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Concept of Project Costing

CMA Ramesh Krishnan 
on 31 December 2012

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Introduction: Costing of an each product or activity will differ from product to product and activity to activity. But the concept of the costing is same for all type of costing whether Product costing or Service costing. In this article I would like to discuss about the concept of Project costing which involves both product & service costing methods.

Project: Project means a set of activity to create unique asset, product or service. It has defined start and end points. A project should have the clear set of goals and objectives.

Project Costing: Project Costing involves identification, formulation, collection and proper presentation of a various costs involving in various stages of a particular project. In simple terms preparation of Cost sheet for a particular project.

Purpose of Project Costing: Basic object of doing the project costing is to ascertain the cost of each activity of the project and to calculate the cost of total project. We can fix the price & margin of the project costing based on project costing. Also various management purposes like to implement the cost controlling system, optimize the project cost and to submit for bank funding etc. project costing is the very important in project management system.

Types of project based on Costing: We everyone knows generally several types of projects such as categorize based on need, time, size, location etc. however based on the costing, we can categorize the projects following 3 types:

a. Project involving only material.

b. Project involving only Labour.

c. Project involves both Labour & Material.

Whatever the project nature or size we can categorize in to above three types. The Concept of Project Costing also based on these types only. We can discuss now each type in detailed.

a. Project involving only Material: It can be also called as supply project. Generally this type of project will be a part of some big project. It involves only supply of material item or items for project period which require completing the project based on the customer requirement.  Costing for this type only calculate the cost of the material supplied or to be supplied with using the Cost Accounting Standard -6 Material cost and any other overheads which directly and indirectly involves to supply the materials.

b. Project involving only Labour: Where the project only involving labour works. It is purely a service project. Labour work may be professional consultancy works or manual labour works which required completing the project. it may be continues work throughout the project period or only one time work in the project period.  Examples of these types of projects are designing, engineering and all type of project involves labour work only. Basic costing involves this type of project is service Costing.  We need to find out the Cost of labour supplied directly and indirectly to the project works with using the Cost Accounting standard -7 Employee cost and any other direct and indirect overheads with using applicable Cost accounting standards. Also this type of project may involve use of material supplied by the customer while doing labour works. We may need to calculate the value of materials  which is issued by the customer available with labour contractor, even though cost is not involved we may need to calculate those material cost to reconcile the material for settlement with the customer.

c. Project involve both labour & material: This is an complete project which starts from designing of project and material supply and labour work together, we may also called these  projects as Engineering, Procurement & construction (EPC) projects. Complete set of project costing will apply this type of project costing only. Project beginning stage we need to do costing of engineering & designing kind of professional work. The project cost sheet of these projects will give comprehensive application of all Cost Accounting standards starting from calculation of cost of material usage, labour cost, direct & indirect overheads, administrative overheads, repairs & maintenance, transportation cost & depreciation. Activity based Costing (ABC Method) also we can use widely for all type of project activities. We can do calculation of cost of each activity before projects starts and set of those computed cost as standard cost for those activity and we can control the cost as well as compare the variances. Calculation of stock of material available in the project & work in progress in the project activity also a part of project costing.

Conclusion: The concept of product & project cost are same which is collection of costs from various activity as material, labour & overheads, whereas  product cost sheet we calculating the Cost of goods manufactured & Cost of goods sold, in project costing we calculating the cost of particular project activity or activates.

Thank you.

Wish you all a very happy & Prosperous New year 2013.

CMA Ramesh Krishnan




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