Table of Contents

**Part I -- Recommendations on Cost Accounting Issues**

Preface i

Introduction iii

Chapter 1 -- The Accountability Model

-   A New Standard for Accountability I-1

-   Establishing a Strategic Management Process I-1

-   Introducing the Accountability Model I-2

    Chapter 2 -- The Relationship of Managerial Cost Accounting to
    Financial Accounting

-   The Interrelationship of Cost Accounting Information in the Federal
    Government I-5

-   Costs for Which Additional Guidance May be Needed I-15

Chapter 3 -- The Relationship of Managerial Cost Accounting to Budgeting

-   Importance of Cost Accounting to the Budget Process I-17

-   Aligning Cost Information with the Budget I-19

-   Steps to Better Alignment I-21

Chapter 4 -- The Relationship of Cost Accounting to Managing --
Supporting Management's Needs

-   Planning I-24

-   Cost Management I-25

-   Pricing I-26

Chapter 5 -- The Relationship of Cost Accounting to Reporting

-   Internal Reporting I-27

-   External Reporting I-34

Acknowledgements I-36

Table of Contents

**Part II -- Tools and Techniques for Implementing a Managerial Cost
Accounting Process**

Chapter 1 - Marketing Managerial Cost Accounting

-   Develop a Strategy II-1

-   Identify Your Customers II-3

-   Educate Customers on the Benefits of Managerial Cost Accounting II-4

Chapter 2 - Introduction to Project Management

-   Project Management Defined II-6

-   The Role of the Project Manager II-7

Chapter 3 - Strategy for Implementation

-   Obtain Management Support II-10

-   Have Clear Objectives II-10

-   Conduct a Pilot Study II-10

-   Establish an MCA Project Team II-11

-   Prepare an MCA Project Schedule II-12

-   Consider Entity-Wide Implementation II-13

Chapter 4 - Assessing Current Environment

-   Conduct a User Needs Assessment II-15

-   Perform a Financial Management System' Assessment II-17

-   Develop Practical Requirements -- A Summary II-19

Chapter 5 - Organizational Analysis

-   Define Components/Responsibilities II-20

-   Create Activity/Output Dictionary II-20

Chapter 6 - Various Costing Methodologies and Methods for Assigning
Costs II-25

Chapter 7 - Building a Managerial Cost Accounting Process

-   Introduction: Obtain Detailed Systems Requirements II-30

-   Getting Started: Conduct a Systems Requirements Analysis II-31

[Appendices:]{.underline}

A. Managerial Cost Accounting Policy A-1

B. Team Charter B-1

C. Cost Accounting Position Description C-1

Table of Contents

**Part II -- Tools and Techniques for Implementing a Managerial Cost
Accounting Process**

D. Bibliography of Costing Literature D-1

E. Example Statements of Work E-1

F. User Needs Questionnaire F-1

G. Listing of Cost Accounting Software G-1

H. Agencies Which Have Initiated Managerial Cost Accounting H-1

I. Lessons Learned - Case Studies From Agencies Which Are

Implementing Managerial Cost Accounting I-1

J. Reporting Case Studies J-1

K. Glossary of Cost Accounting Terminology K-1

**Preface**

This *Managerial Cost Accounting Implementation Guide* is a technical
practice aid to assist federal entities in implementing cost accounting.
The document contains recommendations on many cost accounting issues;
however, it is not intended to address all possible uses of cost
accounting information. Although its use is optional, federal agencies
should find this Guide very helpful in their efforts to understand and
implement managerial cost accounting. Additional recommendations on
costing issues will most likely be addressed at a future time either by
the Governmentwide Cost Accounting Committee or another costing
committee. Agencies planning to implement a managerial cost accounting
system should refer to the Joint Financial Management Improvement
Program's (JFMIP) *System Requirements for Managerial Cost* *Accounting*
document, which establishes the standard, Governmentwide system
requirements that an agency should consider for systems supporting
managerial cost accounting functions.

This Guide is presented in two parts: Part I (Recommendations on Cost
Accounting Issues) and Part II (Tools and Techniques for Implementing a
Managerial Cost Accounting Process). Recommendations that would either
create or modify accounting or budgeting policy are indicated by bolded
text. For each of these recommendations to become official policy, the
appropriate policy-setting organization, such as the Office of
Management and Budget (OMB) or Congress, would need to adopt and
promulgate it. Each part of this Guide functions as a stand-alone
document and, therefore, the Guide need not be read in the order
presented. The appendices provide a jump-start on implementing
managerial cost accounting by providing valuable samples and exhibits.
The Guide is available in electronic format on the Governmentwide Cost
Accounting Committee's worldwide web site:
www.financenet.gov/financenet/fed/cfo/cfocost/cfocost.htm

During March 1996, the Governmentwide Cost Accounting Work Group, later
renamed the Governmentwide Cost Accounting Committee, was created to
provide federal entities with a focal point for the discussion of cost
related issues and problems. It is chartered under the auspices of the
Chief Financial Officers (CFO) Council. The Committee is overseen by a
seven-member board of directors, and its primary objectives are to:

-   provide a forum for open communication and discussion of cost
    accounting questions facing member agencies;

-   achieve a consensus among member agencies in the resolution of cost
    accounting issues which cut across agency lines, particularly in the
    areas of terminology, procedures, and reporting practices used in
    federal cost accounting;

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-   provide nonauthoritative guidance for agencies in understanding (1)
    the *Managerial Cost* *Accounting Concepts and Standards for the
    Federal Government* developed by the Federal Accounting Standards
    Advisory Board (FASAB) and published by OMB and the General
    Accounting Office (GAO), and (2) *System Requirements for Managerial
    Cost* *Accounting* published by JFMIP;

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-   develop tools to assist agencies in implementing cost accounting
    standards; and

-   undertake special studies and projects related to costing, as
    directed by the CFO Council.

Four subgroups were formed to carry out the Committee's objectives:

1.  Integration of Cost Accounting, Budget, and GPRA

2.  Accounting for Full Costs

3.  Implementation of a Managerial Cost Accounting Process

4.  Reporting of Managerial Cost Information

On June 30, 1997, a draft of the *Managerial Cost Accounting
Implementation Guide* was distributed to members of both the federal and
private sector financial communities. The Board of Directors of the
Governmentwide Cost Accounting Committee considered all comments
received on the draft Guide. As a result of these comments, changes were
made to various chapters of the Guide. The majority of the changes
incorporated dealt with Chapters 2 and 3 of Part I of the Guide and
related to the areas of relevant costs, inter-entity costs, and
budgeting for program support costs. The Introduction discusses the
legislative mandates that emphasize management reform and stronger
financial management as well as many of the ways that managerial cost
accounting enhances program management and accountability.

**Introduction**

**[Importance and Role of Managerial Cost Accounting]{.underline}**

Why should federal entities implement managerial cost accounting? That
is a question many program managers are asking and will continue to ask
as they struggle to implement cost accounting in their agencies. The
fundamental answer to the question is that cost information is an
essential component of any well managed, cost effective organization.
Managerial cost accounting assists federal agencies as they strive to
achieve cost effective mission performance and provide full
accountability for taxpayer resources. In addition, managerial cost
accounting practices are recognized as a valuable tool in aiding federal
agencies' efforts to demonstrate accountability in financial accounting,
budgeting (allocating resources), and managing programs. Managerial cost
accounting's relationship to these three areas of accountability is
discussed in Part I of this Guide. As Dorcus Hardy, the former Director
of the Social Security Administration stated in March 1987, "The
business of government should be businesslike." To be truly effective,
it is incumbent on management to lead the effort in implementing
managerial cost accounting.

Program managers measure operational performance from three
perspectives\--cycle time, quality/productivity, and cost. This Guide is
intended to bring costing to the operational decision-making table. It
does not state that cost should always be the primary factor in
decision-making, but any well-managed entity should know what quality or
cycle time changes are available through more or less expensive options.
This is a key reason why entities should want and actually need to
perform managerial cost accounting.

**Legislative Mandates**

The 1990s have proven to be the decade of "rightsizing" and eliminating
inefficiencies. This trend is not exclusive to the private sector, but
is actively underway in the public sector as well.

The *Chief Financial Officers (CFO) Act of 1990* contains several
provisions related to managerial cost accounting, one of which states
that an agency's CFO should develop and maintain an integrated
accounting and financial management system that provides for the
development and reporting of cost information. This information allows
program managers to assess how well their organizations and programs are
doing in meeting their strategic goals and objectives.

The *Government Performance and Results Act (GPRA) of 1993*, requires
federal agencies to develop five-year strategic plans and annual
performance plans beginning with fiscal year 1999; and report annually
on actual performance compared to goals. Cost accounting information
will aid entities in evaluating and reporting planned performance
measures with actual results.

