Project Cost Allocation
 

The allocation of project costs enables a reasonable estimation of the project's revenue and expenses, allowing the profit or loss of the project to be calculated based on the percentage of completion.

Recognizing project revenue is relatively straightforward, requiring only the issuance of invoices according to the progress of the project contract. However, the method of recognizing all project costs and expenses is more intricate. For example, determining which costs and expenses belong to which project can be challenging, especially when a project manager must handle multiple large and small projects each month. Additionally, the purchasing department is responsible for tracking supplier progress to procure the necessary equipment or materials for the project. Therefore, the salaries of these employees are considered project expenses and must be appropriately detailed to classify the various types of work and allocate costs to the respective projects.

The following procedures will undoubtedly assist you:

1. After each department is assigned tasks within the project, they must follow the subsequent evaluation plan:

• Assign a project code: Enter the forecasted revenue and costs.
• Create a sales order: Specify the project code to monitor contract progress and determine the financial amounts.
• Create purchase requisitions and specify the project code: Refer to the contract agreement for procuring necessary equipment and materials.
• Submit expense claims: For each department involved in the project, according to the project code.

2. The purchasing department will execute procurement and select suppliers based on purchase requisitions from the collaborating departments.

• Track equipment and materials until they reach the site, including verifying quality specifications.
• If the project involves sub-tasks, create a code for each sub-task.
• Supervise the status and progress of the project's various sub-tasks (according to the sub-task codes).
• Record work activities categorized by the project's or sub-task's codes.
• Generate payment requests based on purchases linked to the project's or sub-task's codes.

3. The operations department can monitor on-site requirements.

• Assign a Cost Center: Select the appropriate operations department for the project. For example, the project is divided into North, Center, and South.
• Deliver equipment and materials to the site according to the project code, including testing and installation.
• Ensure that personnel involved in the project log their work according to the project code.
• Generate invoices for expenses according to the project code.

At the end of each month, the finance department will compile invoices and receipts according to the project code (e.g., sub-task acceptance invoices, equipment and material receipts, work logs, other project expense invoices, and compensation schedules for personnel involved in the project) to confirm the actual costs incurred each month by project code and the costs that need to be allocated to the project. Direct project expenses must be allocated according to the project code.

Direct costs that must be allocated to the project:

1. Expenses claimed under the project code, such as office rent, including utilities and other related costs.

   • Debit: Project Expenses, Project Code xx1, ฿฿
   • Credit: Accrued Expenses, ฿฿

2. Delivery of equipment and materials to the site, including testing and installation.

   • Debit: Project Raw Materials, Project Code xx1, ฿฿
   • Credit: Inventory, ฿฿

3. Inspection costs for the project's sub-tasks.

   • Debit: Project Expenses, Project Code xx1, ฿฿
   • Credit: Accounts Payable, ฿฿

Indirect Costs to Be Allocated to the Project Code:

1. Project Personnel Compensation

   Calculate the compensation for project personnel using the monthly work log data for each employee based on the project code (as shown in Symbol A).

   • Debit: Project - Salary, Project Code xx1, ฿฿
   • Debit: Project - Salary, Project Code xx2, ฿฿
   • Debit: Project - Salary, Project Code xx3, ฿฿
   • Credit: Salary, ฿฿

2. Purchasing Department Employees Overseeing Sub-Task Expenses

   Calculate the compensation for purchasing department employees using their monthly work log data, based on the project code (as shown in Symbol C).

   • Debit: Project - Salary, Project Code xx1, ฿฿
   • Debit: Project - Salary, Project Code xx2, ฿฿
   • Debit: Project - Salary, Project Code xx3, ฿฿
   • Credit: Salary, ฿฿

3. Compensation for Project Management Employees

   Allocate the compensation for management employees to the cost center based on the designated proportion for each individual. Then, compare this with the total project working hours for the month, and allocate it to the respective project codes (as shown in Symbol B).

   • Debit: Project - Salary, Project Code xx1, ฿฿
   • Debit: Project - Salary, Project Code xx2, ฿฿
   • Debit: Project - Salary, Project Code xx3, ฿฿
   • Credit: Salary, ฿฿

4. Allocation of Other Expenses to the Projects

   Determine the proportion first, then allocate it to each cost center. Compare it with the total working hours for each project during the month, and allocate it to the respective project codes (as shown in Symbols B and C).

   • Debit: Project - Salary, Project Code xx1, ฿฿
   • Debit: Project - Salary, Project Code xx2, ฿฿
   • Debit: Project - Salary, Project Code xx3, ฿฿
   • Credit: Salary, ฿฿

If it is not possible to clearly categorize expenses to a project code, the method of allocating costs based on the work hours can be used, as mentioned above. This method allows for a clear understanding of how many work hours have been allocated to each project code and what related expenses have been incurred.

When starting a project, use the estimated project completion date, the project start date, and the number of personnel required to calculate the total work hours. Then, compare these with the current work hours to assess the project's current progress and predict whether future progress will align with expectations. Additionally, compare the actual costs incurred with the originally estimated costs to understand the current cost progress. This information is highly beneficial for management in analyzing and making informed policy decisions.

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