Cost accounting and product costing in bac mien trung consultancy investment construction and trading joint stock company

DECLARATION
I hereby declare that this thesis is my own work and effort and that has
no been submitted anywhere for any award. Where other resources of
information have been used, they have been acknowledged.
The data, figures and results described in this thesis are taken from the
factual situation of the internship company. The work was done under the
guidance of my supervisor Ms.Cao Phuong Thao, the lecturer of the Academy
of

Finance.
Hanoi, 15th February, 2016
Student
Pham Thi Lan Anh

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ACKNOWLEDGEMENT
Firstly, I am deeply indebted my supervisor Ms.Cao Phuong Thao, who
has continuously helped, and encouraged me to keep the right direction of the
thesis. Without her patience, enthusiasm and strong expertise knowledge, the
thesis could not be completed.
Secondly, I would like to express my profound gratitude to Bac Mien
Trung Consultancy Investment Construction and Trading Joint Stock
Company for giving me a chance to expose factual business environment and

to collect data for my thesis.
A sincere thank I want to send to all the company’s staff, especially
Ms.Nguyen Thi Hue, the Director, an accountant for their kindness and
support during my internship.
Besides, I also get much support from my friends at the Academy of
Finance, whose recommendations and advice are really a great help for my
thesis. A special deep thank is what I sent to them, by this way.
Especially, I would not have gone this far but for my family, who are
always beside and stimulating me to finish the tasks. From my heart, I want to
express how grateful I am to them which I cannot say in words. I will not
forget all these contributions.
Finally, because of limitations of time and knowledge, the mistakes are
unavoidable. Therefore, I hope to receive more contributions and suggestions
to make my graduation thesis better.

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ABSTRACT
In the social-oriented market economy with many sectors, enterprises
struggle for a bigger and bigger market share. Being aware of the strong
competition, enterprises in general, construction enterprises in particular;
therefore make a serious concern of accounting. Because, accounting makes
itself available for the business owners to assess and analyze the business's

performance. This will help the owner to decide what improvements they
need to make, or what practices to keep doing in order to keep the company at
it is successful place. Due to its specific business characteristics of building
many constructions, the accounting for Cost accounting and product costing
becomes more difficult and complicated .
After an internship at Bac Mien Trung Consultancy Investment
Construction and Trading Joint Stock Company, my study with topic: “Cost
accounting and product costing in Bac Mien Trung Consultancy
Investment Construction and Trading Joint Stock Company” will point out
how important accounting for expense and cost of product are, and how they
are carried out at the company.
The main content is shown in three chapters.
Chapter 1: Literature review of cost accounting and costing product
Chapter 2: Current situation of cost accounting and product costing in
Bac Mien Trung Consultancy Investment Construction and Trading Joint
Stock Company
Chapter 3 : Some suggestions for improving the efficiency of organizing
accounting in company

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LIST OF ABBREVIATION

Numbe
r

Abbreviation

1
2

Acc
VAS

3
4
5

VAT
No.
Dept

Full phrase
Account
Vietnamese Accounting
Standard
Value Added Tax
Number
Department

TABLE OF CONTENT

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PART 1: INTRODUCTION
1. Rationale of the study
When starting a business, one of the most important aspects to think
about is the accounting process and how you choose to account all of your
financial information. The purpose of accounting for a business is to have a
record of the receipts and expenditures of it is daily activities. Also,
accounting makes itself available for the business owners to assess and
analyze the business's performance. This will help the owner to decide what
improvements they need to make, or what practices to keep doing in order to
keep the company at it is successful place.
Nowadays, every companies work for the only aim of gaining money or
profit. Companies cannot survive with negative business result for a long
continuously period. Therefore, the work of calculating expenses and

calculating the cost of product is more important. The more accurate the
expenses are reflected, the easier the management can find out the existing
problems and look for solutions. That is the reason why accounting for
expenses and cost of product is especially paid attention within accounting
system.
From its foundation, Bac Mien Trung Consultancy Investment
Construction and Trading Joint Stock Company always realizes the
important role of accounting for expenses and costs of product. As a student
of the Academy of Finance, undergo internship at the company, I was an
insight into the organizational structure and the management apparatus of the
company and see the importance of the organization of cost accounting and
product costs. In this situation a research with the topic named: “Organizing
accounting for Cost accounting and product costing in Bac Mien Trung

