CONSTRUCTION ACCOUNTING & COST CONTROL

Dr.K.ANANTHANARAYANAN Associate Professor Department of Civil Engineering IIT Madras Chennai-600036

CONTENTS

Management accounting Nature and scope, Financial Accounting principles, Basic cost concepts Financial Analysis: Financial statements analysis and interpretation, Accounting ratios, funds flow statement, cash flow statement

Fundamentals:

Planning and Control: Budgetary control, standard costing, variance analysis,

Managerial costing and profit planning, decision involving alternative choices, capital budgeting, Management reporting Capital, leverages, Dividends rights and bonus, lease financing, investment portfolio management, sources of finance, international financial management income, Human resource accounting, Business risk and insurance coverage, Tax implication and financial planning

Funds Management: Business finance, Working capital Management, Cost of Miscellaneous: Inventory valuation, Depreciation policy, Accounting concept of

Ref: Management Accounting and Financial Control by Dr.S.N. Maheshwari , Sultan Chand & sons

Board of Directors Chairman /Managing Directors Sales Manager Personnel Manager Finance Manager Production Manager

Treasurer Funds Management Pension Management Auditing Planning & Budgeting Profit Analysis

Controller Cost & Inventory Accounting & Payroll Special Reports & studies

Credit Management

Tax Administration

CONSTRUCTION ACCOUNTING
Definition: It is the process of collecting, recording, classifying and summarizing financial data for the needs of Management, shareholders, creditors, bankers and Government.
Accounting

Financial Accounting

Cost Accounting

Management Accounting

FUNCTIONS OF ACCOUNTING
Historical accounting
recording, classifying, summarising, analysing, and interpreting the past transactions

Managerial function
Planning the future activities and controlling the operations of the business

CLASSIFICATION OF ACCOUNTING
Financial Accounting
Accounting designed to serve parties external to operating responsibility of the firm e.g.. creditors, investors, employees

Management Accounting
Accounting designed for use in the operational needs of the business e.g.. Information relating to the costs, funds , profits

FINANCIAL ACCOUNTING
It is helpful to a firms management to ascertain the results of its operations and status of business Two fundamental statements : * Income and expenditure statement * Balance sheet

FINANCIAL ACCOUNTING
Definition: Accounting is an art of recording, classifying and summarizing in terms of money transactions and events of a financial character and interpreting the result thereof.

FINANCIAL ACCOUNTING
FUNCTIONS Recording basic
the book Journal transaction function of accounting. Recording is done in

Classifying systematic analysis of data with a view to group Summarizing presenting the classified data in a manner
which is understandable to both internal as well as external end users. Trial balance, income statement, balance sheet

Interpreting final function of accounting

FINANCIAL ACCOUNTING
LIMITATIONS Provides only limited information Provides only a post-mortem record of business transactions Considers only quantifiable information Fails to provide informational needs of different levels of management

MANAGEMENT ACCOUNTING
Definition: Management Accounting provides necessary information to the management for discharging its functions. planning, organising, directing and controlling . day to-day operations of an undertaking

FUNCTIONS OF MANAGEMENT ACCOUNTING

Provides data management planning Modifies data- purchase figures for different months- product
wise , supplier wise

Analyses and interprets data ratios calculated and

likely trends are projected

Serves as a means of communicationFacilities control- budgetary control Uses also qualitative information

to top

management, downwards and out wards through organisation

Scope of Management Accounting

Financial Accounting Cost accounting Budgeting and forecasting Inventory control Statistical analysis Internal audit Tax Accounting

Functions of Management Accounting

Presentation of data Aid to planning and forecasting Decision making Communication of Management policies Effective control

Financial Statements
Objectives: 1. To provide the economic activities of the enterprise to several group of people 2. To provide useful information to the creditors 3.To provide information to the investors # For Management # For Financiers # For Creditors # For Investors Financial statement analysis # External analysis # Internal analysis Tools: ratio analysis, cash flow analysis, fund flow analysis comparative financial statements.

FINANCIAL MANAGEMENT
Accounting Information System Needed to measure financial performance. Accounting- record of historical transactions. To be useful- needs to be compared with budgets and analysis of performance. Timely action most important. Manager needs to know how to manage the accounting function, not how to perform the accounting function.

Accounting Methods
Two methods - Cash - Accrual

Cash System
Records transactions at the time that they impact cash. - Revenue recorded when cash is received from the clients. - Expenses recorded when cash is paid out. - Means of keeping track of cash. - Not an accurate method of measuring a firms financial performance

Accrual Accounting
Records income or revenue when it is earned. - Expenses when they are incurred. - Revenue may be shown for services performed before payment is received. - Expenses shown when they are received not when cash is paid for payment. -Provides a method of determining profit or loss by matching revenue and expenses. - Also billed and not-yet-billed revenues are recorded and shown on firms balance sheet. - Now cash expenses such as depreciation, write-offs for bad debts etc. are also considered in accrued accounting

General and Firm Accounting System

Include all activities concerned with keeping records, preparing financial statements and submitting tax returns. Procedures not much different among companies. Standardized- payroll records, receipts, disbursements, tax preparation etc. Major components - General ledger and chart of accounts.

