Cost Accounts and Work Packages

Returning to Figure 3-5, we see that there are four work packages: A, B, C, and D. What, then, are the cost accounts? Typically, cost accounts are either one or more work packages rolled up vertically (project view) or horizontally (organizational view). Depending on the project management approach regarding "matrix management" and project responsibilities, either roll up could be possible. ^[10] So, there are either three cost accounts corresponding to "depart- ments 1, 2, and 3" or three cost accounts corresponding to "deliverables a, b, and c." We know from prior discussion that the total project expense is not dependent on whether the cost accounts are rolled up vertically or horizontally. Therefore, the choice is left to the business to decide how responsibility is to be assigned for project performance.

Now, let us consider the chart of accounts of the business. The chart might well be shown as in Figure 3-7. We see that Organization has expense and Project has expense. We would not want to count expenses in both categories since that would be counting the same expense twice. If both were fed to the chart of accounts, an accounting process known as "expense elimination" would be required to reconcile the total expenses reported. To avoid the accounting overhead to eliminate redundant expenses, the solution, of course, is not to connect one or the other roll up to the chart of accounts. That is, if the project is going to have an account on the chart of accounts, then the project expenses would not roll up under department and organization; instead, project-specific, or direct, expenses would roll up under the project itself.

Figure 3-7: Chart of Accounts and the WBS.

We see also on the chart of accounts a place for capital accounts. From Chapter 1, we know that capital accounts represent asset values that have not yet been "expensed" into the business expense accounts. Capital purchases made on behalf of projects are usually not recorded as project expenditures at the time the purchases are made. Rather, the practice is to depreciate the capital expenditure over time and assign to the project only the depreciation expense as depreciation is recorded as an expense in the chart of accounts. As capital is depreciated from the capital accounts, depreciation becomes expense in the expense accounts, flowing downward through the WBS to the RAM where depreciation expense is assigned to a work package.

In the foregoing discussion we established an important idea: the WBS is an extension of the chart of accounts. Just as a WBS element can describe a small scope of work, so also can a WBS element account for a small element of cost or resource consumption (hours, facilities usage, etc.).

Of course, not only is the budget distributed among the work packages on the RAM, but so also are the actual performance figures gathered and measured during project execution. Thus, work package actuals can be added across the OBS and up the WBS hierarchy all the way to the level 1 of the WBS or Organization of the OBS. The variance to budget is also additive across and up the WBS. In subsequent chapters, we will discuss earned value as a performance measurement and forecasting methodology. Within the earned value methodology is a concept of performance indexes, said indexes computed as ratios of important performance metrics. Indexes per se are not additive across and up the WBS. Indexes must be recomputed from summary data at each summarization level of the WBS or the OBS.