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Consultancy Investment Construction and Trading Joint Stock Company”
was chosen to be carried out.
2. Aims of the study
The study was carried out in order to achieve: First, it is to show the
situation of carrying out organizing accounting “Cost accounting and
product costing”in Bac Mien Trung Consultancy Investment Construction
and Trading Joint Stock Company to compare with theory. Second, it is to

point out the strengths and weaknesses, achievements and limitations existing,
and suggest possible solutions to improve the efficiency of organizing
accounting in future.
3. Scope of the study
My study mainly focuses on expenses, cost of product and all items
reflected in Journal at June, 2015. Another focus is the accounting method and
procedures applied by the company. All data and figures belong to accounting
fiscal year 2015.
4. Methods of the study
There are two main research methods: qualitative and quantitative
approach that was decided on gathering relevant information from primary
and secondary data sources for the study.
The data for the study was collected from financial statements of Bac
Mien Trung Consultancy Investment Construction and Trading Joint Stock
Company (general journals, ledgers and related vouchers) which is focused
on expenses, cost of product and all items reflected in Journal at June, 2015. It
is primary data.
The secondary data which were collected from existing literature formed
the literature review of this study. The sources of the secondary data included
books, journals, articles obtained from the internet.
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5. Organization of the study

The study comprises three main chapters:
Chapter 1: Literature review. This chapter gives a general overview of
accounting for cost accounting and product costing.
Chapter 2: Reflects to current situation of accounting for Cost
accounting and product costing in Bac Mien Trung Consultancy
Investment Construction and Trading Joint Stock Company
Chapter 3: Some suggestions for improving the efficiency of organizing
accounting in company.

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PART 2 : MAIN CONTENT
CHAPTER 1: LITERATURE REVIEW OF COST ACCOUNTING AND
PRODUCT COSTING
1.1 The necessity of organizing the collection of costs accounting and
calculate cost of product in the enterprise
1.1.1 Meaning of accountants set costs accounting and product costing in
the construction business
In today market economy, competition is inevitable; it forces
companies to enhance their production as well as the quantity and quality of
the products. However, at high quality, the products price must be acceptable
to customer. This is the reason why every company needs cost accounting to
accurate measure and record any costs and expenses appear at the right time,

and from that information, managers could produce ideas and make decision
for future production development in order to generate as much profit as
possible for the company. Making things simple, we can say that there are
three points should be attempt by every corporation: product quality and
design, low down production costs and expenses, and low price for
theproducts and services.
While cost accounting is often used within a company to aid in decision
making, financial accounting is what the outside investor community typically
sees. Financial accounting is a different representation of costs and financial
performance that includes a company's assets and liabilities. Cost accounting
can be most beneficial as a tool for management in budgeting and in setting
up cost control programs, which can improve net margins for the company in
the future.
One key difference between cost accounting and financial accounting is
that while in financial accounting the cost is classified depending on the type
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of transaction, cost accounting classifies costs according to information needs
of the management. Cost accounting, because it is used as an internal tool by
management, does not have to meet any specific standard set by the Generally
Accepted Accounting Principles and as result varies in use from company to
company or from department to department.
Scholars have argued that cost accounting was first developed during the

industrial revolution when the emerging economics of industrial supply and
demand forced manufacturers to start tracking whether to decrease the price
of their overstocked goods or decrease production.
During the early 19th century when David Ricardo and T. R. Malthus
were developing the field of economic theory, writers like Charles Babbage
were writing the first books designed to guide businesses on how to manage
their internal cost accounting.
By the beginning of the 20th century, cost accounting had become a
widely covered topic in the literature of business management.
All types of businesses, whether service, manufacturing or trading,
require cost accounting to track their activities. Cost accounting has long been
used to help managers understand the costs of running a business. Modern
cost accounting originated during the industrial revolution, when the
complexities of running a large scale business led to the development of
systems for recording and tracking costs to help business owners and
managers make decisions.
In the early industrial age, most of the costs incurred by a business were
what modern accountants call "variable costs" because they varied directly
with the amount of production Money was spent on labor, raw materials,
power to run a factory, etc. in direct proportion to production. Managers could

