by direct labour costs which is not fairly reasonable. As you know, Huong Giang is a construction company, so in order to raise the construction schedule and enhance the qualify of buildings, next to using more workers, construction machinery are used much more and they have high wear. Besides, company has allocated the value of scaffoldings one time to the first using construction which makes unit cost increased and profit decreased. 2. Solutions to enhance performance of accounting division of the company in production costs aggregating and unit cost evaluating. 2.1. Raw – materials accounting: Company can elect a staff to communicate and sign the long term contract for high value materials with the suppliers. Besides, the supply division should make the most economical effect purchasing and delivering process for each construction. Simultaneously, in order to save raw– materials costs, company should make the alternative of technique betterment, replace several possible materials to be able to decrease costs but not effect to the qualify of construction ... 2.2. Equipment costs: In order to reflect more accurately equipment costs for each construction, company should design “Machinery operation recognizing table” for all of equipment. It makes advantages in getting to know generally the using situation of construction machinery. Example is made to each work – camp. In my opinion, this table may be designed as follows: Machinery operation recognizing table At: Construction N 18 Construction brigade’s number:8 Month:10 Year: 2002 Equipment names Supply fuel and oil Operation time Date Amount Morning Afternoon Evening 1. Concrete mixer 2/10 270.000 x x X 4/10 262.500 x x X 6/10 0 SC SC ......... ......... ... ... ... 2. Bulldozer 4/10 145.000 x x X ......... ......... ... ... ... 3. Drill machine ......... ......... 1 1 1 ......... ... ... ... Total 1.364.000 Guiding: Fuel, oil suppliers records for each machine in supply fuel and oil column at the end of day. The manager of construction machinery and technical staff record daily the machinery operation to this table as follows: Operating machines: mark (x) Non – operating machines: mark (0) Repairing machines: mark (SC) For render – services machines: mark (1) Construction machinery of company are elevator machine, concrete bracker, excavating machinery, concrete mixer, ... Company should apply the depreciation method followed the volume of operated machines – shift because the more taking part in construction procedure, the more getting wear of machinery. This depreciation method is equal to the machinery wearer. It ensures to take back the beginning investment capital and evaluate exactly unit cost. 2.3. Method of estimation of finished product: At present, method of finished product payment between part A and company is acceptance to pay when product of construction is whole completion. In my opinion, company should change the method of estimation of finished product to pay followed point of technical ending. It will escape from capital conserving, to increase capital rotation ring, beneath unit cost. Especially, with volume of finished products are continue to build._.