Business

How should Project Expenditure be Treated in Accounting

Should Project Expenses go under Manufacturing Expenses

There is stand alone arguments in favor of project costs to be the part of the Cost of Goods Sold in any manufacturing company. In practice, should these costs go under manufacturing costs? I say, No.

From the day one, when a new project gets start, all the expenses associated with that project should be booked under a CIP (Capital-in Progress) account. Until the project is fully completed and certified by a competent authority of the manufacturing entity these cost must be accumulated to that project.

When the certificate of completion is given by the competent authority, it is the accounting department of the entity who will capitalize the project and classify all the project activities into different tasks and assign assets of the project to the different costs centers.

Since all the expenses from day one till the end of the project are capital in nature, these should not be directly expended out in the income statement. Again, since these costs are not directly attributed to the cost centers before capitalization, should not be treated as manufacturing costs.

That means, project expenses are Balance Sheet items and not the items of the Income Statement.

How should a Project be opened?

A project is comprised of a group of tasks and activities. It may be completed in a single phase or extend upto different phases. But every activity under the project should be assigned to a task. From the very beginning of the project, all expenses related to materials, labor, payroll, machines, installation, testing etc. should be booked or recorded in a CIP account by the accounting department.

Each expense should be grouped and tagged with an activity or task with a task number and associated area or cost center mentioned where post project expenditures i.e. depreciation, repair etc  should go to.

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