The *Federal Financial Management Improvement Act (FFMIA) of 1996*
states that agencies must incorporate accounting standards and reporting
objectives established for the federal government into their financial
management systems so that all the assets, liabilities, revenues, and
expenses of the programs and activities of the federal government can be
consistently and accurately recorded, monitored, and uniformly reported
throughout the federal government.

The *National Performance Review (NPR)* sets the stage for reforms to
create a government that works better and costs less. On the importance
of management information systems, such as managerial cost accounting,
NPR states:

> \"Management isn't about guessing, it's about knowing. Those in
> positions of responsibility must have the information they need to
> make good decisions. Good managers have the right information at their
> fingertips. Poor managers don't\...Good information comes from good
> information systems\...If federal decision-makers are supplied the
> same type of financial and performance information that private
> managers use, it too will show up on the bottom line\...and cut the
> cost of government.\"[^1]

The *Government Management Reform Act (GMRA) of 1994* authorizes the
establishment of franchise fund pilot programs in six executive
agencies. The purpose of these franchise funds is to provide common
administrative support services both internally to the agency and
externally to other agencies in an efficient manner. Services are
provided by such funds on a competitive basis, and each fund is expected
to be self-sustaining through the collection of fees charged to their
customers. Participation in these franchise funds requires proper
costing procedures.

The *Clinger-Cohen Act*, formerly known as the *Information Technology
Management Reform* *Act (ITMRA) of 1996*, revolutionizes the procurement
and management of Information Technology (IT). The Act eliminates GSA
procurement authority over IT and thereby streamlines IT acquisitions.
It emphasizes the management of IT as a capital investment, emphasizes
planning of IT acquisitions as part of the agency's strategic plan, and
establishes a chief information officer in each agency. The Act, for the
first time, links IT management to agency mission and budget
formulation, and makes agency management more accountable for IT
projects by requiring the development of performance measures that will
be tied to the agency\'s strategic plan.

**Other Requirements**

In July 1995, OMB and GAO approved and published the Statement of
Federal Financial Accounting Standards (SFFAS) No. 4, *Managerial Cost*
*Accounting Concepts and Standards for the Federal Government*, as
recommended by FASAB. Effective October 1, 1997, federal entities are
required to implement these managerial cost accounting standards. In
addition, full cost reporting is recommended in the Statement of Federal
Financial Accounting Concepts (SFFAC) No. 2, *Entity and Display*, and
required in the SFFAS No. 7, *Accounting for Revenue and Other Financial
Sources*, for the annual general purpose financial statements of federal
entities.

In March of 1996, OMB issued its OMB Circular A-76 Revised Supplemental
Handbook to expand the level of competition for the procurement of
commercial goods and services, by encouraging agencies to compete with
one another and with the private sector on a level playing field.
Competition spurs efficiency. Entities\--be they private sector
contractors or federal agencies\--need the stimulus of competition to
sharpen their technology, accounting, and reinvention skills, improve
performance, bring new technologies, capital, and management techniques
to bear on existing performance, and to control costs. In the interim,
the A-76 Revised Supplemental Handbook relies on standardized cost
factors and specific costing guidance. In the long-term, managers and
competitors will be better served by replacing these standards with
improved cost information developed on a site and functional basis
through improved cost accounting.

**Enhancing Program Management and Accountability**

With the budget on an obligation basis, it is difficult to draw a
correlation between a program's budget and how much it costs to run the
program. The question "How much is spent within a budget appropriation?"
can generally be answered, but in most cases the question "What does it
cost to provide a product or service to the customers?" cannot.

The Comptroller General has recognized the deficiencies in the current
budget process and has stated "The federal government has always
stressed appropriation accounting and fund control, in other words, the
budget process. This is certainly a critical part of government
financial management; unfortunately, in many organizations, it may be
the only part that is seriously considered. In many situations, the
question 'How much can I spend?' overshadows the equally important
question 'How well am I managing and controlling the resources I already
have?'"[^2]

Federal managers are witnessing shrinking budgets. There are fewer
resources to do even larger tasks. Therefore, it is imperative that
managers use available resources in the most efficient manner. Cost
accounting will play a crucial role in providing managers with
information they need to manage available resources in the most
efficient manner. Cost accounting will provide management with
information about the full and relevant costs of activities, goods, and
services, thereby enabling managers to know which activities to pursue
and which to eliminate. Effective pricing decisions cannot be made and
reimbursable rates cannot be established without proper cost data.
Managerial cost accounting will provide an answer to the question "How
much are we spending for what we are getting?" and thereby assist
management in relating resources consumed and results achieved. There
will often be difficult decisions to make regarding agency
reorganizations and downsizing. However, fear of these decisions should
not preclude adoption of managerial cost accounting.

#### Cost accounting aids stakeholders such as OMB, Congress, and the American public in evaluating the efficiency of government operations and the cost-effectiveness of programs by informing them ofThe Accountability Model

Public demand to reduce federal spending is causing the federal
government to rethink, re-engineer and restructure the way it provides
goods and services. Growing out of this budgetary pressure is the need
for improved accountability and program management. As these needs have
increased, the President, the Congress, and other stakeholders have
looked for ways to better focus discussions on program expectations and
results in order to better allocate and monitor program spending. The
CFO Act, GPRA, GMRA, and the Clinger-Cohen Act provide the statutory
foundation to achieve these improvements. For these laws to succeed,
federal managers need tools to demonstrate accountability, improve
program performance, and reduce program costs. This Guide presents one
such tool\--managerial cost accounting.

####### [A New Standard for Accountability]{.underline}

Federal agencies are increasingly accountable to the American public for
the results achieved with tax dollars spent. The NPR reinvention
initiatives and the management reforms cited in the Introduction were
developed to improve federal operations and restore faith that tax
dollars are being spent wisely. The American public wants the federal
government to be more accountable, better managed, and less costly.

Webster defines accountability in two ways, the first being
"answerable." This historically is how accountability has been viewed in
the federal government. The negative overtones that this definition
carries have often led to the interpretation of having one's head on the
chopping block. Reports of program operations focused primarily on
demonstrating that federal resources were spent in accordance with the
law.

A second more positive definition of accountable is "capable of being
explained." Adequately explaining program operations in terms of the
results achieved is closer to the new standard and is broader than just
being answerable for how dollars were spent. It requires quantifiable
measurements of program performance, management discussion, and analysis
of those performance measurements, and more comprehensive, consistent,
and meaningful financial reporting in audited financial statements,
budget requests, and performance reports.

####### [Establishing a Strategic Management Process]{.underline}

A strategic management process focuses policy and funding discussions
around relevant information, assists managers in monitoring program
performance, and helps taxpayers understand the goals and objectives
that programs are intended to accomplish and the results that were
achieved. The GPRA is the centerpiece of agency strategic management. It
provides a broad framework for improving agency management and
accountability.

GPRA envisions a management process where federal agencies routinely
develop strategic plans, articulate program goals, allocate federal
resources to meet desired performance levels, and measure and report
program results. The requirement for audited financial statements
contained in the CFO Act and the GMRA, the FASAB development of federal
accounting standards, particularly SFFAS No. 4, and the improved
information technology planning requirements contained in the
Clinger-Cohen Act, all provide components of the strategic management
process.

Developing a long-term strategic plan that defines the overall agency
mission and major goals is the first step of a strategic management
process. An agency's strategic plan should be driven by top management,
and made available to stakeholders and customers. In addition to
defining the agency mission and over-arching goals, the plan should also
address goals for each major program that supports the agencywide goals.
An annual performance plan elaborates further on these goals by defining
quantifiable measures for each major program.

Plans and performance goals are developed based upon anticipated
resource levels. At this point in the process, program managers are
beginning to connect resources to results. However, without cost
accounting in place, managers are likely to plan based upon resources
directly allotted to their programs and ignore the support to program
operations requiring the use of indirect services that are separately
appropriated or paid from pooled funds. When the cost of a program is
identified through cost accounting, and the goals are defined, program
costs can be monitored and managed more efficiently.

In a fully integrated strategic management process, the program
objectives, federal resources used to accomplish the objectives, and the
actual program activity results achieved are closely linked. Currently,
there are varying degrees of linkage between the program objectives in
strategic plans, the federal resources described in annual budgets, and
federal resources actually spent to carry out the program. Cost
accounting is intended to enhance this linkage by identifying the cost
of federal resources used by a program and by supporting the process of
resource allocation to program activities in the budget process.

Implementing an effective process requires that financial accounting,
budgeting, and management functions come together to form a fully
integrated system. Standing alone, the effectiveness of these individual
functions is limited. However, when linked, they can create a powerful
process for improving program management and accountability. Improving
the linkage between these processes may require agencies to overcome
significant organizational barriers associated with coordinating across
functional areas. To integrate these processes, agencies must weave
together existing and possibly new systems to create a better way of
doing business.

