In manufacturing enterprises, production cost accounting plays a key role in controlling costs, optimizing resources and increasing business efficiency. Tracking and recording production costs correctly helps businesses accurately determine product costs, thereby making pricing decisions, controlling profits and planning finances more accurately.
Production cost information, if fully and accurately accounted for, will be an important foundation for management in evaluating production performance, analyzing break-even points and planning long-term development strategies.
1. Introduction to production cost accounting
In manufacturing enterprises, control and optimization production cost is a key factor in ensuring profitability and maintaining competitiveness. An effective tool to support this goal is production cost accounting. Not only recording data, accounting also helps manage cash flow, calculate costs and make business decisions. So where does this process start and how is it done?
1.1 What is production accounting? The role of production accounting
Production accounting is the department responsible for recording, classifying and summarizing costs incurred in the production process. The role of production accounting is not only to record data but also to be the bridge between production activities and corporate financial management.
The main objectives of production accounting include:
- Monitor, record and analyze production cost according to each constituent element such as raw materials, labor, general production costs.
- Guaranteed to count accurate, transparent and full of production cost information.
- Provide input data for calculation product cost, profit analysis and production performance evaluation.
- Assist the executive board in making decisions management decision based on real data.
1.2 Main tasks of production accounting
To ensure information quality and management efficiency, production accounting needs to perform the following core tasks:
- Calculate production cost and determine cost of goods sold.
- Monitor and record fluctuations of raw materials, supplies, goods and finished product in production departments.
- Production warehouse management, control inventory and circulation of goods.
- Detect the manufacturing process error, thereby taking timely corrective measures.
- Set up the cost analysis report to serve internal inspection and supervision work.
1.3 Basic principles in production cost accounting
When implementing production cost accounting, accountants need to comply with the following accounting principles to ensure the reasonableness, validity and consistency in recording and presenting information:
- The principle of matching costs and revenues: Only expenses directly related to revenue in the period are recorded.
- Original price principle: Production costs should be recorded at actual cost incurred, not based on estimated or market prices.
- Principle of consistency: Cost accounting methods should be applied consistently throughout accounting periods.
- Principle of caution: Always prepare for risks that may occur during the production process and limit the recognition of uncertain revenue or profits.
- Principles of legality, rationality and validity: All expenses must have full accounting documents, comply with legal regulations and be consistent with production activities.
2. Account 154 – Cost of production and unfinished business according to Circular 200/2014/TT-BTC
Account 154 is used to collect all production and business costs incurred during the period related to products and services that are in the production process and not yet completed at the end of the period. Correct and complete accounting of this account helps businesses track detailed costs by workshop, stage, and product type, and at the same time serves to calculate accurate costs.
2.1 Concept and purpose of using Account 154.
Account 154 is an accounting tool used to reflect all production and business costs incurred during the period to calculate the cost of products and services. This is a key account in production cost accounting of the business.
- For business regular declaration, Account 154 is used to record costs throughout the production and business process.
- For business periodic inventory, Account 154 mainly reflects value of unfinished products at the end of the period.
2.2 Scope of reflection of Account 154.
Account 154 is used to reflect:
- Production and business costs incurred during the period.
- Cost of products and services completed during the period.
- Work in progress at the beginning and end of the period, including main, ancillary, or outsourced activities.
- Costs related to production or service provision activities of a commercial enterprise (if any).
2.3 Detailed requirements of expenses on Account 154.
To ensure efficiency in accounting for production costs, businesses need to classify costs according to:
- Cost location: workshop, team, construction site, production department.
- Product or service type: by product group, product detail, service stage.
- Nature of activity: main production, secondary production, or outsourcing activities.
2.4 Types of expenses are recorded in Account 154.
a) Direct material costs
- Includes the actual value of main and auxiliary materials directly involved in product manufacturing.
- Accounting principles: Recorded at actual value incurred.
