Project management accounting tracks the costs for specific business projects or processes. This type of accounting falls under the standard job order cost accounting method. Individual financial reports provided by project management accounting indicate whether the project is on budget, has major cost overruns, or is failing to meet other financial goals set by management.
Job order costing tracks all costs associated with specific individual projects. Companies use projects to track the success of individual activities in their company. These projects are often under the direction of project managers who need information on financial performance.
Companies use job order costing to track direct materials, direct labor, and manufacturing overhead. Each item used in a project has a specific account on the general ledger. Accountants will record costs for each project every time an item is used. The total of these costs represents the current project cost.
Some companies may separate costs into categories to understand which area is the result of cost overruns. For example, when projects fall behind, more manpower is often necessary to bring the project current. Accountants will therefore allocate more direct labor costs to the project, increasing the total overall project costs.
A few industries are more notable for using project management accounting, including construction, manufacturing, and infrastructure firms. For example, a manufacturer of airplanes may use a project management accounting system built on standard job order costing. If the company takes special orders for airplanes, the company will need to create a separate accounting system for each special order. All costs used on the project must be allocated accordingly. Failure to manage project costs is likely to result in lower profits, as the airplane manufacturer may not be able to raise the price on its initial bid for the project.
Project management accounting is often susceptible to fraud and false information. Companies that have multiple projects going on at once may allocate costs from one project to the next. This allows the company to shift cost overruns among different projects in order to show a profit on a specific project. This represents fraud, as each project will have costs associated with it that does not accurately reflect the materials or labors used on the project. Management review is often necessary to approve orders for materials or labor, which can help ensures that project managers do not have the final say on ordering items for use on the project and attempting to hide costs.