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simply total the variable costs for a product and use this as a rough guide for
decision-making processes.
Some costs tend to remain the same even during busy periods, unlike
variable costs, which rise and fall with volume of work. Over time, these
"fixed costs" have become more important to managers. Examples of fixed
costs include the depreciation of plant and equipment, and the cost of
departments such as maintenance, tooling, production control, purchasing,
quality control, storage and handling, plant supervision and engineering. In
the early nineteenth century, these costs were of little importance to most
businesses. However, with the growth of railroads, steel and large scale
manufacturing, by the late nineteenth century these costs were often more
important than the variable cost of a product, and allocating them to a broad
range of products led to bad decision making. Managers must understand
fixed costs in order to make decisions about products and pricing.
Product cost refers to the costs used to create a product. These costs
include direct labor, direct materials, consumable production supplies, and
factory overhead.
Product cost can also be considered the cost of the labor required to
deliver a service to a customer. In the latter case, product cost should include
all costs related to a service, such as compensation, payroll taxes, and
employee benefits.
Product cost can be recorded as an inventory asset if the product has not
yet been sold. It is charged to the cost of goods sold as soon as the product is
sold, and appears as an expense on the income statement.
Product cost appears in the financial statements, since it includes the
manufacturing overhead that is required by both GAAP and IFRS. However,
managers may modify product cost to strip out the overhead component when
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making short-term production and sale-price decisions. Managers may also
prefer to focus on the impact of a product on a bottleneck operation, which
means that their main focus is on the direct materials cost of a product and the
time it spends in the bottleneck operatio.
Costs that become part of the cost of goods manufactured are called
product costs. Such costs are incurred on manufacturing process either
directly as material and labor costs or indirectly as overheads. Since the
matching principle of accounting requires expenses to be matched to the
revenue they generate, therefore it is necessary to expense product costs only
when the revenue from the sale of products is realized. This is achieved by
debiting product costs to the cost of goods manufactured and thus expensed
only at the time of sale of such goods.
All of the requirements above are considered to be covered by cost
accounting as itself objectives. Cost accounting covers classification, analysis,
and interpretation of cost. In other words, it is a system of accounting, which
provides the information about the ascertainment, and control of costs of
products, or services. It measures the operating efficiency of the enterprise. It
is an internal aspect of the organization. Cost Accounting is accounting for
cost aimed at providing cost data, statement and reports for the purpose of
managerial decision making.
1.1.2 Requirements management costs accounting and product costing in
the construction business
Cost management is the process of planning and controlling the budget
of a business. Cost management is a form of management accounting that

allows a business to predict impending expenditures to help reduce the chance
of going over budget.

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Many businesses employ cost management plans for specific projects, as
well as for the over-all business model. When applying it to a project,
expected costs are calculated while the project is still in the planning period
and are approved beforehand. During the project, all expenses are recorded
and monitored to make sure they stay in line with the cost management plan.
After the project is finished, the predicted costs and actual costs can be
compared and analyzed, helping future cost management predictions and
budgets.
Implementing a cost management structure for projects can help a
business keep their over-all budget under control. Several business
intelligence (BI) programs, such as Oracle Hyperion, offer cost management
software to help businesses monitor costs and increase profitability. While the
software may help, it is not imperative that software is used when executing a
cost management plan.
Vendors may refer to cost management software applications as cost
accounting, spend management or cost transparency products.
Management accounting facilitates the provision of financial
information to management for decision making. Management accounting