####### [Introducing the Accountability Model]{.underline}

Financial accounting, budgeting, and managing are three essential
ingredients of accountability in the federal government. The managerial
cost accounting concepts contained in SFFAS No. 4, which can be viewed
as general guidance but not authoritative requirements, describe the
relationship between these elements and discuss how information should
be drawn from a common data source by all three. SFFAS No. 4 summarizes
the managerial cost accounting concepts in the federal government as
follows:

"Managerial cost accounting should be a fundamental part of the
financial management system, and to the extent practicable, should be
integrated with other parts of the system. Managerial costing should use
a basis of accounting, recognition, and measurement appropriate for the
intended purpose. Cost information developed for different purposes
should be drawn from a common data source, and output reports should be
reconcilable to each other."[^3]

The common data source, as SFFAS No. 4 describes it, "consists of all
financial and programmatic information used by the budgeting, cost
accounting, and financial accounting processes. The common data source
may include many different kinds of data, which may be spread among
multiple systems or locations, including non-computerized sources. This
data is far more than the information about financial transactions found
in the standard general ledger, although that is a significant part of
the data source."[^4]

The five standards in SFFAS No. 4, which provide specific guidance and
are authoritative in nature, set forth the fundamental elements of
managerial cost accounting for the federal government: (1) accumulating
and reporting costs of activities on a regular basis for management
information purposes, (2) establishing responsibility segments to match
costs with outputs, (3) determining the full cost of government goods
and services, (4) recognizing the costs of goods and services provided
by one federal entity to another, and (5) using appropriate costing
methodologies to accumulate and assign costs to outputs. These standards
are broad enough to allow maximum flexibility for agency managers to
develop costing methods that are best suited to their operational
environment. Managerial cost accounting standards and practices are
expected to evolve and improve as agencies gain experience in using
them.

The graphical presentation in Figure 1 depicts a model of the
interrelationship of the three major aspects of accountability, each
drawing on a common data source. Cost accounting information supports
all three aspects of accountability as will be explored in more detail
later in this Guide. Managerial cost information must support
decision-making within a variety of different business environments,
such as in:

-   **Budgeting** - to make resource allocation decisions;

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-   **Managing**

> [Program Management]{.underline} - to manage resources in the
> accomplishment of broad program purposes;
>
> [Project Management]{.underline} - to manage resources allocated to
> the project for achievement of desired results by a given deadline or
> according to a particular schedule;
>
> [Manufacturing Operations Management]{.underline} - to manage the unit
> costs of output to ensure that the units of output are produced as
> inexpensively as possible;
>
> [Franchise Fund Management]{.underline} - to determine pricing and to
> manage costs to be competitive in the marketplace; and
>
> [Mission Driven Fee for Service Management]{.underline} - to set fees
> within legal requirements and to allow external oversight
> organizations to monitor and review fee decisions.

-   **Financial Accounting** -- "financial accounting is largely
    concerned with assigning the value of past transactions to
    appropriate time periods".[^5] "Federal financial reporting should
    assist report users in evaluating service efforts, costs, and
    accomplishments of the reporting entity."[^6]

In each of these environments, management must know the costs of their
organizations/lines of business and cost objects (programs, projects,
activities, goods, or services) in order to make good business decisions
and to report the financial and performance information to external
parties such as Congress and the public. Thus, the Accountability Model
presented in Figure 1 depicts the manner in which cost information is
derived from a common data source that supports financial accounting,
budgeting, and managing, the components of accountability discussed in
detail in this Guide.

The subsequent chapters of this Guide focus on: the interrelationship of
cost accounting information in the federal government (cost components
(differentiating funded and/or reimbursed costs from unfunded and/or
non-reimbursed costs), types of cost information to use, uses of costs
information, and levels to which costs are assigned) and the
relationship of cost accounting to budgeting, managing, and financial
accounting.

**The Relationship of Managerial Cost Accounting to Financial
Accounting**

Financial accounting provides the ability to track the effects of
financial events on the financial position of the federal government and
results of operations, including assets, liabilities, changes in net
position, revenues, and expenses. "Managerial cost accounting is the
process of accumulating, measuring, analyzing, interpreting, and
reporting cost information useful to both internal and external groups
concerned with the way in which the organization uses, accounts for,
safeguards, and controls its resources to meet its objectives.
Managerial cost accounting is therefore the servant of budgeting,
financial accounting, and reporting because it assists those functions
in providing information. In addition, managerial cost accounting
provides useful information directly to management."[^7] Although this
chapter touches on budgeting, managing, and reporting since all are
related closely to managerial cost accounting, the primary focus in this
chapter is the impact of federal financial accounting standards and
other federal regulations on managerial cost accounting.

## The Interrelationship of Cost Accounting Information in the Federal Government 

The chart in Figure 2 provides the foundation to this Guide by
displaying the interrelationship of cost accounting information to
management decision-making situations and the organizational units,
programs, and outputs to which costs are assigned. It identifies the
cost components (differentiating funded and/or reimbursed costs from
unfunded and/or non-reimbursed costs), types of cost information to use,
uses of cost information, and level to which costs are assigned. In
addition, it relates the uses of cost information to cost components
defined in federal accounting standards and to OMB Bulletin 97-01, *Form
and Content of Agency* *Financial Statements*, although it does not
attempt to illustrate how exchange revenues would be applied to
determine net costs.[^8] A detailed explanation of each of the terms
used in the chart is presented on the following pages. In addition, this
chapter discusses cost information needing additional guidance.

########  {#section .unnumbered}

########   {#section-1 .unnumbered}

######## **Cost Components --** The two principle components of Cost are Program Costs and Costs not Assigned to Programs. {#cost-components-the-two-principle-components-of-cost-are-program-costs-and-costs-not-assigned-to-programs. .unnumbered}

[Program Costs]{.underline}

Program costs include direct costs, indirect costs, and non-production
costs associated with programs. Program costs include the full cost of
the program outputs, which consist of the direct costs and indirect
costs (all other costs that can be directly traced, assigned on a cause
and effect basis, or reasonably allocated to the program outputs). In
addition, program costs include non-production costs that can be
assigned to the program but not to its outputs. The costs of program
outputs shall include the costs of services provided by other federal
entities whether or not the providing entity is fully reimbursed. The
cost of program outputs shall also include costs that are paid in total
or in part by other entities to the extent that the accounting standards
require them to be recognized in financial statements. Although not
illustrated in Figure 2, OMB Bulletin 97‑01 requires "costs related to
the production of goods and services provided to other programs to be
reported separately from the costs of goods, services, transfers, and
grants to the public."[^9]

Programs that make transfer payments to the public (e.g., welfare
payments, social insurance payments) should separately identify (1) "the
costs of federal resources that have been or will be transferred to
individuals and state/local governments, and (2) the costs of operating
the programs."[^10] These transfer payments would be considered direct
costs in most instances, since they would be outputs of the program. In
most cases, transfer payments will be funded for budgetary purposes by
the program making the payments. In some instances, such as the trust
funds operated by the Department of Labor for unemployment and workers
compensation payments, agencies make payments to the program's funds to
cover the costs.

An important distinction needs to be made between costing and pricing.
The same amounts are not necessarily used. Although full costs are
recorded and reported, the prices charged and paid may be very
different. (See the discussions on Pricing for Governmental User Fees
below.)

### Direct Costs

"Direct costs are costs that can be specifically identified with a
single cost object (e.g., an output)."[^11] Direct costs are assigned to
cost objects by direct tracing of units of resources consumed by
individual activities that lead to the production of an output.
"Examples of resources that are directly used in the production of an
output and might be included in direct costs include materials that are
used in the production of the output, employees who directly worked on
the output, facilities and equipment used exclusively in the production
of the output, and goods or services received from other entities that
are directly used in the production of the output."[^12] "Although
direct cost tracing increases accuracy in cost assignments, it can be
very expensive. Management must use their judgment to determine whether
the information and accuracy obtained by using direct tracing to
identify direct costs is worth the effort and expense of doing so."[^13]

Many direct costs are incurred internally by the program, responsibility
segment, reporting entity, or other cost object, depending on the level
of reporting needed. Two very common examples are salaries and other
benefits of employees who work for the organization, and the cost of
goods and services purchased from the private sector. The full cost of
these items is to be included in the cost of the output whether or not
it is funded in the budget covering the program.

Another type of direct cost is the costs of goods and services received
from other federal entities that can be directly traced to one of the
program's outputs. An example is computer services obtained from another
agency's data center that are used to produce the output. The costs of
these goods and services, called inter-entity costs, included in the
full cost of the output, may be fully reimbursed, partially reimbursed,
or not reimbursed at all.

