Allocating Indirect Costs

Accounting for And Allocating Indirect Costs:

Allocating indirect costs are as important as direct job costs. Although, these costs are not directly related, they are still costs that need to be accounted for to obtain the true costs of the jobs.

So,  how do we account for these indirect costs?

For Further Reading:

Allocating Indirect Costs IRS.GOV

The Body of Knowledge for CCIFP’s – Answers to Q- on previous post

The Body of knowledge for the CCIFP – Answers from previous Post!

On our previous post we discussed Chapter 4 – Income Recognition and we had homework!

How many of you did your homework?  Come on now… raise your hands!!  : – )

Well, no worries… because we are going to answer them in this post!

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The Body of Knowledge for CCIFP’s Income Recognition – Questions

Income Recognition:

We’ve previously discussed Income Recognition and how it differs in construction accounting versus other industries.

By now I’ll assume everyone has “The Book” or has been following along. If you are just getting started or new following the CCIFP Study Blog, you can read up on the Income Recognition or get a copy of “The Book” by clicking this link.

I’d like to thank you all for following, and encourage your feedback / responses. Feel free to comment anytime!

Alright then…. Let’s get started!

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Revenue Recognition

There are several variables that come into play when working with revenue recognition in the construction industry.

Chapter 4 4.01 in “The Book”, discusses the Financial Reporting – GAAP (Generally accepted accounting principles), that must be followed when presenting your financials. As most of us know, and for those of us who don’t  know, the construction industry has two types of methods for financial accounting and reporting which are conformed with GAAP.

The two GAAP acceptable methods of the income recognition:

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Accounting & Reporting – Admin

Administrator of the Finance Department “THE BOOK” 2.01-2.03

Hiring, training, motivating and organizing the finance department will help streamline processes, assure accuracy and timely reporting.

Looking back in my career, I do appreciate these four essential processes when managing the finance and accounting department. When it’s time to hire the right person in your department, put a plan together. This is one of the most important decision you can make for your organization.

As the book mentions hiring is considered one of the most important functions that a manager performs. Put the keys in the wrong hands and it’s heading for a train wreck! I’ve heard many stories from hiring managers (including my own) how they made terrible mistakes in the hiring process.

This is where your policies, procedures and processes written out in a format that is easy to read and follow.

The three P’s will help you in the hiring, training, motivating and organizing process. The first thing I do is to create my headers. The Who, What, Why, Where, When and How’s. Then, I’ll go back to each header and write out a draft under each one. Once I have my draft, I’ll go back and re read it, and re write it until I feel it’s a comprehensive plan that is easy to read and follow.

You’ll need your job description, the three P’s and your hiring criteria to hire, train, motivate your assistant. And, have an organized office with streamlined processes, accurate and timely financials.

Let’s recap on this-

Hiring, if you were tasked to hire an assistant for the accounting department, who would you hire, what would they need to know, how would you know if they are the right person, and when would you be able to make a decision?

These are all very good questions to ask yourself while you write up the expectations for the position.

Training, you’ve made a decision, you hired your assistant. Now, who is going to train the new hire? What will they need to know? Why would they be motivated to learn? Where would you start in the training process? When would you release responsibilities to the new hire? How would you know when the new hire is ready to be work independently?

Motivation, When writing your three P’s, Who would be the subject matter go to person for questions? What materials would you need to include in the three P’s to have an easy to read and easy to follow study plan? Where will training take place? How will your train the new hire?

Organization, Having an organized office setting, which includes a training program will be a form of motivation for your new hire and for existing employees to include yourself. Many times I’ve searched for information and could not find it due to lack of organization. If you have a comprehensive plan in place for everyone to follow, your organization will be organized.

Think about the Who, what, why, where, when and how’s when putting together your plan for hiring, training, motivating and organizing your office.

Remember: Rome Wasn’t Built in a Day, But They Were Laying Bricks Every Hour. –John Heywood

Further Reading: “The Book”

More to come…….

 

Impact of Change Orders on Revenue

Let’s discuss the impact of change orders on revenue. (2.15 AICPA Construction Contractors Audit & Accounting Guide), Accounting for change order depends on the underlying circumstances, which may differ for each change order depending on the customer, the contract, and the nature of the change.

2.18 If the percentage-of-completion method is used and the contractor and the owner agree on both the scope and price of a change order, contract revenues and costs should be adjusted to reflect the change order.

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Percentage of Completion Method

The construction Industry is by far different from any Industry I’ve worked in. The (our) standard industry month end close accounting policy, we’d have your typical month end close process. We used a purchase order system for our expenses. And, any PO’s that we didn’t have an invoice for, we accrued in the current month and reversed in the following month. Almost all revenue was booked or Expenses were booked in the month they occurred (with each other)(on the accrual method).

The Construction Industry however,

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