Chart of Accounts
- Listing of all accounting classifications used by the firm. - Accounts are numbered in the sequence that groups them and identifies assets, liabilities, revenue, expenses and net worth .

Ledgers
Compile recorded transactions to keep a running total of each account in the chart of accounts

General Ledger
- Master listing that prepares the financial statements for the firm. - Measure profit or loss, assets, liabilities, owners equity, working capital.

Project Accounting System

Enables the firm to identify revenue and expenses by project. Important information to control projects. When the project has been estimated and awarded, a project budget is established based on the amount of the contract award. Original estimate is the starting point Subsequent revisions or adjustments to reflect work scope changes and actual Progress For various activities the project manager establishes the budgeted hours/day and Rs. The accounting system should report the actual time and expenses and any variances have to be determined.

ART OF RECORDING
Two statements 1. Trading & Profit and loss account 2. Balance sheet

Groups interested

Owner Management Potential Investors Creditors Employees Government Researchers-students

Accounting Principles
Main features: Usefulness Objectivity Feasibility Concepts: Duality- Going concern Accounting period-Historic Cost Money measurement- Revenue Recognition- matching Accrual- objectivity

Dual aspect concept

Purchase of good from several suppliers Sales to several customers on cash and credits Payments to suppliers and collection from customers, Payment of salaries to salesmen, Payment of taxes, rents Two aspects involved- receipts of goods and payment of cash

Example
Mr.Nithin, the proprietor of the business, starts his business with a cash Rs20,000 and building of Rs 50,000 this fact is recorded in two places: assets account and capital account
Capital Nithin 70000 = Assets building + cash 50000 + 20000

Accounting
* The business increases by borrowing Rs 20000 Capital+ Liability = Assets Nithin +Loan building + cash 70000+20000 50000 + 40000 *Pays for furniture Rs 5000 and purchase land on credit for Rs 8000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 70000+20000 +8000 50000 + 35000+ 5000+8000 If he pays expenses say Rs2000 Capital+ Liability = Assets Nithin +Loan +creditor building + cash+ furniture+ land 68000+20000 +8000 50000 + 33000+ 5000+8000

Capital + Liabilities
Proprietor's capital + Loan, Bank overdraft, Creditors, bills payable Outstanding expenses

Assets
Building Land Machinery Furniture Stock in trade Debtor Bills receivable Bank cash

Problem
A limited company purchases a machinery for Rs1,60,000. Its estimated life is 5 years at the end of which it will have a scrap value of Rs12,440. The asset has to be depreciated at 40% on diminishing balance method. If the profits before depreciation are Rs1,00,000 per annum show what will be the amount of profits after depreciation under 1. straight line method 2.Diminishing balance method

Year

Straightline method Depreciation Profit after dep.

Diminishing Balance method Depreciation Profit after dep.

I Yr II Yr III Yr IV Yr V Yr. Total profit Total depre. Add Scrap value Cost of asset

29510 29510 29510 29510 29520 ------147560 12440 1,60,000

70490 70490 70490 70490 70480 352440 ------------

64000 38400 23040 13820 8300 ------147560 12440 1,60,000

36000 61600 76990 86180 91700 352440 -------------

Comments
1.

2.

3.

4.

Total depreciation, total profits is the same by both the methods over 5years In the straight line method dep. and profit after dep. Are constant for each year In the diminishing method dep. Charge is heavy in the earlier years resulting in reduction in the profits. Uniform profit is assumed. In practice productivity of the assets diminishes, the profit also diminishes as the age of the asset increases. This method is preferred as it helps early recovery of the investment

Financial Statements

A financial statement is an organized collection of data according to logical and consistent accounting procedures.

Basic statements
Basic statements are: Income statement Balance sheet Retained earnings Changes in financial statements

Income statement

Income statement, also called profit and loss statement (P&L) and Statement of Operations, is a company's financial statement that indicates how the revenue is transformed into the net income. The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.

INCOME STATEMENT
For the year ended DECEMBER 31 2007 Rs
Revenues GROSS PROFIT (including rental income) Expenses: ADVERTISING BANK & CREDIT CARD FEES BOOKKEEPING EMPLOYEES ENTERTAINMENT INSURANCE LEGAL & PROFESSIONAL SERVICES LICENSES PRINTING, POSTAGE & STATIONERY RENT RENTAL MORTGAGES AND FEES UTILITIES TOTAL EXPENSES NET INCOME

Rs
496,397

6,300 144 3,350 88,000 5,550 750 1,575 632 320 13,000 74,400 491 (194,512) 301,885

Nature of Financial Statements

Recorded facts Accounting Personal judgments Ignore substance LIMITATIONS: Interim reports Accounting concepts and conventions Influence of personal judgments Disclose only monetary facts