######## Funded and/or Reimbursed Costs

> Funded and/or Reimbursed Costs include amounts that were either
> budgeted to an entity or that were paid to another entity for goods or
> services provided. It should be fairly easy to see why the entity
> receiving goods or services from another federal entity would record
> reimbursed amounts as a cost. This is similar to the accounting
> treatment used for purchasing goods and services from a vendor or
> contractor in the private sector. Recording costs (as either expenses
> or assets, as appropriate) equal to the price paid also applies to
> items received from other federal entities for which payment is made
> to cover the providing entity's full cost. The primary difference
> between accounting for goods and services received from another
> federal entity where full costs are reimbursed and accounting for
> goods and services from a non-federal entity is the need to identify
> the costs as inter-entity costs, along with the other entity's
> identification, so that appropriate elimination entries can be made
> when preparing consolidated reports that cover both entities to avoid
> double-counting. It is important to know whom the other entities are
> to allow crosschecking and verification of inter-entity amounts and to
> determine which amounts are to be eliminated. For example,
> intra-entity costs and revenues between two bureaus in the same
> Department, if recorded, would be eliminated when preparing the
> Departmental consolidated financial statements. Inter-entity
> transactions between Departments would not be eliminated for
> Departmental statements but would be for the Governmentwide
> Consolidated Financial Statements.

######## Unfunded and/or Non-reimbursed Costs

> Unfunded costs represent amounts for which no entity has paid. An
> example of an unfunded cost is accrued annual leave. Non-reimbursed
> costs represent amounts that were paid by an entity other than the
> entity receiving the benefit. An example of a non-reimbursed cost is
> the retirement costs paid by the Office of Personnel Management (OPM)
> for federal retirees. If goods and services are received from another
> federal entity with no or partial reimbursement, the receiving entity
> may need to record non-reimbursed costs in addition to the
> reimbursements in order to determine the full cost to the government
> of goods and services received and of outputs ultimately produced by
> the receiving entity. Non-reimbursed costs to other federal entities
> are still a cost to the government as a whole, and ultimately to the
> taxpayers. Treating these costs as a "free resource" to the receiving
> entity distorts the actual costs to the government and would make cost
> comparisons between goods and services provided by the private sector
> and by other federal entities invalid.
>
> Ideally, all inter-entity costs should be recognized. However, there
> are some cases in which the cost of non-reimbursed or under-reimbursed
> goods or services received from other entities need not be recognized
> as part of the cost of the receiving entity. Recognition of
> inter-entity costs that are not fully reimbursed is limited to
> material items that (1) are significant to the receiving entity (the
> cost of the good or service is large enough that management should be
> aware of the cost when making decisions), (2) have a direct
> relationship to the entity's operations (the good or service provided
> is an integral part of and necessary to the output produced by the
> entity), and (3) can be identified or matched to the receiving entity
> with reasonable precision. Broad and general support services provided
> by an entity to all or most other entities (e.g., OMB oversight)
> should not be recognized unless such services form a vital and
> integral part of the operations or output of the receiving entity.
> Both the providing entity and the receiving entity should recognize
> the cost of the goods and services, which will include those
> inter-entity costs specifically identified by OMB. To the extent that
> reimbursement is less than the full cost (direct and indirect costs)
> of the output, the receiving entity should recognize the difference in
> its accounting records as a financing source, which will appear on the
> Statement of Changes in Net Position. Inter-entity expenses/assets and
> financing sources would be eliminated for any consolidated financial
> statements covering both entities.
>
> Reimbursed amounts of inter-entity costs need to be matched with the
> other entity's records because one agency has the expense (payable)
> and the other has the revenue (receivable), but non-reimbursed costs
> can be eliminated against the imputed financing sources at the
> receiving entity, since it has both the cost and the financing source.
> The providing entity doesn't need to be involved in the elimination of
> imputed costs and financing sources, although it is involved in
> providing cost information to the receiving entity. The entity
> providing the goods and services has the responsibility to provide the
> receiving entity with the cost information of such goods or services,
> either through billing or other advice. Agencies are strongly
> encouraged to negotiate reimbursable agreements that include a
> description of both the reimbursed and non-reimbursed portions of the
> cost and provide sufficient support to be auditable. Full cost should
> be determined in accordance with the federal accounting standards and
> using the best available estimates. The receiving entity should record
> the cost (both the reimbursed and non-reimbursed amounts) as goods and
> services are received.
>
> In some cases the federal budget has been established such that some
> costs incurred by a federal entity are actually paid for, in part or
> in full, by another federal entity using its budgetary resources.
> Common examples are (1) the cost of pensions and other retirement
> benefits covered by trust funds administered by OPM and the Department
> of Defense (DOD), and (2) items paid by the Treasury Judgment Fund on
> behalf of other agencies. Pensions are funded by contributions to the
> trust funds by employees and the employer entities as well as by the
> trust funds themselves (e.g., direct appropriation to the trust fund,
> interest earned on investments). The employee contributions are
> transferred to the administrative agency (e.g., OPM or DOD), and the
> employer entity records no costs for these. Budgetary resources of the
> employer entity are used (i.e., obligations are incurred) and payment
> made for the employer entity's contributions as required by law. "The
> employer entity recognizes an 'employer's pension expense' in an
> amount equal to the service cost (based on the plan's actuarial cost
> method and assumptions) attributable to its employees during the
> accounting period, less the employees' contributions. The difference
> between the employer's pension expense and the employer's contribution
> is credited to the employing entity as a financing source"[^14] in
> much the same way that non-reimbursed inter-entity costs (discussed
> above) are. Likewise, as judgment costs are incurred, they should be
> recognized by the agency in litigation, even though they are paid by
> the Treasury Judgement Fund.
>
> **Modifying the federal budget such that the employer agencies provide
> contributions covering all of the federal government's portion of
> these employee-related costs to the agencies administering the trust
> funds would help bring budgeting, costing, and financial accounting
> more into line with each other. This would reduce the need for
> calculating imputed costs and imputed financing sources, thereby
> reducing potential confusion among users of financial and budgetary
> information. In addition to bringing budgeting and accounting closer
> for the costs of an agency's own employees, it would also bring closer
> the costs of inter-entity services and reimbursements. The budgets of
> the agencies that administer the pension and other retirement benefits
> programs should be adjusted to reflect the additional revenues they
> will receive from the agencies, and the employer agency budgets should
> be increased to reflect the additional payments they will make. The
> net dollar effect of these changes to the budget should be zero.**

### Indirect Costs

### 

"Indirect costs are costs of resources that are jointly or commonly used
to produce two or more types of outputs but are not specifically
identifiable with any one of the outputs. Typical examples of indirect
costs include costs of general administrative services, general research
and technical support, security, rent, employee health and recreation
facilities, and operation and maintenance costs for buildings,
equipment, and utilities."[^15] As with direct costs, indirect costs can
be incurred internally or for goods and services received from other
federal entities and may or may not be funded in the budget covering the
program.

*Non-Production Costs*

Non-production costs (as a part of program costs) are costs linked to
events other than the production of goods and services that can be
traced to a particular program. (Non-production costs that cannot be
traced to a program are designated as "costs not assigned to programs."
See the discussion below.) These costs are not factored into the full
cost of an output, but are considered part of the full cost of a
program. Examples of non-production costs include the following:

• other post-employment benefits (OPEB) costs recognized as expenses
when an OPEB event occurs (e.g., a reduction in force);

• certain property acquisition costs recognized as expenses at the time
of acquisition (e.g., costs of acquiring or constructing stewardship
property, plant, and equipment);

• reorganization costs; and

• nonrecurring cleanup costs resulting from facility abandonments that
are not accrued.

"Since these costs are recognized for a period in which a particular
event occurs, assigning these costs to goods and services produced in
that period would distort the production costs."[^16]

In special purpose cost studies, management may have reasons to
determine the cost of outputs by distributing some of the non-production
costs to the cost of outputs over a number of past periods. Such
distribution may be appropriate when (1) experience shows that the
non-production costs are recurring in a regular pattern, and (2) a nexus
can be established between the costs and the production of outputs that
may have benefited from those costs.

OMB Bulletin 97-01 requires separate reporting on the Statement of Net
Cost for non-production costs associated with stewardship property,
plant, and equipment (PP&E); heritage assets; and stewardship land \--
known collectively as stewardship PP&E. Costs of acquiring or
constructing these items, which are usually considered to be
non-production costs and expensed in the period incurred, must be
reported separately from each other and from other non-production costs.
Recurring costs associated with stewardship PP&E, such as the National
Park Service's ongoing maintenance of a building designated as a
heritage asset, could be treated as a direct cost or indirect cost
assigned to an output (see above), since part of their mission is to
maintain such buildings and make them available to the public. Costs
associated with stewardship PP&E that cannot be assigned to a particular
program should be shown under "costs not assigned to programs." (See
below.)

