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PM 521 Project Cost Accounting and Finance

American University of Ras Al Khaimah

School of Engineering

Dr. Ahmed Al sharif

Instructor

• Instructor: Dr. Ahmed Al sharif• Phone: 072210500 – Ext. 1158• Email: ahmed.alsharif@aurak.ae• Office: Bld. C. Room # 44• Office hours: …………. or by appointment, or just stop by.

Course Work

• Assignments (timed)• HW • Case studies• Project

• Exams: Mid term +Final exam• Course material• Will be Posted

• Blackboard and email policy.• Groups: Team up or work individually• Instruction Language : English

Grades

•Semester work: Homework, cases, and participation 40•Mid Term 15•Final project 20•Final exam 25

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Textbook: Chapters from:

•Cost Accounting: A Managerial Emphasis, 14th Edition . Horngren, Charles T. . •Financial & Managerial Accounting, Warren & Reeves•Essentials of Managerial Finance, Beasley, 14th Edition

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Course Goal

•To introduce certain accounting and financial concepts, tools and techniques that are used in the effective management of the company’s financial resources.

The Honor Code and Honor System• Read the course outlines

Week 1:MEPE 521 Project Cost

Accounting and Finance

Terms and Concepts

Introduction

Project Managers

•The first step toward advancement is to become proficient in project management knowledge and skills.•Project managers, typically, are not accountants.•Project managers need to acquire knowledge beyond their area of expertise.

Accounting and finance in project management •Accounting and finance are related to project management and can serve to help an organization perform projects in a manner that supports sound financial and accounting management.

Review of project management stages1- Initiation: Project charter• The project charter in particular includes the definition of

success for the project. • This definition ought to include a description of the financial

success of the project and how it will be measured. • This definition provides the guidelines by which project

performance may be judged.• Often project sponsors ask what a project’s return on

investment (ROI) will be.

2- Planning: Work breakdown structure, project schedule, project budget and cash flow, resource plan, procurement plan, quality plan, risk response plan - If the project is for an external client, there may be a request for proposal and a contract or some other agreement for services.

•How to develop and monitor the project budget as well as how to develop and monitor a project cash flow. (Project Cost)• The procurement plan covers materials that are

needed for the project, along with estimated costs.•During project execution and control, project

managers monitor the cost of quality by ensuring that any work related to quality prevention is completed and by determining whether any correction work is necessary.

Risk response plan•What will it cost to mitigate for risk, and what are the potential costs if risk occurs?•The potential costs are often expressed as contingencies and the amount of resource time or money that is budgeted for use if risk occurs.

3-Project Execution•Project managers must not only ensure that work is progressing as planned, but also must monitor all aspects of project execution, in particular the financial results.•If managers do not have an accurate measurement of the expenditure of resources and materials, then they cannot determine the actual cost of a project or understand how the project is performing financially.

4-Project Control•Project control consists of one primary process: project status reporting. •There are four secondary processes: schedule control, change control, risk control, and quality assurance control.

Change control•Once the estimates are complete, the stakeholder can accept or reject the change.•Effects of the change on the project, on the cost.•Changes could affect the financial health of the project.

Earned Value

•Earned value calculations express the amount of value that a project has created at any given point in the project in relationship with the amount of value that should have been created at that point.•Earned value can be expressed in terms of schedule or cost.

•One way for project managers to making greater contributions to your organizations is by gaining expertise in finance and accounting, thereby enabling them to view the organization from a different perspective and to make a greater contribution to it.

Accounting

Definition of Accounting

• Accounting is a system for recording information about business transactions to provide summary statements of a company's financial position and performance to users who require such information

•Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

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Accounting

… is an information system thatmeasuresprocesses

communicatesfinancial information

about an identifiable, economic entity

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•Financial accounting•Cost accounting•Management accounting

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Financial accounting

•Provides information to users who are external to the business• It reports on past transactions to draw up financial statements•The format are governed by law and accounting standards established by the professional accounting policies

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Cost accounting

•Is concerned with internal users of accounting information, such as operation managers.•The generated reports are specific to the requirement of the management.•The reporting can be in any format which suits the user

Management Accounting

Use various internal accounting reports for planning, control and decision making • Focuses on internal decision makers • Reporting format is flexible and based on the type of information needed, such as budgets and sales forecasts• Used to report past performance and expected future performance

Cost Accounting

Define Terms

1) Cost :• Expenditure incurred in producing a product

or in rendering a service•measurement, in monetary terms, of the

amount of resources used for the purpose of production of goods or rendering services.

2) Costing :The technique and process of ascertaining costs.

3) Cost Accounting : • Begins with recording of income and

expenditure• ends with the preparation of periodical

statements and reports

Uses of Cost Accounting Information

Determination of Selling PricePlan and controlAssisting Management in decision-making• The information produced by a cost accounting system provides

a basis for determining product costs and selling prices, and it helps management to plan and control operations.• The cost accounting information system must be designed to

permit the determination of unit costs as well as total product costs.