also involves the evaluation of alternative strategies and actions by the
application of techniques and concepts such as relevant costing, cost-volumeprofit analysis, limiting factor analysis, investment appraisal techniques and
client / product profitability analysis
Control process in management accounting system starts by defining
standards against which performance may be measured such as standard costs
and budgets. Actual results are measured and any variance between targets
and results are analyzed and where necessary, corrective actions are taken.
Management accounting plays a vital role in the monitoring and control of
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cost and efficiency of the routine processes and as well as one-off jobs and
projects undertaken by an organization.
Management accounting lays great emphasis on accountability through
effective performance measurement. By setting targets for strategic business
units and as well as for departments, management accounting assists in the
assignment of responsibility for the achievement of business targets by
individual managers. Responsibility accounting is achieved by appraising the
performance of managers responsible for their business units while giving due
consideration for factors not within their control or influence.
Product cost management (PCM) is a set of tools, processes, methods,
and culture used by firms who develop and manufacture products to ensure
that a product meets its profit (or cost) target.
There is not an agreed-upon definition for product cost management or

an agreed scope for what it encompasses. Some people argue that PCM is a
synonym for target costing. However, others argue that PCM is different,
because target costing is a pricing method, whereas, PCM is focused on the
maximum profit or minimum cost of a product, regardless of the price at
which the product is sold to the end customer.Some analysts seem to equate
PCM to design-to-cost.
Some practitioners of PCM are mostly concerned with the cost of the
product up until the point that the customer takes delivery (e.g. manufacturing
costs + logistics costs) or the total cost of acquisition. They seek to launch
products that meet profit targets at launch rather than reducing the costs of a
product after production. Other people believe that PCM extends to a total
cost of ownership or lifecycle costing (Manufacturing + Logistics +
operational costs + disposal). Depending on the practitioner, PCM may
include any combination of organizational or /cultural change, processes,
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team roles, and tools. Many believe that PCM must encompass all four
aspects to be successful and have shown how the four parts work together
1.1.3 The task of costs accounting and product costing in the construction
business
Cost accountants complete gross margin analysis related to a company's
products, inventory and its overall value. As an essential part of the
accounting function, cost accountants calculate the costs of goods sold on the

company's financial reports, which affects the company's bottom line. They
also use complicated formulas, software and spreadsheets to help
management and business owners decide what prices to charge for products.
The Cost Accountant will be responsible for:
+ Planning, Studying, and collecting data to determine costs of business
activity such as raw material purchases, inventory and labor.
+ Analyzing data collected and recording results
+ Analyzing changes in product design, raw materials, manufacturing
methods or services provided, to determine effects on cost
+ Analyzing actual manufacturing costs and preparing periodic reports
comparing standard costs to actual production costs
+ Recording cost information for use in controlling expenditures
+ Analyzing audits of costs and preparing reports
+ Making estimates of new and proposed product costs
+ Providing management with reports specifying and comparing factors
affecting prices and profitability of products or services.
+ Maintaining Cost Accounting System
+ Assisting in Month end close of the General Ledger
+ Conducts physical inventories and monitors cycle count program
+ Reconciles finished goods inventories
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1.1.4 The role and significance of costs accounting and product costing in

