Accounting_Ver04. _ “Why Accruals and Provisions Are Essential in Manufacturing Project Accounting — Preventing Profit Distortion with Three Cost Categories: Not-yet Ordered / Ordered but Not-Invoiced

shigenoritanaka3
3月12日
読了時間: 3分

　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　Mar 12, 2026

Hello everyone.

Today, I would like to write about project accounting for budget management within project management (scope, schedule, budget, and resources).

Introduction

In manufacturing projects, it is common that costs have already been incurred, but the invoice has not yet arrived.

Additional outsourcing charges, extra material consumption, repairs and rework, additional labor hours… There are many cases where costs have occurred but are not yet reflected in the numbers.

If these costs are not recorded as Provision / Accrual, then:

monthly profit fluctuates
project profitability becomes misleading
management decisions may move in the wrong direction

In this article, Provision / Accrual is organized into three cost categories: Not‑yet Ordered / Ordered but Not‑Invoiced / Invoiced, and I explain a practical method to prevent numerical inconsistencies.

1. The fundamental difference between Provision and Accrual

Provision and Accrual are completely different in nature.

Provision = costs that may occur (uncertain) = risk‑based costs

High likelihood of occurrence
Amount and timing are not yet certain
Warranty costs are a typical example

Accrual = costs that have already occurred (committed)

Economically incurred already
The invoice has not yet arrived
PO issued, work completed, etc.

2. Three cost categories

Project accounting should classify all costs into the following three categories.

A. Not‑yet Ordered Costs

These are costs that are expected to occur but have not yet been ordered.

This category includes, the following two categories:

A-1. Warranty Cost (product / installation warranty costs expected within one year), such as

- defect handling

- rework

- potential warranty‑related costs

→ These should be treated as Provision.

A-2. Additional costs expected immediately after acceptance, such as

- additional labor hours

- additional materials

- customer‑requested extra work

- factory‑side rework that is already confirmed

→ These should be treated as Provision, but practically close to an Accrual.

B. Ordered but Not‑Invoiced Costs

These are costs that have already been ordered but the invoice has not yet arrived. They are certain to occur.

Examples include:

outsourcing costs with PO issued
material purchases with PO issued
service fees with PO issued

These are recorded as Accrual.

C. Invoiced Costs

These are costs for which the invoice has arrived and has already been recorded.

They are handled through normal accounting procedures.

3. Why these three categories are important

If this classification is not applied:

A. Not‑yet Ordered costs → project profit appears overstated

Ordered but Not‑Invoiced costs → monthly profit fluctuates
Only Invoiced costs → numbers differ between operations and accounting

In short, the essence of Provision / Accrual is to reflect project profitability on an incurred basis.

To achieve this, accounting department should proactively acquire information from project managers, manufacturing, service, sales, and quality assurance.

4. Alignment with European PM accounting

This three‑category framework aligns with European PM accounting concepts.

Classification Above	European PM Accounting Concept
Warranty Cost	Risk Provision
Additional expected cost	Forecasted Cost
Ordered but Not‑Invoiced	Committed Cost
Invoiced	Actual Cost

This is a project accounting framework that is applicable internationally.

5. What changes when this framework is implemented

Project profit becomes stable
Monthly profit no longer fluctuates
Management decisions become more accurate
Numbers align between operations and accounting
“One Truth” becomes achievable
Accounting inconsistencies during PMI are reduced

Conclusion

Provision / Accrual is not simply an accounting task. It is the numerical foundation that supports project decision‑making.

By organizing costs into Not‑yet Ordered / Ordered but Not‑Invoiced / Invoiced, you can prevent distortions in project profitability and enable sound management decisions.

For inquiries: info@metricjapan.com

We support manufacturing companies with project accounting, PMI, and cost management improvement.

TAG

#ManufacturingFinance