Accountants usually allocate the estimated costs for a project evenly over the d

Question

Accountants usually allocate the estimated costs for a project evenly over the duration of the task. Consider the following scenario: In a 10-million-dollar project, a major task involving an extremely complex and expensive equipment was budgeted at $6 million. The task requires the purchase of this equipment at the beginning of this task. The task has a five-month duration and begins on January 1. Given the accountant's approach to cost allocation, what problems might this pose for a project manager? (Adapted from "Project Management in Practice" Mantel et. al, page 105)

Explanation / Answer

As per the Accountants approach the cost $6 million of the expensisive equipment is spread over as $1.2 million per month during the five months of Jan., Feb., Mar., Apr., and May. The Project manager needs the equipment before January 1 therefore the expenditure of $6 million needs to be booked before January 1 or on January 1. The cost variance/ variations may be distorted in case the periods of actual expenditure and the periods under which it is booked differ. Further time value of money and budget requirements (actual) may not give correct picture for Project management perspective.

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