the construction business
1.1.4.1 The role of costs accounting and product costing in the construction
business
A cost accountant observes and analyzes the costs associated with doing
business. These costs can be tangible or intangible and cover everything from
the cost of the office lease to inventory and labor expenditures. A person in
this position is responsible for determining which costs can be reduced or
eliminated and how to implement the savings without compromising the
quality of daily operations or customer service.
The analysis process of a cost accountant is fairly constant regardless of
the industry in which he works. The cost accounting software used can be
generic, industry specific or created in-house for the specific company. The
software program normally consists of a database of costs, both fixed and
variable. It usually includes basic features to track changes and project
fluctuations in expenditures and assets.
Armed with these software parameters, a cost accountant delves into
detailson material, manufacturing and labor costs. He includes analyses of
costs versus profitability in all areas of operation. The finer points of his
research may include utility costs, real property and equipment values, tax
issues and variations in profit margins. Reports reflecting his findings are
generally supplied to management.
Cost accountants may find standard systems for analysis insufficient, as
their capabilities are often limited. In this case, the accountant may create his
own database and create checks and balances tailored to the research at hand.
He is mosteffective in his job when the data accumulation and analysis system
is streamlined to meet his diagnostic needs. Customized software systems also
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facilitate the creation of reports for management that pinpoint critical areas of
concern.
Unlike product costing, cost accounting doesn't have the problems
associated with adjusting projections to suit modern manufacturing techniques
or counting individual inventory components. This allows cost accounting to
deliver detailed reports regarding the cost of each phase of production. A
business can use these reports to specifically target areas of the company for
cost reduction and efficiency improvement. Additionally, cost accounting
focuses solely on the cash spent to create goods as an economic factor of
production. This means a business using cost accounting views money as the
single factor affecting the company's ability to produce goods and services.
1.1.4.2 Significance of costs accounting and product costing in the
construction business
The significance of cost accounting is its capacity to shed light on the
overall profitability of company operations. The better you understand the
financial workings of your business, the better you can fine-tune processes
and limit unnecessary waste. Cost accounting allows you to look past the dayto-day mechanics of managing cash flow to assess whether your company is
actually making money or whether you need to tighten systems and reassess
priorities.
Cost accounting addresses business expenditures, or sums that your
company spends to operate its infrastructure and provide customers with
products and services. The cost accounting process tracks variable costs, or
expenditures such as materials and payroll that go directly into the products
and services you provide. Cost accountants also tally fixed costs, or other
expenses such as rent and utilities that do not change much regardless of sales

volume.
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When you are calculating your company's finances, accuracy is crucial
to both financial statements and tax filings. Each component of your financial
statements and reporting impact the overall financial picture presented for
your business. Incorrect calculations or inaccurate reports can create legal
problems with your tax filings as well as significant concerns from investors.
When you are calculating your company's finances, accuracy is crucial
to both financial statements and tax filings. Each component of your financial
statements and reporting impact the overall financial picture presented for
your business. Incorrect calculations or inaccurate reports can create legal
problems with your tax filings as well as significant concerns from investors.
When you are calculating your company's finances, accuracy is crucial
to both financial statements and tax filings. Each component of your financial
statements and reporting impact the overall financial picture presented for
your business. Incorrect calculations or inaccurate reports can create legal
problems with your tax filings as well as significant concerns from investors.
Your inventory calculations on the balance sheet rely on accurate
reporting of the direct costs of your product. If you fail to calculate your
product cost correctly, your inventory value will be inaccurate. Depending on
the amount of the error in calculation, it can create a material error in your
asset reporting. The company's assets are an important factor in determining

the worth of your business, particularly when you are seeking investments or
financing.
When you calculate product costs, the approach varies if you
manufacture the product versus buying from a wholesaler. If you purchase
your product from a wholesaler, the product cost is simply represented as the
price you pay to acquire the product. When you manufacture the product inhouse, consider all of the associated costs. The overhead for your
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manufacturing facility, payroll for manufacturing activities and the cost of
parts are all part of your cost of goods sold.
1.2 Costs accounting and classification of costs in the construction
business
1.2.1 Costs accounting
Cost accounting is a process of collecting, recording, classifying,
analyzing, summarizing, allocating and evaluating various alternative courses
of action & control the cost. Its goal is to advise the management on the most
appropriate course of action based on the cost efficiency and capability. Cost
accounting provides the detailed cost information that management needs to
control current operations and plan for the future.
Expenses are the decreases in economic benefit during the accounting
period in the form of outflows and depletion of assets or incurrence of
liabilities that result in decreases in equity, other than those relating to
distributions to equity participants (VAS 01-The general standard). The