######## Costs Not Assigned to Programs

"Costs not assigned to programs consist of costs that are attributable
to the reporting entity or responsibility segment but cannot be assigned
reasonably to programs through direct tracing, assignment on a
cause-and-effect basis, or a reasonable allocation method. Examples of
such costs include (1) high-level general management and administrative
support costs (e.g., the Department Secretary's office and other central
office functions), and (2) non-production costs that cannot be assigned
to a program. These costs appear on the Statement of Net Cost as part of
the entity and suborganization costs and are labeled "costs not assigned
to programs."[^17] Since these costs are not part of the full cost of an
output, generally (though not necessarily always) they would not be
included in the prices of those outputs either.

####### Types of Cost Information to Use

The term "full cost" is defined in SFFAS No. 4. This Guide uses the term
"relevant costs" when full cost is not required. When to use full cost
or relevant costs is dependent upon management's use of the cost
information.

####### **[Full Cost]{.underline}**

FASAB recommended, and OMB issued, a requirement (contained in SFFAS No.
4) for developing and reporting cost accounting information. SFFAS No. 4
requires "the full cost of outputs to be reported in general purpose
financial reports."[^18] In addition, full costing capability is
required in federal agencies' basic cost accounting processes. "Each
reporting entity should measure the full cost of outputs so that total
unit cost of outputs can be determined."[^19] The Statement of Net Cost,
in an agency's financial statements, is the report most obviously
affected by these requirements. "The Statement of Net Cost and related
supporting schedules show the net cost of operations for the reporting
entity as a whole and for its suborganizations and programs."[^20] "The
full cost accounting standard does not require full cost reporting in
federal entities' internal reports or special cost studies."[^21] Full
cost is required in certain situations such as financial statements and
performance measurement under GPRA.

[Relevant Costs]{.underline}

Those cost elements that are necessary for particular management
analyses and/or decision-making purposes when full cost is not
necessarily required. Relevant costs are appropriate for decision-making
purposes such as devolution decisions and the pricing of governmental
user fees. For example, certain management decisions might involve
looking only at variable costs. The costs appropriate for consideration
in particular situations may only be a portion of the full cost, may be
greater (e.g., A-76 contracting-out decisions), or in the case of
budgeting, be computed on a different basis other than the accrual
basis, which is normally used for financial reporting. Of course, full
cost may also be relevant to these decisions as well.

########  {#section-3 .unnumbered}

######## **Uses of Cost Information** {#uses-of-cost-information .unnumbered}

########  {#section-4 .unnumbered}

######## Budgeting {#budgeting .unnumbered}

Provides information and analysis for use in achieving annual and
long-term revenue and resource levels, in making resource allocation
decisions, and for use in monitoring performance against those decisions
throughout the budget period.

-   *Resource Allocation -* This use includes the comparison of the
    costs and benefits of various proposals and the resulting decisions
    to allocate planned federal resources. Using the full cost of
    programs allows for more meaningful cost comparisons because more of
    the costs to taxpayers are considered than might be if using only
    funds directly appropriated to the program.

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-   *Budgeting Formulation, Budget Execution, and Funds Control* -- This
    use focuses on identifying budgetary resources and tracking
    obligations and outlays incurred against them. These are measured on
    a different basis than the accrual basis used to measure full cost.

######## Managing

Provides information on the performance of operations and assists
managers in determining the prices to be charged for outputs.

-   *Cost Control* - This use, which can be looked at from several
    levels, includes management decisions to control costs by changing
    work processes or allocating/reallocating federal resources. In some
    situations, managers may only look at variable costs that would be
    affected by a change in output volume.

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-   *Performance Measurement (GPRA)* - This use includes the costs to be
    considered when reporting performance measures, including the costs
    relating to outputs or outcomes in order to meet the objectives of
    GPRA.

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-   *Contracting-Out Decisions (Commercial Activities as defined in OMB
    Circular A-76***)** - This use includes costs to consider (full cost
    plus other items, such as federal taxes and bid and proposal costs)
    for comparative purposes, when evaluating whether non-sovereign
    activities should be performed in-house, using federal government
    resources and personnel, or under contract with commercial sources.

-   *Devolution Decisions* - This use includes costs to use in
    management decisions to spin-off or discontinue some or all of the
    operations of an organizational component.

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-   Determining the Price to be Charged for Governmental User Fees -
    This use applies only in situations when one federal entity provides
    an activity, good, or service to another federal entity.
    **Generally, the price charged would only include the recovery of
    costs that the providing agency was funded for and/or reimbursed.
    However, the providing entity must furnish information regarding the
    full cost of the activity, good, or service provided, regardless of
    whether or not these amounts are recovered from the receiving
    entity. In situations other than revolving funds, costs related to
    capitalized assets are treated differently for budgetary and
    financial accounting. Full acquisition cost is a budgetary
    expenditure in the year acquired, whereas the asset's cost is
    depreciated over more than one period for financial accounting
    purposes. Where fees are based upon depreciation expense or other
    expenses not funded out of the providing entity's current
    appropriation, the amount collected from the receiving entity that
    relates to the unfunded expense should be forwarded to the U.S.
    Treasury, unless specifically allowed by statute or as outlined in
    OMB Circular A-25, to be retained by the providing entity.**

> **Within an agency, funding can also be in a separate appropriation.
> When billing within a reporting entity (as defined in the Statement of
> Federal Financial Accounting Concepts No. 2, Entity and Display),
> intra-entity costs do not have to be recovered. However, when billing
> another reporting entity, all intra-entity costs have to be recovered
> (subject to specific legislation preventing this recovery).**

-   Determining the Price to be Charged for Nongovernmental User Fees
    (OMB Circular A-25 Situations) -- This use applies only to the
    activities, goods, and services provided to nonfederal entities and
    includes the prices charged for the sale or use of government
    property or federal resources and for services rendered. The prices
    set for nongovernmental user fees should recover all direct and
    indirect costs (funded or reimbursed as well as unfunded or non-
    reimbursed) incurred in providing the good or service. **The portion
    of the fees collected that were not funded out of the providing
    entity's current appropriation, e.g., depreciation included in the
    direct costs that was funded in a different year should be collected
    from the receiving entity by the providing entity and forwarded to
    the U.S. Treasury, unless specific legislation allows the providing
    entity to retain these funds. OMB Circular A-25 allows prices to be
    set at market price levels in excess of full cost in certain
    situations.**

    [Financial Accounting]{.underline}

Evaluates service efforts, costs, and accomplishments of the
organization.

-   *Asset Valuation --* Certain costs, such as for inventory and
    general property, plant, and equipment (PP&E), are capitalized
    rather than expensed in the period incurred. "To match the costs
    more closely to the periods benefited, expenses are recognized over
    time as inventory is used and general PP&E is depreciated."[^22]

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-   *Financial Statements* - This use includes the consolidated
    governmentwide financial statements and the organizationwide
    (agency) financial statements used by federal executives, program
    managers, Congress, and the American public.

####### Levels to Which Costs are Assigned {#levels-to-which-costs-are-assigned .unnumbered}

[The Hierarchical Levels (in descending order) for Which Costs are
Assigned]{.underline}

-   Governmentwide

-   Agencywide (reporting entity defined under FASAB)

-   Responsibility Segments (suborganizations)

-   Programs

-   Projects

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-   Outputs (activities, goods, and services)

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-   *Governmentwide* - The total federal government (Executive Branch at
    this time), including all costs incurred by the government and
    reported in the federal consolidated Governmentwide financial
    statements.

-   *Agencywide* - A reporting entity, which is generally assumed to be
    an agency or department. If a large government department has
    organizational components that are themselves reporting entities
    (e.g., Internal Revenue Service within the Treasury Department,
    Forest Service within the Department of Agriculture), then the
    reporting components and their organizational equivalents could also
    be considered the agencywide level.

-   *Responsibility Segment* - A major suborganization of the agency
    that has responsibility for delivery of an activity, good, or
    service within the reporting entity.

-   *Programs* -- "Agencies should decide the exact classification of
    major programs based on the missions and outputs described in the
    GPRA strategic and annual plans, the entity's budget structure and
    the guidance for defining and structuring responsibility segments
    presented in SFFAS No. 4."[^23]

-   *Projects* - Planned undertakings, usually related to a specific
    activity, such as the research and development of a new product or
    the redesign of the layout of a production plant. Projects generally
    have a finite life span, with a specific start and end date.

######### 

######### Activities, Goods, and Services

-   [Activities]{.underline} - Work tasks or steps performed in
    producing goods or services.

-   [Goods and Services]{.underline} - Outputs generated from the
    consumption of resources.

As indicated in Figure 2, the full cost for programs includes all
direct, indirect, and program non-production costs (funded or reimbursed
as well as unfunded or non-reimbursed). The full cost for an output
(activity, good, or service) includes all direct and indirect costs
(funded or reimbursed as well as unfunded or non-reimbursed) but does
not include any program non-production costs because these costs can not
be related to outputs.

