“Aggregating production cost and evaluating unit cost in Huong Giang construction company”.

Graduation thesis Aggregating production costs and evaluating unit cost

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, 2006

Dang Thi Lan Anh

dang thi lan anh accounting and auditing 1

Graduation thesis Aggregating production costs and evaluating unit cost

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:

dang thi lan anh accounting and auditing 2

Graduation thesis Aggregating production costs and evaluating unit cost

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:

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Graduation thesis Aggregating production costs and evaluating unit cost

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:

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Graduation thesis Aggregating production costs and evaluating unit cost

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:

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:

dang thi lan anh accounting and auditing 5

Estimation

of cost

Cost to finish the estimation

volume of construction

Normed

profit = +

Graduation thesis Aggregating production costs and evaluating unit cost

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.

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.

dang thi lan anh accounting and auditing 6

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

Graduation thesis Aggregating production costs and evaluating unit cost

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.

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Graduation thesis Aggregating production costs and evaluating unit cost

Finally, management of unit cost must be linked to production costs

management.

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

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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