Section 1 - Ch2

Question 1

Users of Cost Accounting

Answer 1

*Uses of Cost Accounting

Primary users of cost accounting = government managers

• Monitor programs to ensure operations are efficient and effective
• Cost info helps to make allocation decisions among programs
• User Fees:link revenues to services and cost accounting helps to establish user fees (government functions similar to private sector in the area of user fees).

Cost Accounting is just as important to the government as private corporations.

Question 2

Determining Costs of Outputs

Answer 2

*Determining Costs of Outputs

Cost accounting must be applied to some cost objective to be effective.

Internal Service Funds: used by state and local gov’ts account for administrative services with these funds

Intragovernmental Revolving Funds: used by federal gov’t to account for services

Question 3

Two types of costs associated with an objective

Answer 3

Two types of costs associated with an objective:

1. Direct Costs: can be specifically identified with an objective
   
   • Salaries, benefits of employees, materials, supplies, travel costs
2. Indirect Costs: associated with resources that are not specifically or readily identifiable with any of the objective’s outputs or that are jointly or commonly used on two or more types of objectives.
   
   • General administrative services, rent, space and utilities (facilities & admin, maint/dep’n, interest)
   • HR, payroll processing, centralized procurement, central data processing, accounting maintenance (OMB Circular A-87 has indirect cost allocation plans for these costs)
   • Inter-entity costs: costs incurred by one agency on behalf of another w/o reimbursement

Question 4

Assignment of Costs

Answer 4

Assignment of Costs:

• Direct Tracing: (preferred method) directly trace costs used in production of outputs
• Cause and Effect: intermediate step between direct assignment and cost allocation. Based on the premise that outputs require the performance of certain activities that take place and that the activities cause costs to occur. The activity = link betwn outputs and the costs. (i.e. hrs plane flown x gal/hr = gal consumed)
• Allocation: allocation on a reasonable and consistent basis. (most general mgt & admin costs)
  
  • SGA, support, depreciation, rent, maintenance, security, utility costs
  • i.e. (total fuel used by military base/ (# of planes flown in period) = fuel consumed/plane
  • Cost Pools: group costs with similar characteristics (i.e. personnel costs)

Question 5

*Cost Accounting for Federal Agencies

The FASAB issued Statement of Federal Financial Accounting Standards (SFFAS) 4 — 5 components:

Answer 5

*Cost Accounting for Federal Agencies

The FASAB issued Statement of Federal Financial Accounting Standards (SFFAS) 4 — 5 components:

1. Requirement for Cost Accounting: cost accounting system: assign costs to objects
2. Responsibility Segments: should be defined; each is responsible for carrying out a mission, conducting a major line of activity, or producing related products/services.
   
   • Managerial costing for each segment
     
     • Define outputs
     • Accumulate costs
     • Assigned costsàoutputs
3. Full Cost: reporting entities should report full costs of outputs in general purpose financial reports. The full cost is the SUM of (1) costs of resources consumed by the segment that directly or indirectly contribute to the output, AND (2) the costs of identifiable supporting services provided by other responsibility segments within the reporting entity.
   
   • Direct costs à specifically attributed to an output (salaries, materials, space, equipment, vehicles)
   • Indirect costs à not specifically attributed to an output (SGA, rent, maintenance, support)
     
     • 2 types of Indirect costs:
       
       1. Those incurred within a responsibility segment (traced by “cause and effect”)
       2. Support service costs (directly traced or assigned to segments that receive services.
4. Inter-Entity Costs: each entity’s full costs should include the full costs of goods and services it receives from other entities. Recognition of inter-entity costs that are NOT fully reimbursed is limited to material items that are: (the providing entity provides the cost, if not provided, the receiving entity can estimate)
   
   • Significant to the receiving entity
   • Form a necessary part of the receiving entity’s output
   • Can be identified to the receiving entity with reasonable precision
5. Costing Methodologies: cost assignments should be performed in the following order:
   
   • Directly tracing costs where feasible and economically practicable
   • Assigned costs on cause-and-effect basis
   • Allocating costs on a reasonable and consistent basis

Question 6

Determining Allowable Indirect Costs under Uniform Guidance/OMB Circular A-87

Answer 6

Determining Allowable Indirect Costs under Uniform Guidance/OMB Circular A-87

• After receiving a federal grant; state, local, or tribal governments may incur costs of administering the grant which the federal government will reimburse (direct and indirect costs) based on procedures in A-87.

