Agile Project Cost Accounting

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Hong Sun
Management Consultant, Canada

Agile Project Cost Accounting

🔥NEW It's very important for a company to take an informed decision as to how to account for its projects' costs. When it comes to agile projects, the accounting decision can be even more complicated to make, since most generally accepted accounting practice (GAAP) guidelines that explain capitalization rules were mainly designed for traditional IT projects. Whereas it's not an easy task, there is still a way to properly allocate agile projects' costs without sabotaging the company's objectives or breaching tax laws.

The structure of allocating agile project cost is as follows:



Cost allocation BEFORE the first iteration starts
  • Any work the development team does before it obtains initial funding approval such as portfolio planning and envisioning (product planning), by default, should be expensed.
  • Release planning: can be either expensed or capitalized.
Cost allocation DURING the iterations
  • Features: the work required to develop new features or make changes or enhancements to current features—can be capitalized.
  • Defects: maintenance work—must be expensed.
  • Knowledge-acquisition items such as prototypes, proof-of-concept, experiments, and spikes. These are necessary for achieving problem understanding or technical feasibility and should most often be expensed
How does one calculate the accounting costs during an iteration?
The teams estimate the size of every product backlog item they bring into an iteration. These size estimates are typically expressed as points, and are a very simple, reliable, and verifiable tool for doing proper cost accounting. If the team doesn't formally estimate the size in points, an estimation of percentage of time the team spent in each iteration on feature development vs. defect repair vs. knowledge acquisition is equally useful.

Capitalized cost = Total cost of the iteration* × percentage of points (or time) related with feature development.

Expensed cost = Total cost of the iteration* × percentage of points (or time) related with defect repair and knowledge acquisition.

*Total cost per iteration is usually a fixed cost in agile projects. If you know who is on your team and you know the fixed duration of your iteration, you can very easily calculate your cost per iteration (Labor × Time = Cost per Iteration).


Source:
Rubin, K. (2015, Oct. 7). Closing the GAAP between Finance and Agile. Retrieved from
http://www.innolution.com/blog/closing-the-gaap-between-finance-and-agile.

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Accounting for Agile Projects

Agile projects (wether in software development or (...)

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