You can use a work breakdown structure to help you gain an overview of your project and facilitate project accounting. With the systematic approach of the work breakdown structure, you can establish projected costs for individual activities and control actual costs as the project incurs them. As the project progresses, cumulative costs from the completed activities let you determine whether you are on budget and let you make adjustments if needed.
Work Breakdown Structure
The work breakdown structure divides the work to be done for a project into individual, self-contained tasks. Starting with major project segments like design, deliveries and installation, you divide each segment further until you reach a level where a task is the responsibility of one person,
For example, a construction project could be divided into building design, site preparation, foundation, structure and finishing. Dividing design work further, it might include architectural, electrical and mechanical drawings. Breaking down the work of electrical drawings you would include the details of the connection to the utility supply. By breaking the work down into activities such as preparation of the drawings for the utility connection you can identify small, individual tasks for which project accounting can assign costs.
Project accounting involves matching incurred costs against cost projections to ensure that the project comes in on budget. With a completed work breakdown structure, you can calculate how much the completion of each activity or task will cost. This exercise breaks the budget down into small dollar amounts that you can assign to individual work breakdown structure tasks. If, for example, the amount budgeted for electrical drawings is $200 but your work breakdown structure shows preparing the drawings will take 30 hours, the budget is unrealistic. In that case, you have to change how you plan to carry out the work to use fewer hours or change the budget.
Once the project work has started, the project accumulates costs. The key purpose of project accounting is to assign the costs to the activity whose budget covers it, so you can see if the actual costs match the budgeted costs and to make sure the actual costs doesn't exceed the budget. For example, the costs for the technicians preparing the electrical drawings are paid out of the electrical drawings budget. You can immediately see when a task such as electrical drawings has used up its budget and threatens to exceed its assigned cost.
The critical value for project accounting is how well the project as a whole is adhering to the overall budget. The work breakdown structure allows you to calculate overall budgetary performance through the work you have completed. If you add the budgets of all the tasks that you have finished, divide by the total budget and multiply by 100, you get a percent of budget that you should have spent. If you add the actual costs of the completed tasks, divide by the budget and multiply by 100 you get the percent of budget you have actually spent. If the percent of budget actually spent is more than the percent you should have spent, you immediately know you are over budget. You then have to spend less on the remaining tasks or revise the budget.