Question 7

Application of costs principles are based on 3 fundamental premises

Answer 7

Application of costs principles are based on 3 fundamental premises:

1. Governmental units are responsible for the efficient and effective administration of federal awards through the application of sound management practices.
2. Governmental units assume responsibility of administering federal funds consistent w/program objectives.
3. Each governmental unit, will have the primary responsibility for employing whatever form of organization and management techniques may be necessary to assure proper and efficient administration of federal awards.

Question 8

Basic Guidelines: To be allowable, costs must meet

Answer 8

Basic Guidelines: To be allowable, costs must meet:

• Be necessary and reasonable for proper and efficient performance of federal awards
• Be allocable to federal awards as provided in A-87.
• Be authorized or not prohibited under state/local laws
• Conform to any limitations set forth
• Be consistent with policies, regulations
• Be accorded consistent treatment
• Be determined IAW GAAP unless A-87 states otherwise
• Be net of all applicable credits
• Be adequately documented

Question 9

A cost is reasonable if it does not exceed that which would be incurred by a prudent person

Answer 9

A cost is reasonable if it does not exceed that which would be incurred by a prudent person:

• Cost must be ordinary and necessary for the operation
• Market prices for comparable goods/services
• Individuals involved must act with prudence

Question 10

Composition of Cost

Answer 10

Composition of Cost

Total cost of awards = Direct costs + Allocable portion of Indirect costs – Credits

Direct & Indirect costs SHALL NOT include CAPEX and unallowable costs.

Question 11

Allocating Indirect Costs and Determining Indirect Cost Rates

Answer 11

Allocating Indirect Costs and Determining Indirect Cost Rates:

~Establish “pools” of indirect costs

Simplified Method: use when government agency/dept has only one major function or where all major functions benefit from indirect costs proportionately. Two steps:

1. Classify the agency’s total costs for the base period as either Direct OR Indirect.
2. Divide the total allowable indirect costs (net of credits) by an equitable distribution base such as
   
   • Total direct costs
   • Direct salaries and wages; or
   • Another base which results in equitable distribution

Question 12

Types of Rates

Answer 12

Types of Rates:

• Provisional: (Temporary rate) Based on past experience, and a grantee can reliably project costs
• Predetermined: (Future estimate) Prior to gaining experience, use this rate based on estimates of costs. Discouraged by federal gov’t if used for more than 2 to 4 years.
• Fixed: (Actual costs based on experience) Once grantee has sufficient experience to be able to use actual costs and uses
• Final: (Backward looking, applicable to a past period) Once the project is complete, the rate using actual costs and uses is determined. Could be audited by grantor.

Question 13

User Fees

Answer 13

*User Fees

~Many gov’t supplement tax revenue with fees. Advantage: enables all or portion of costs of a service to be borne by those who avail themselves to the service. Common for water, sewer, parks and recreational activities, DMV.

• Fare box recovery ratio: 20% (municipal transit fares to recover transpo cost)

Question 14

Difference between Cost and Price

Answer 14

Difference between COST and PRICE:

~An entity may charge more for college football tickets than cost to cover the cost of other less profitable activities in the school (goal is to Break-Even).

Question 15

Developing a User Fee

Answer 15

Developing a User Fee:

~User fee should cover at least direct costs and may cover indirect costs, cost of depreciation, interest, allowance for maint/replacement of equipment, all expenditures, pay principal on outstanding bonds

Question 16

Cost Recovery Objectives

Answer 16

Cost Recovery Objectives:

Break-Even formula =à Volume x Unit Price = Fixed Costs + (Volume x Unit VC)

Break-Even Price à Unit Price = [FC + (Volume x VC)] / Volume

Break-Even Volume à Volume = FC / (Price – VC)

• Price should include all direct costs at a minimum (if not, subsidy is needed)
• Policy decisions must be made regarding the recovery of indirect costs
• Use cash, accrual, or modified accrual?
  
  • If accrual, include all exp & dep’n, and allowance for replacement of equipment
• User fee may be charged to recover all expenditures, but not capital assets or to include capital assets
• User fee can include amount to pay principal on outstanding bonds in lieu of depn’

Question 17

Policy Decisions other than Costs

Answer 17

Policy Decisions other than Costs:

Reasons for charging user fees other than cost:

• Politically or socially wise to charge less
• Competition might necessitate charging less