definition of expenses encompasses losses as well as those expenses that arise
in the course of the ordinary activities of the entity. Expenses that arise in the
course of the ordinary activities of entity include cost of sales, wages and
depreciation.
1.2.2 Classification of costs accounting
Classification of cost means, the grouping of costs according to their
common characteristics. The important ways of classification of costs are:
By Element: There are three elements of costing i.e. material, labor and
expenses.
By Nature or Traceability:Direct Costs and Indirect costs. Direct Costs
are Directly attributable/traceable to Cost object. Direct costs are assigned to
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Cost Object. Indirect Costs are not directly attributable/traceable to Cost
Object. Indirect costs are allocated or apportioned to cost objects.
By Functions: production,administration, selling and distribution, R&D.
By Behavior: fixed, variable, semi-variable. Costs are classified
according to their behavior in relation to change in relation to production
volume within given period of time. Fixed Costs remain fixed irrespective of
changes in the production volume in given period of time. Variable costs
change according to volume of production. Semi-variable costs are partly
fixed and partly variable.
By control ability: controllable, uncontrollable costs. Controllable costs

are those which can be controlled or influenced by a conscious management
action. Uncontrollable costs cannot be controlled or influenced by a conscious
management action.
By normality: normal costs and abnormal costs. Normal costs arise
during routine day-to-day business operations. Abnormal costs arise because
of any abnormal activity or event not part of routine business operations. E.g.
costs arising of floods, riots, accidents etc.
By Time: Historical costs and predetermined costs. Historical costs are
costs incurred in the past. Predetermined costs are computed in advance on
basis of factors affecting cost elements. Example: Standard Costs.
By Decision making Costs: These costs are used for managerial
decision making.
Marginal costs: Marginal cost is the change in the aggregate costs due
to change in the volume of output by one unit.
Differential costs: This cost is the difference in total cost that will arise
from the selection of one alternative to the other.

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Opportunity costs: It is the value of benefit sacrificed in favor of an
alternative course of action.
Replacement cost: This cost is the cost at which existing items of
material or fixed assets can be replaced. Thus this is the cost of replacing

existing assets at present or at a future date.
Shutdown cost:These costs are the costs which are incurred if the
operations are shut down and they will disappear if the operations are
continued.
Capacity cost: These costs are normally fixed costs. The cost incurred
by a company for providing production, administration and selling and
distribution capabilities in order to perform various functions.
Sunken cost: cost already incurred
Other costs.
Relevant cost: The relevant cost is a cost which is relevant in various
decisions of management.
1.3 Costs of production and classification costs of production in
construction business
1.3.1 Costs of production
The cost of product is the cost of the merchandise that a retailer,
distributor, or manufacturer has sold (VAS 01-The general standard). The cost
of product is reported on the income statement and can be considered as an
expense of the accounting period. When costs change during the period, a cost
flow will have to be assumed.
1.3.2 Classification costs of production
Product costs refer to the costs used to create a product. These costs
include direct labor, direct materials, consumable production supplies, and
factory overhead. Product cost can also be considered the cost of the labor
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required to deliver a service to a customer. In the latter case, product cost
should include all costs related to a service, such as compensation, payroll
taxes, and employee benefits.
The cost of a product on a unit basis are typically derived by compiling
the costs associated with a batch of units that were produced as a group, and
dividing by the number of units.
1.4 The relationship between costs accounting and product costing in the
construction business
Basically, cost and product cost represent for cash out-flow of a
manufacturing process cycle. cost in a period is the basis unit to calculate the
price of products, tasks, or jobs which had done in that period. Cost has
directly influence to the cost of the product that a company producing. There
are some differences between cost and cost of product, as follow:
a. Cost is directly connected with the period that cost occurs. For more

detail, when we mention of a cost, also we must give a specific period
of activity, otherwise the information of cost will useless for manager.
Product cost, on the other hand, is not really directly connected to
producing period, but it is connected to a specific amount of cost for a
number of finished product units.
b. Cost in a period may include items such as indirect material, indirect
labor, maintenance and repairs on production equipment (which may be paid
from previous period but the services only reality occur in the current period)
and heat and light, property taxes, depreciation, and insurance on facilities.
However, product cost only be considered with costs assigned during the time
a number of products started to be produce till the time they are finished
goods.