- Sample entry:
- Debit account 154
- Have account 152
b) Direct labor costs
- Including salary, allowances and salary deductions (social insurance, health insurance, union contributions) for direct production workers.
- Sample entry:
- Debit account 154
- There are accounts 334, 338
c) Cost of using construction machinery (for construction enterprises)
- Includes regular costs (fuel, maintenance) and temporary costs (transportation, installation, dismantling of machines).
- Sample entry:
- Debit account 154
- Have account 653
d) General manufacturing costs
- Including workshop management costs, shared materials, fixed asset depreciation, electricity and water costs and regular repairs.
- Sample entry:
- Debit account 154
- Have account 627
2.5 Principle of not recording in Account 154.
To avoid mistakes when production cost accounting, accountants should note not to include the following items in Account 154:
- Selling expenses, administrative expenses, financial expenses and other expenses.
- Corporate income tax expense.
- Career expenses, basic construction investment, or funded from other sources.
- Raw material and labor costs exceeding normal levels and unallocated fixed manufacturing overhead costs.
3. Method of applying Account 154 in industries
Account 154 is an important tool in production cost accounting and calculate the cost of products and services. Proper application of TK 154 according to the characteristics of each industry will help businesses control costs effectively and ensure accuracy in financial reports. Below are specific applications for each field:
3.1. Industry
In industry, TK 154 is used to collect and allocate production cost at the workshop, production department. Enterprises need to focus on:
- Aggregate costs by location (workshop, production team).
- Cost details by product type or product group.
- Accounting for outsourcing costs such as processing, manufacturing, technical services.
Detailing each stage of production will assist in determining product cost realistic
3.2. Agriculture
With the agricultural sector, the production cost accounting need to be flexible according to the season and characteristics of crops and livestock:
- Aggregate costs by industry: cultivation, livestock, processing, agricultural services.
- Details by type of tree, animal, specific area, farm or service.
- Determine the cost at the end of the season or the end of the year.
- For perennial plants, it is necessary to clearly distinguish between the basic construction and exploitation stages.
- Cost of land reclamation and planting new perennial trees during the basic construction period not recorded in account 154.
- Livestock farming needs to be accounted for separately for each type and group of livestock to calculate the exact cost.
3.3. Service industry
Service industries require centralized accounting direct costs and manufacturing overhead To calculate service cost:
- Aggregate cost of raw materials, direct labor, manufacturing overhead.
- Details by service type: transportation, tourism, hotels,…
- Transportation: classified by mode of transportation, handling tire costs and vehicle depreciation separately.
- Tourism, hotels: accounting for specific service types (accommodation, tours, food, etc.).
Tracking each type of service in detail helps businesses optimize operational efficiency.
3.4. Construction industry
The construction industry requires the application of a regular declaration method, with the collection of production costs at the construction site:
- Use the Level 2 account of account 154:
- 1541 – Construction and installation costs.
- 1542 – Other products.
- 1543 Construction services.
- 1544 – Construction warranty costs.
- Details by project, item, cost item such as materials, labor, construction machinery, general costs.
- Costs at the team and construction site are collected into Account 1541, while administrative expenses are recorded at Account 642.
- With real estate investor, Account 154 is used to collect construction costs of completed real estate products.
4. Structure and Reflection Content of Account 154
Account 154 – Work in progress – is used to reflect all costs incurred in the production and service provision process that are not yet completed at the end of the period. This is the core account in production cost accounting, helping businesses track and determine the correct cost of products and services.
Debit side of Account 154:
Reflects actual costs incurred during the period directly related to production or service provision activities, including:
- Direct material costs.
- Direct labor costs.
- Cost of using construction machinery (in the construction and installation sector).
- General manufacturing costs.
- Similar expenses are involved. construction product cost.
- Carry over unfinished production and business costs at the end of the period (according to the periodic inventory method).