**[Costs for Which Additional Guidance May Be Needed]{.underline}**

"To assist in implementing the inter-entity costing standard in a
practical and consistent manner by the various federal entities, OMB,
with assistance from FASAB, is supposed to identify and provide guidance
on the specific inter-entity costs that federal entities should begin
recognizing."[^24] OMB should also identify other costs that may not be
inter-entity costs under FASAB's definition but should be recorded as
costs to the entity and are not paid for from the entity's budget, in a
manner similar to the treatment of pension and other retirement
benefits. As of December 1997, OMB has not yet developed this guidance.
**OMB needs to develop this guidance as soon as possible.** Agencies
will need time to implement the guidance once it is released. Without
this guidance, agencies and their auditors will interpret the cost
accounting standards in their own ways, which will likely lead to
inconsistencies across government.

Costs for which there is no reimbursement are the most controversial and
difficult to capture. Costs that OMB should consider in preparing this
guidance (and determining whether or not the receiving entity should
record the costs) include, but are certainly not limited to, the
following:

**• space provided to another entity for which there is no negotiated
inter-agency agreement;**

**• costs of employees working on non-reimbursed details;**

**• costs of employees working on inter-agency working groups or task
forces;**

**• Department of Justice legal services (lawyer and staff time to
develop cases);**

**• payment services provided by Treasury, if material to the receiving
entity; and**

-   **recognition of environmental clean-up costs by the entities
    causing the damage and/or doing the clean-up.**

In May of 1997, OMB, working with GAO, Treasury, the CFO Council, and
the President's Council on Integrity and Efficiency, established the
Accounting and Audit Policy Committee (AAPC) to research accounting and
auditing issues requiring guidance. The AAPC is intended to address
issues, which arise in implementation and are not specifically or fully
discussed in the accounting standards, interpretations of the accounting
standards, OMB's Form and Content Bulletin, or OMB's Audit Bulletin. OMB
is to issue the final interpretations based on the AAPC's
recommendations. Agencies and other interested parties can submit issues
to the AAPC for their consideration.

FASAB is currently working on projects to develop accounting standards
for natural resources, internal use software, and the cost of capital.
These standards, once developed, will probably also affect how entities
determine the full cost of their outputs and programs.

###### The Relationship of Managerial Cost Accounting to Budgeting

**[Importance of Cost Accounting to the Budget Process]{.underline}**

Federal agencies account for costs at different levels and use different
costing methods as defined in Chapter 2. Generally costs are accumulated
at the budget account (Treasury Fund Symbol), object classification, and
program level according to budgetary accounting guidelines to meet
budget needs, and are accounted for using accrual accounting as defined
in federal financial accounting standards for financial statement
purposes. Historically, the emphasis has been on costs accumulated at
the budget account level using budgetary accounting to ensure that
dollars spent (amounts obligated within a budget account) did not exceed
the amount appropriated, apportioned, or allotted.

While the accounting of costs in budget appropriation accounts is
necessary for legal purposes, it is not always the most effective way to
accumulate cost information for budget analysis or information purposes.
Specifically, while appropriations funded in separate statutorily
authorized accounts have the advantage of enhancing control by
designating a specific level of federal resources for specific purposes,
they do not facilitate an understanding of the total level of federal
resources needed to achieve policy or program goals. Cost accounting can
play an important role in the budget process and assist the
Congressional and executive decision-makers who allocate federal
resources during budget formulation by informing them of the costs of
federal resources required to support policy and program goals. Cost
accounting also assists the budget execution process by consistently
accumulating and reporting the costs of the federal resources consumed,
and by comparing actual against planned federal resource consumption.

**Budgeting**

Budgeting provides information and analysis for use in achieving annual
and long-term revenue and resource levels, in making resource allocation
decisions, and for use in monitoring performance against those decisions
throughout the budget period.

There are two major aspects to budgeting. The first, called budget
formulation, allocates budgetary resources in accordance with national
priorities and program objectives established by the President and the
Congress. The second, budget execution, controls the funds and other
resources allocated to federal entities during the budget formulation
process.

[Budget Formulation]{.underline}

"Budget formulation is the annual cycle wherein budget estimates are
developed (formulated), using projections and forecasts, beginning each
spring within the agencies' organizational (program) units, submitted to
OMB for review, transmitted by the President to the Congress, and
tracked through the Congressional appropriation process."[^25] OMB
Circular A-11, *Preparation and Submission of Budget Estimates*,
provides the guidance for the budget formulation process. Although the
budget is not prepared on an accrual basis, cost information can still
be very useful in making resource allocation decisions during the budget
formulation process. The costs and benefits of various proposals should
be compared to determine their relative merits. Cost accounting
information on the full cost of a program, regardless of how it is
funded, can provide a different perspective to the decision-makers that
they may not get by only looking at budgetary information.

In addition to the differences caused by using different bases of
accounting, the current budget structure does not line up the budgetary
resources provided with the costs of programs that are authorized. For
example, some of the costs associated with pensions and other retirement
benefits are funded through OPM and DOD, even though the employees work
for other agencies. (See the discussion in Chapter 2 on Unfunded and/or
Non-reimbursed Costs.) Several misalignments between programs and budget
accounts have arisen over the years for various reasons that may no
longer be valid, thus causing unnecessary administrative work and
potential confusion. Once the decision is made to fund a particular
program, the budgetary resources (e.g., appropriations, anticipated
reimbursements) need to be assigned to the appropriate budget accounts.
The closer this assignment is to the accounting for costs of the
program, the easier it is for the agencies and other users of budgetary
and cost information.

[Budget Execution/Funds Control]{.underline}

Budget execution includes funds control and provides features to record,
distribute, and control budget authority and spending in accordance with
the provisions of OMB Circular A-34, *Instructions on Budget Execution*.
"Budget execution provides the ability to track the effects of financial
events on the sources and uses of budgetary resources authorized by the
President and the Congress. Its primary purpose is to ensure that
spending does not exceed the funds appropriated or authorized."[^26]

Cost information on an accrual basis is probably not as useful to budget
execution as it is to budget formulation. However, it still can be used
to predict the possibility of a need for additional budgetary resources
in the future. Furthermore, the closer that budget and cost accounting
can be aligned, the more useful cost information will be for budget
execution.

In defining the annual performance plans connected with the budgeting
process, program managers can establish performance goals based upon an
understanding of both the direct and indirect costs of their programs,
and therefore appropriately connect resources to results. Cost goals can
be defined that will assist managers in deploying resources more
efficiently. Cost accounting's consistent accumulation and reporting of
the costs of resources consumed supports the budget execution process
and the comparison of actual versus planned resource consumption assists
management in identifying and addressing problems.

Managerial cost accounting, as envisioned under SFFAS No. 4, assists
budget analysts and policy-makers in four key areas:

-   aligning the level of federal resources consumed by a program with
    the program's outputs and results;

-   providing reliable and consistent cost information for different
    programs;

-   prioritizing how limited federal resources can be allocated to
    achieve desired policy objectives; and

-   making other specific budget decisions such as those concerning
    future capital expenditures and lease/purchase alternatives.

Cost accounting focuses on evaluating performance plans, goals, and
objectives in quantitative (numerical) terms. "Just because qualitative
factors cannot be measured in numerical terms, does not make them
unimportant."[^27] Successful performance requires maximizing both
quantitative and qualitative factors.

If incomplete or inaccurate cost information is used in budget
decisions, some programs could gain approval under the expectation that
they will yield a net gain for society. With complete cost information,
decision-makers at various levels can better establish budget priorities
based on a more comprehensive accounting of the costs incurred in the
administration of federal programs.

**[Aligning Cost Information with the Budget]{.underline}**

The GAO report, titled *Budget Account Structure -- A Descriptive
Overview*, issued September 1995, notes "Nearly eighty percent of the
federal government's resources are clustered in less than five percent
of budget accounts. Conversely, eighty-five percent of all budget
accounts contain about six percent of the federal government's total
budgetary resources."[^28]

The alignment of cost accounting with budget and management practices is
necessary to achieve the objectives of managerial cost accounting
standards in an effective and efficient manner. **A first step in
implementing a system of accounting for costs is to develop a plan for
aligning or crosswalking an agency's programs to budgeted federal
resources.**

Cost accounting is focused on identifying the full or relevant, as
appropriate, costs for a specific program, but funding for the program
in many cases is budgeted from multiple appropriation accounts. In
addition to this structural misalignment, costs may be accounted for
using different guidelines (bases) for budgeting and financial statement
purposes. It is not the intention of this document to discuss the issues
or pros and cons of different accounting bases, other than to
acknowledge that the accrual basis is appropriate for financial and cost
accounting. The differences between budget accounting and financial
accounting should be reconciled, and that is, in fact accomplished in
the Statement of Financing prepared as part of an agency's financial
statements.