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c. cost is not only related to finished product but also related to unfinished product and fail product at the end of financial period. On the other
hand, product cost is only related to the cost of un-finished product brought
forward from the previous period and the cost of finished product in current
financial period, it means that product cost is not covered the cost of fail units
or un-finished units at the end of a period.
1.5 Organizing accounting for costs accounting
1.5.1 Methods of accounting for costs accounting
These pronouncements permitted the use of two different accounting
methods for the treatment of construction contracts:
+ Cash
+ Completed Contract;
+ Percentage of Completion.
The completed-contract method recognizes revenue upon completion of
the contract; the percentage-of-completion method recognizes revenue over
the life of the contract.
The two methods should not be used for the same circumstances as
acceptable alternatives from which contractors are free to choose as suits
them. The percentage-of-completion method ordinarily is to be used for the
accounting of long-term construction contracts except in two situations:
Where reasonably reliable estimates cannot be made; or
Where the results of using the completed-contract method do not differ

materially from those obtained by using the percentage-of-completion
method.
It is ordinarily presumed that virtually all contractors are capable of
making reasonably reliable estimates, otherwise their companies would not be
going concerns. SOP 81-1 states:
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For entities engaged on a continuing basis in the production and
delivery of goods or services under contractual arrangements and for whom
contracting represents a significant part of their operations, the presumption is
that they have the ability to make estimates that are sufficiently dependable to
justify the use of the percentage-of-completion method of accounting.
Persuasive
1.5.2 Organizing accounting for costs accounting
evidence to the contrary is necessary to overcome that presumption. The
ability to produce reasonably dependable estimates is an essential element of
the contracting business. Accordingly, entities with significant contracting
operations generally have the ability to produce reasonably dependable
estimatesand for such entities the percentage-of-completion method of
accounting is preferable in most circumstances.
All attributable costs of a contract must be recognized as construction
costs. Other costs that cannot be reasonably attributed to contract activity
shall be charged as general and administration expense in the accounting

period they are incurred. Contract costs consist of the following:
-

Direct or Specific Costs of the construction contract. Examples of
direct costs include:

-

Direct material consumed on a specific project
-Direct labor allocated to a particular contract (e.g. project in charge,

site engineers, etc)
- Insurance cost specifically incurred on a construction contract
- Depreciation of machinery and equipment used on a specific contract
- Indirect Costs that may be allocated to individual contracts on a
reasonable basis.

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Examples of such costs include:

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Allocation of the cost of central technical assistance department based on
for example number of hours spent by technical staff on various contracts

Insurance cost allocation in respect of machinery used on multiple sites
Construction overheads
Allocation of salary of staff employed on multiple contracts (e.g. project
supervisors)
Indirect costs must be allocated on the basis of normal level of
construction activity. Similar to the requirements of IAS 2 Inventory, any
abnormal wastage must not be included in the contract costs. This is to
prevent recognition of any such costs as construction assets which are not
likely to be recoverable in the future.
Any other costs specifically allowable under the contract.
Contract Costs are recognized according to the method of stage of
completion used. Contract costs incurred but not recognized in income
statement are included in the Gross Amount Due from Customers as
explained below.
1.6 Organization of accountants calculate product costs
1.6.1 Product cost calculation period
IAS 11 Construction Contracts was introduced in order to counter the
deficiencies observed in accounting for construction contracts. It defines how
a contractor should recognize costs and revenue over the life of a construction
contract.
IAS 11 proposes accounting for construction contracts on the basis of
expected outcome.
a) Outcome of a contract can be reliably measured:
Net Profit: If a profit is expected under the contract, revenue and costs
(and hence profit) are to be recognized in the income statement based on the
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Pham Thi Lan Anh

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