Credit side of Account 154:
Recorded when products and services are completed or have factors that reduce production costs, including:
- Actual manufacturing cost of finished products stored in warehouse, sold, or used internally.
- Cost of completed construction products handed over to the investor.
- The actual cost of the service completed and provided to the customer.
- Value of recovered scrap and damaged products is determined.
- Value of raw materials, finished processed materials in stock.
- Overhead costs or unallocated overhead costs.
- Carry forward unfinished production and business costs at the beginning of the period.
Debit balance of Account 154:
Reflection unfinished production and business costs at the end of the period, is the basis for calculating the cost of unfinished products and services.
Note to accountants and business owners:
Correct accounting according to the structure of Account 154 is a key factor in controlling costs and building transparent financial reports. Especially for manufacturing or construction enterprises, monitoring work in progress help determine accurate costs, thereby making more effective operating decisions.
Bizzi – Accompanying businesses in digitizing and automating accounting processes, helping with accounting production cost clear, transparent and time saving.
5. Accounting Methods for Some Major Economic Transactions
Applying the correct accounting method for each type of transaction helps businesses accurately reflect the nature of the business and ensure transparency in accounting for production costs.
5.1 Case of accounting for inventories using the perpetual inventory method
The perpetual method requires accountants to record timely and continuous transactions related to inventory. Commonly used accounts include:
Record raw materials, tools, and equipment
- Account 152 – Raw materials and supplies: Record raw materials, materials imported and exported for use.
- Account 153 – Tools and instruments: Record tools and equipment for production and business.
Transfer of direct material costs
- Account 621 – Direct material and raw material costs: Collect direct material costs for each production object.
- Account 155 – Finished products: When the product is completed, the cost of raw materials will be transferred to account 155 if the product is in stock.
Transfer of direct labor costs
- Account 622 – Direct labor costs: Record labor costs directly involved in the production process.
- Account 154 – Cost of production and business in progress: After collection, the cost from account 622 will be transferred to account 154.
Carryover of general manufacturing costs (allocated according to normal capacity)
- Account 627 – General manufacturing costs: Collection of costs such as depreciation, electricity and water, workshop management salary, repair costs...
- Account 154 – Cost of production and business in progress: Cost 627 is allocated and transferred to 154.
Import raw materials for external processing
- Account 152 – Raw materials and supplies: Record completed processed materials and return to warehouse.
- Account 154 – Cost of production and business in progress: Transfer of outsourcing costs.
Handling damaged products
- Account 811 – Other expenses: Record costs caused by defective products.
- Account 156 – Goods or Account 155 – Finished products: Record inventory reduction (if any damaged goods are removed or destroyed).
Overhead and unallocated fixed costs
- Account 632 – Cost of goods sold: Record excess costs or unallocated fixed costs.
- Account 811 – Other expenses: Record unreasonable expenses that are not included in product cost.
Finished product warehouse
- Account 155 – Finished products: Record finished products and enter into warehouse from production process.
Products for internal use or for basic construction
- Account 153 – Tools and instruments: Record internal use products (conversion of use).
- Account 241 – Construction in progress: If used for basic construction investment purposes.
Adjustment when receiving trade discount or purchase price reduction after releasing raw materials from warehouse
- Account 711 – Other income: Record discounts or rebates on purchased goods after they have been released from inventory.
- Account 152 / 156: Adjust inventory value if relevant.
Trial production product accounting
- Account 154 – Cost of production and business in progress: Record trial production costs. If finished product standards are met, they can be recorded in account 155.
Products are not stored in warehouse but delivered directly to customers.
- Account 511 – Sales revenue and service provision:Recognize revenue upon delivery.
- Account 632 – Cost of goods sold: Record the cost of goods sold corresponding to the delivered products.
Construction cost accounting
- Account 241 – Construction in progress: Record all costs related to the construction and installation process.
- Account 154 – Cost of production and business in progress: If the project is outsourced or internally produced for construction purposes.
