Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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 dang thi lan anh accounting and auditing 1 Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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. dang thi lan anh accounting and auditing 2 Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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 dang thi lan anh accounting and auditing 3 Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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 dang thi lan anh accounting and auditing 4 Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 2.2. Classification: 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. Or : 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.‘ dang thi lan anh accounting and auditing 5 Estimation of cost Cost to finish the estimation volume of construction Normed profit = + Cost price of construction work Estimation of cost Normed profit -= Cost price of construction work = Volume of works following the economic and technique norms are determined by Goverment x Unit price is announced by Government for each construction area and other normed costs Planned unit cost = Cost price - Profit base on decreasing unit cost +(-) Difference from estimate Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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. dang thi lan anh accounting and auditing 6 Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 The scheme of relationship between production costs and unit cost: 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. dang thi lan anh accounting and auditing 7 Costs in progress at the beginning Costs create in process Total of unit cost of finished products Costs in process at the ending Total of unit cost of finished products = Costs in progress at the beginning + Costs create in progress - Costs in process at the ending Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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: 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. 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 No ending balance exists in A/C 621 dang thi lan anh accounting and auditing 8 Costs allocate to object i = Total costs to be allocated General criterion of allocation of all objects x General criterion of allocation of object i 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 A/C 152(611) A/C 621 A/C 152(611) Raw materials are used directly for producing process The unused materials distributed for manufacturing are returned and stored A/C 111,112,331 Raw materials are not stored and used immediately for producing products A/C 154(631) Transferring actual direct raw materials costs Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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 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 dang thi lan anh accounting and auditing 9 A/C 622 A/C154(631)A/C 334 Salaries and allowances payable to direct employees Transferring direct labour costs to cost objects A/C 335 Payable expenses for labour costs on day leave’ Website: http://www.docs.vn Email : lienhe@docs.vn Tel (: 0918.775.368 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: 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. dang thi lan anh accounting and auditing 10 Volume of factory overhead costs are allocated to each cost objective = General criterion of allocation of all objects General criterion of allocation of each object x Total factory overhead costs must be allocated