**If the steps to better alignment of cost accounting and budgeting
presented in this chapter are accomplished, the differences between
budget accounting and financial accounting that now exist should be
greatly reduced. The agencies, OMB, and Congress will be able to make
better use of cost information when allocating budgetary resources
because the reconciliations needed because of differing structures and
accounting practices will be much less onerous. Furthermore, the need to
impute costs (and offsetting financing sources) to determine full cost,
which is needed when significant costs such as employee benefits and
pensions are funded in the budget by another entity, will be reduced
significantly.**

**A very clean budget appropriation account structure, from a cost
accounting perspective, would have a straightforward alignment between
budget accounts and major programs.** However, in many cases under the
current budget structure, a program's costs are funded from a multitude
of different budget accounts. **Agencies need to analyze the
relationship between their budget account structure and their programs
in order to better align programs with the identification and
accumulation of their costs.** The following three examples illustrate
the differences between programs and the budget structure:

-   Administrative costs for departmental management within the
    Department of Health and Human Services (HHS) are funded from one
    appropriation account. To identify the complete cost of, for
    example, the Head Start program, Head Start's share of
    administrative costs needs to be assigned to the program.

-   In the case of the Department of Veterans Affairs (VA), the cost of
    providing medical care to veterans is budgeted in a number of
    separate appropriation accounts. Separate appropriations are
    provided for medical care operations, construction, and
    administration. To determine the cost of providing this service to
    veterans, the costs within these separate budget accounts must be
    crosswalked to the medical care program.

-   Another example in VA is the National Cemetery System (NCS) which
    receives programmatic support from the Veterans Benefits
    Administration (VBA). Total funding for NCS operations is provided
    from two different appropriation accounts\--a direct NCS
    appropriation and a VBA account. Authorizing statutes require that
    graveliners used by NCS be funded by VBA's Compensation & Pension
    Appropriation. The total cost of NCS' programs must include the
    costs funded from both of these appropriations.

In all of these cases, the budget appropriation account structure is not
aligned with the program it funds. The disclosure of a program's cost
requires that the costs contained in various budget accounts be assigned
to the program to which they relate. Determining the cost of a program
by crosswalking between budget accounts and the program may require
establishing a methodology to identify a program's share of
administrative costs as in the HHS example. In the case of the first VA
example, it would require totaling a number of related budget accounts.
In the last VA example, it would necessitate identifying the appropriate
share of direct program costs statutorily required to be funded from
another appropriation.

The intent of the steps to better alignment is not to proliferate budget
accounts. The overriding intent is to align budgeted federal resources
to programs. Where feasible, aligning budget accounts to programs as
defined in strategic plans and financial statements can facilitate this
alignment. The definition of a "program" is a matter of perspective, and
**agencies need to define programs to be isolated in separate budget
accounts based upon their strategic goals.**

Where appropriate and feasible, budget account restructuring could be a
way to avoid complex crosswalks between the two structures. However,
budget account restructuring will not eliminate the need to have systems
or procedures in place that assign a share of indirect administrative
costs to a program. The following sections contain steps that can be
taken in the near future and over the long-term to create a better
linkage between cost accounting information contained in financial
statements, GPRA performance reports, and budget accounts.

## Steps to Better Alignment

To achieve proper integration of cost accounting with budgeting and
management, the following approaches could be used to better align costs
with program budgets and thereby, minimize the need for unnecessary
reconciliation efforts and improve the usefulness of comparative
information.

1.  **Align Program Budgets with Program Objectives - All budget
    accounts should be aligned with the programs providing goods,
    services, grants, and transfers to the public.** In many cases under
    the current budget structure, agencies have been given the authority
    to move people and other resources between programs to meet
    emergencies or other changing requirements. **In those instances, it
    may be appropriate for one budget account to fund multiple programs
    or for the agency to have transfer authority** **between accounts**.
    In other situations, Congress or OMB may wish to maintain legal
    control over different aspects of the program, such as separating
    the administrative costs from the benefit payments to citizens in a
    social insurance program. **In this case, two budget accounts should
    be established, but the sum of these accounts should align with the
    program and the account numbers should indicate the association.**
    Credit programs operating under credit reform use two accounts -- a
    program account and a financing account -- but only the program
    account is included in the budget totals.

2.  **Align the Data Classification Structures Used for Managerial Cost
    Accounting and Budgeting -- To the extent possible, the data
    classification structures and the code values used to classify
    information for purposes of managerial cost accounting and for
    budget formulation and execution should be made the same, or at
    least consistent. For example, organization codes used for
    accounting and budgeting should be the same, although cost
    accounting may go to a lower level of detail. Aligning program
    budgets with program objectives (as discussed in Step 1 above)
    should enable more consistent coding of program designations and
    budget accounts (appropriation codes). It may not be possible to
    align object classes used for budget purposes perfectly with cost
    categories used for management and accounting because of the variety
    of decisions made and controls imposed. For example, a manager may
    want to know the complete cost of transferring an employee from one
    place to another and use a cost code to capture that information.
    Under the current OMB object class structure, several object classes
    are used to capture pieces of that cost. Another agency may need to
    capture these costs in another way. Despite these variations, the
    object class data and cost category data should be reconcilable at
    least at a summary level.**

3.  **Charge Traceable Costs to Program Budgets - Preferably, the cost
    of all significant inputs that can be traced to the achievement of
    the program outputs and intended outcomes should be *budgeted and
    charged* to the program budget account (or accounts). For example,
    salaries and expenses related to personnel used in providing a
    program should be charged to one of the program's budget accounts.**
    **This includes (1) costs incurred by the program but now funded
    elsewhere (e.g., pension costs paid for by general funds payments to
    OPM), and (2) non-reimbursed costs for goods and services received
    from another federal entity that are included in the entity's full
    costs reported on the financial statements. Following this approach
    will provide more accurate and complete information to
    decision-makers reviewing the budget and will reduce the differences
    between reported program costs in financial statements and the
    budget.**

> If political or other considerations require budgeting salaries and
> expenses centrally instead of charging them directly to programs, then
> actual salaries and expenses used by each program and the expected
> amount of the " call on" the central fund in future years should be
> reported as an information item under the Program and Financing
> Schedule submitted as part of the agency's budget submission.
> **Another option to be considered when budgeting for such resources
> centrally is to place them in a revolving fund, which then charges
> programs, support services, and the Secretary's office as they are
> used**.

4.  **Charge the Costs of Support Activities to Programs Through the Use
    of Revolving Funds** **-- Support activities are those that provide
    goods and services to an agency's own programs and sometimes to
    other agencies' programs. They include personnel services; safety
    and health services; security; legal services; financial management
    services; information technology, automated data processing, and
    communications services; mail and messenger services; publications,
    reproduction, graphics, and video services; library services;
    scientific facilities; research and analytical services; office and
    commissary supplies; office and ground maintenance; procurement and
    contracting services; services to acquire, maintain, rent, and
    operate plant and equipment; and more. As much as possible, these
    services should be provided through a self-sustaining revolving fund
    that must remain competitive in terms of both cost and quality.
    Users of these services (e.g., programs, other support activities,
    Secretary-level offices) would budget and be charged for the costs
    of these support goods and services received and, barring other
    constraints, would be able to obtain these services anywhere. If a
    revolving fund has not been established for a particular type of
    support activity, special budget exhibits should be prepared showing
    the costs incurred by programs for support services even though they
    are not actually funded by the program.**

5.  **Separately Identify Agency Management Costs - Agency management
    costs should be identified separately, perhaps in a separate budget
    account, which is used to finance the agency head's immediate office
    and to purchase support services for policy development and
    coordination.** **These costs would then be more easily identified
    for cost analyses purposes.**

6.  **Align Budgets for Inventory and Fixed Asset Expenditures with
    Usage - In the case of inventories and fixed assets, the budget
    outlay precedes the use of the resource. To adjust for these
    timing** **differences (caused by the use of different accounting
    bases), inventories could be handled through the use of
    self-sustaining revolving funds. These funds could also accommodate
    operation and maintenance of fixed assets. In these cases, a
    separate budget account could be established solely for ownership of
    the assets. Internal borrowing from the U.S. Treasury and rental
    charges to the program could finance the acquisition of inventory
    and fixed assets and support accounts could finance acquisition and
    capital costs.**

7.  **Reflect Liabilities for Future Costs in Budget Accounts -** In the
    case of retirement benefits and environmental clean up costs, the
    accrual of the expense precedes the outlay. **Individual agencies
    could be provided appropriate funding and be required to pay the
    accrued expense from their program and support budget accounts to
    the employee benefit or environmental cleanup accounts, which would
    be responsible for paying these benefits or carrying out cleanup
    operations.**

**The Relationship of Cost Accounting to Managing -**

**Supporting Management's Needs**

One of the primary objectives of cost accounting information is to
provide useful information in support of management's different
functions. These functions may be performed at various levels in an
organization, and the cost accounting needs at different organizational
levels related to these functions may vary. "To meet these needs,
managerial cost accounting should use basic cost data and nonfinancial
or programmatic data. For example, data should be tracked for the
outputs produced and the inputs used, including the amount of labor
consumed in terms of employees or employee-hours. Information from cost
analyses can also be used to compare actual to predetermined or
anticipated costs. In determining actual as well as anticipated costs,
an organization may use cost estimates, cost studies, and cost finding
techniques."[^29]

The key issue related to management is how decisions are made and what
information is considered in making those decisions. Resources required
for an activity, good, or service may include elements of cost to the
federal government as a whole that are not reflected in the obligations
and/or outlays of the providing entity. If decisions are based on
incomplete or inappropriate cost information, the "under priced"
resource, which in reality may have higher costs, will tend to be over
used. Providing full and relevant cost information, as appropriate, will
disclose the real costs of activities, goods, and services. Once the
costs are known, this should result in an overall savings to the
government being realized as the result of management's decision to use
a mix of inputs that includes less of the "under priced" resource and
more of its less costly substitutes.