Carryover of construction costs
- Account 211 – Tangible fixed assets: Recorded when the project is completed and put into use.
- Account 154 / Account 241: Carry over construction costs to form assets.
5.2 Cases of accounting for inventories using the periodic inventory method
This method only determines inventory at the end of the period, not continuously monitored.
- End of period work in progress: Record the unfinished production costs into account 154.
- Work in progress at the beginning of the period: Carry over from previous period to this period to continue calculating cost.
5.3 Accounting methods for some specific transactions in the agricultural sector
The agricultural sector is unique in its by-products and biological assets.
- Recovered by-products: Pricing and write-off of main production costs.
- Young animals and fat livestock converted into fixed assets: Record decrease in livestock costs, record increase in fixed assets.
5.4 Accounting methods for some specific transactions in the Service industry
The service industry does not have physical inventories, but still needs to account for costs.
- Price of completed service: Transfer from 154 to 632 when service is completed.
- Internal use: Record internal consumption costs, do not record revenue.
5.5 Accounting methods for some specific transactions in the Construction industry.
Accounting for production costs in construction is often associated with each project.
- Cost of materials, labor, construction machinery, general production: Grouped into 154 by category.
- Non-recoverable costs: Recorded separately if the contract is not recoverable.
- Scrap, liquidated materials: Accounting for reduced construction costs.
- Completed construction cost: Transfer to 632 to determine cost of goods sold.
6. Production cost management
Production cost management is an important factor in optimizing production activities and improving business efficiency. To better understand how to manage production costs, businesses need to grasp the following factors:
Identify and classify production costs
- Direct costs: These are costs that are easily identifiable and directly related to the manufactured product, such as raw materials and direct labor costs.
- Indirect costs: Costs that cannot be directly allocated to a specific product, such as machinery maintenance costs, electricity and water costs.
- Fixed costs: Are costs that do not change with the level of production, such as factory rent, management salaries.
- The variable costs: Costs that vary with the level of production, such as raw material costs and direct labor costs.
Monitor and control actual production costs against standards
Comparing actual costs with standards helps businesses detect and promptly adjust deviations, ensuring production costs are always at a reasonable and optimal level.
Analysis of factors affecting production costs
Factors such as raw material prices, labor productivity, production processes, and technology used all have a direct impact on production costs. Careful analysis will help businesses come up with effective cost reduction strategies.
Measures to save and optimize production costs
Businesses can adopt measures such as automating production, improving production processes, and negotiating better with raw material suppliers to optimize production costs.
The relationship between production cost accounting and management decision making
Accurately accounting for production costs helps businesses make the right management decisions, from adjusting production strategies to making decisions on pricing and resource allocation.
7. Illustrative example
To better understand how to account for production costs, here are some illustrative examples of common business transactions:
Examples of accounting for raw material purchases
When a business purchases raw materials, the related costs will be recorded in account 152 (Raw materials).
Example of raw material production output
When raw materials are released from the warehouse to serve production, the cost will be transferred to account 621 (Direct material cost).
Example of direct labor cost pool
Costs for direct labor involved in production will be recorded in account 622 (Direct labor costs).
Example of a manufacturing overhead cost pool
Costs such as maintenance costs, equipment depreciation, will be recorded in account 627 (Overhead manufacturing costs).
Example of transferring work in progress costs to finished goods
When the product is completed, the related costs will be transferred from account 154 (Work in progress) to account 155 (Finished products).
Example of accounting for cost of goods sold
When goods are sold, the cost price will be recorded in account 632 (Cost of goods sold).
Example of accounting for cost of sales
Selling expenses, including advertising costs and shipping costs, will be recorded in account 641 (Selling expenses).
Production cost accounting plays an important role in effectively managing the financial performance of the enterprise. By identifying and classifying costs accurately, closely monitoring and analyzing influencing factors, enterprises will be able to make accurate management decisions, thereby optimizing costs and increasing profits.