Determining the selling price of a product.

• Knowing the manufacturing cost of a product aids in determining the desired selling price. selling price should be high enough to cover all costs and provide satisfactory profit.•Meeting competition. (reducing the selling price). Detailed

information regarding unit costs can be used to determine whether the problem can be resolved by reducing the selling price,• Bidding on contracts. Knowledge of the unit costs attributable to a

particular product is of great importance in determining the bid price.• Analyzing profitability. Unit cost information enables management

to determine the amount of profit that each product earns

Planning and Control

• Planning is the process of establishing objectives or goals for the firm/project and determining the means by which they will be met.• Cost accounting information enhances the planning process

by providing historical costs that serve as a basis for future projections.•Management can analyze the data to estimate future costs

and operating results and to make decisions regarding the acquisition of additional facilities, any changes in marketing strategies, and the availability of capital.

•Control is the process of monitoring the company’s operations and determining whether the objectives identified in the planning process are being accomplished.

=Responsibility accounting and cost center .•A cost center is a unit of activity within the factory to

which costs may be practically and equitably assigned. =Cost and production reports.The performance report will include only those costs and production data that the center’s manager can control.

1. Periodically Measuring and Comparing Results.The actual dollars, units produced, hours worked, or materials used are compared with the budget, which is management’s operating plan expressed in quantitative terms (units and dollars). This comparison is a primary feature of cost analysis.2. Taking Necessary Corrective Action. The performance reports may identify problem areas and deviations from the plan.

Finance

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Business Goals, Activities, and Performance Measures

•Business •An economic unit that aims to sell goods

and services to customers at prices that

will provide an adequate return to its

owners

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Business Goals

•Profitability•The ability to earn enough income to attract and hold investment capital

•Liquidity•Having enough cash available to pay debts when they are due

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Business Activities

•Financing Activities•Investing Activities•Operating Activities

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Operating Activities

•Involve activities associated with the course of running a business•Selling goods and services•Employing managers and workers•Buying goods and services•Paying taxes

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Investing Activities•Activities associated with spending funds to begin and

continue operations• Buying resources such as land, buildings, and equipment

needed in the operation of the business• Selling these resources when no longer needed

• Selling land, buildings, and equipment is associated with investing activities, even though it results in a cash inflow, because it involves resources used to begin and continue operations

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Financing Activities•Activities associated with obtaining adequate funds to

begin and continue operations• Issuing stock• Paying dividends to stockholders• Obtaining loans from creditors• Repaying amounts to creditors, plus interest

•Payments of dividends and interest are associated with financing activities, even though they involve cash outflows, because they are necessary to obtain funding

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Separate Entity

•A business is distinct from its•Owner(s)•Creditors•Customers

•Its financial records and reports should refer only to its own financial affairs

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Financial Position

• Economic resources that belong to a company and the claims against those resources, at a point in time.

• Economic Resources = Equities

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Financial Accounting EquationAssets = Liabilities + Owner’s Equity

Two sides of equation are always in balance• Assets• Economic resources owned by a company that are expected to

benefit future operations• Liabilities• Obligations of a business to pay cash, transfer assets, or provide

services to other entities in the future• Represent claims of creditors to the assets of the business

• Owner’s Equity• Represents the claims by owners to the assets of the business

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Owner’s Equity

•Assets = Liabilities + Shareholder Equity•Shareholder Equity components:•Contributed Capital. Amounts paid in by investors in exchange for capital stock•Retained Earnings. Shareholder equity generated by operations less dividends paid out

Communications Through Financial Statements- The Annual Report

• Balance Sheet- Financial position (listing of resources and obligations) on a specific date• Income Statement- Results of operations over a period of time using accrual accounting (i.e., recognition tied to business activities)• Statement of Cash Flows- Sources and uses of cash over a period of time• Statement of Stockholders' Equity- Changes in stockholders' equity over a period of time

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Income Statement

• Summarizes revenues earned and expenses incurred over a period of time

• Dated “For the Month Ended …”

• Purpose to measure a company’s performance over a period of time

• Shows whether or not a company achieved its profitability goal

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Income Statement (cont’d)

• Considered by many to be most important financial statement • Also called• Statement of operations• Statement of earnings• Profit and loss statement

• First financial statement to be prepared in a sequence • Net income figure used to prepare statement of retained

earnings

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Statement of Retained Earnings

• Shows changes in retained earnings over a period of time

• Dated “For the Month Ended …”

• Uses net income figure from income statement

• Retained Earnings end of period balance used to prepare balance sheet

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Balance Sheet

• Shows the financial position of a business on a certain date

• Dated as of a certain date

• Presents view of business as holder of assets that are equal to the claims against those assets

• Claims consist of liabilities and stockholders’ equity

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Statement of Cash Flows

• Shows cash flows into and out of a business over a period of time

• Dated “For the Month Ended …”

• Focuses on whether the business met its liquidity goal

• Explains how the Cash account changed during the period

•Questions?