Cost information for management's use in decision-making must support
the diverse needs described in the sections that follow:

**[Planning]{.underline}**

1.  **Provides Information on Planned Versus Actual Costs -**
    Information on planned and actual costs is necessary for planning
    and control. For planning purposes, information such as historical
    cost information, projected volumes of production, and information
    on changes in processes will assist in the allocation of federal
    resources. For control purposes, managers need feedback on actual
    costs compared to planned costs. This information should assist
    managers in detecting variances from expected results and the cause
    of these variances. The feedback information should provide
    sufficient detail to allow managers to change plans, reallocate
    federal resources, adjust prices, and measure performance.

## Cost Management 

####### Monitors Performance and Aids in Implementing GPRA **- This information should provide operational, financial, and policy managers with cost data on the various processes involved in producing an activity, good, or service. This information assists operational managers in making decisions on staffing, work assignments, and the allocation of federal resources. Activity or process cost information also assists policy-makers with strategic planning. This type of cost information focuses on the economy and efficiency of existing processes. Cost information for long-term decisions should assist the decision-makers in determining whether to change operating processes, automate processes, eliminate costly and unnecessary processes, or search for alternative methods of accomplishing objectives. This type of information should provide the cost of current processes as well as the projected costs of new processes.**

> Full and relevant, as appropriate, cost information can help managers
> improve efficiency by showing program and project managers where costs
> are being incurred so they can redesign operations to reduce costs
> and/or increase performance. An analysis of the components of cost
> information can help managers to better understand how their projects
> or program operations place a demand on the federal resources of other
> organizational units and contribute to their organizational costs.
>
> Cost accounting is an integral part of GPRA. Determining the costs of
> outputs and the relationship of program costs to program outcomes is
> critical to enhanced management and accountability.

1.  **Furnishes Information on Capital Purchases and Investments** -
    Cost information on capital purchases and investments should provide
    managers with sufficient information to determine the life-cycle
    costs of the investments and the effect of capital purchases and
    investments on the cost of activities, goods, and services. The cost
    information should include installation, start-up, and maintenance
    costs. Information about depreciation, salvage value, and
    replacement costs of capital equipment is important for many capital
    investment decisions. **Cost information on capital purchases should
    also include the cost of conversion, \"shut down\" costs, and/or
    consolidation costs.** (Organizations usually incur such costs when
    installing or adapting to new technologies.)

2.  **Provides Information on Excess Capacity Costs - Information on
    excess capacity needs to be available to assist managers in hiring
    decisions, use of contract or seasonal labor, and determining
    whether to market excess capacity. When marketing excess capacity,
    sufficient cost information needs to be provided to enable potential
    customers to fairly evaluate the cost, efficiency, and effectiveness
    between potential providers of the activities, goods, and
    services.**

**[Pricing]{.underline}**

####### 

####### Produces Market-Type Incentives for Efficiency **-** **In franchise fund and working capital fund operations, the government organization acts much like a private sector organization, competing its services with alternative sources on the basis of price and quality to the customer and recovering the full or relevant costs as shown in Figure 2 in Chapter 2. This is done by operating with sufficient efficiency to keep costs at or below the revenues collected. To operate in this manner, managers need cost information that is produced on a businesslike basis, and that focuses on the full and/or relevant costs of the outputs produced, not on the specific federal funding sources. This will facilitate comparison between federal and private sources for like goods and services.**

1.  **Provides Managers with Cost Information with Which to Make Pricing
    Decisions - For pricing decisions, information must provide details
    on direct and indirect costs, methods used to assign costs and the
    items included as indirect costs. Fixed and variable costs need to
    be identified, as well as the levels of output at which fixed costs
    change. Cost information in support of pricing decisions should
    include the volumes of output used in calculating unit costs and any
    variables that may affect the anticipated volumes.** Such cost
    information provides managers with the ability to perform analyses,
    such as \"what if\" and break-even, to determine optimal pricing and
    reserve strategies. (Reserves may be for capital equipment
    replacement or for contingencies, such as unexpected fluctuations in
    the demand for activities, goods, and services.)

2.  **Provides Cost Data to the Customers and Users of Activities,
    Goods, and Services for Which Fees are Charged** - Because the
    federal government is a public entity, accountable to various
    customers and the American taxpayers, cost information needs to be
    made available to justify price levels and/or increases in fees.
    Customers include not only the internal and external direct users of
    the activities, goods, and services, but also interest groups,
    Congressional staffs, central agencies, and the public at large.
    Cost information can also assist all customers in determining if the
    activities, goods, and services provide value for the prices
    charged.

An annual performance plan defines measurements for each major activity,
good, and service. Plans and performance goals are developed based upon
anticipated resource levels. In the budget formulation process, program
managers begin to connect federal resources to results. However, without
cost accounting in place, managers are likely to base their planning
upon federal resources directly allotted to their programs and ignore
the allocated support for activities, goods, and services requiring the
use of indirect services that are separately appropriated or paid from
pooled funds. When the cost of a program is identified through cost
accounting, and cost goals are defined, the costs of the activity, good,
and service can be monitored and managed more efficiently.

######   {#section-7 .unnumbered}

###### The Relationship of Cost Accounting to Reporting

## 

## Proper financial management requires that the three accounting processes work closely together to provide useful reporting to both internal and external users. The internal-external dual focus of federal reporting has been established in the Objectives of Federal Financial Reporting. It states that "The FASAB and its sponsors believe that any description of federal financial reporting objectives should consider the needs of both internal and external users and the decisions they make."[^30] Four major groups use financial information: program managers, executives, the Congress, and citizens. These categories include both internal and external users. This chapter covers the reporting of cost information for both internal and external purposes.

## Internal Reporting

This section attempts to answer the questions quite often asked by
managers: "Why do I need cost reports?" and "How can internal cost
reports help me manage better?" No matter what information they may
purport to contain, internal cost reports are meaningless without having
a fundamental understanding of the purpose, attributes, and benefits of
internal cost reporting.

The need to focus on an entity's internal management and operational
reporting requirements has been stressed repeatedly. Based on a limited
survey, the federal government, with few exceptions, e.g., the
Department of the Treasury's Bureau of Engraving and Printing (BEP) and
the Department of Defense, has little experience capturing cost
accounting data and arraying that data in such a manner that it is
useful to management. Rather, most federal agencies surveyed have only
recently begun to implement cost accounting and reporting in their
agencies.

Several federal agencies were asked to prepare case studies of their
efforts to implement cost accounting in their agencies. These studies
show the types of reports they use and their benefits in managing
operations more effectively and efficiently. Some of the agency case
studies are provided in the appendices of Part II of this Guide (Tools
and Techniques for Implementing a Managerial Cost Accounting Process).
Where appropriate, this chapter cross-references the material in the
case studies to emphasize important points.

Cost accounting's manipulation and accumulation of information is based
upon the characteristics and attributes of the information that
influence what data is accumulated and how it is reported in internal
cost accounting reports. It could also be described as a reflection of
managers' expectations regarding the data portrayed on cost accounting
reports and the "story" that a data array "tells." What may be new to
some is the notion that the federal government is really not very
different from the private sector\--every manager needs good cost
accounting information to make informed management decisions. What
seemingly makes the thought of employing cost accounting in the federal
sector more difficult than it otherwise would be is a cultural mind-set
that inevitably relies on obligational execution data to manage
operations rather than cost data related to operational performance.
Some federal agencies have begun to embrace change and are now exploring
how cost accounting information can aid managers in their day-to-day
decision-making. Some leaders and managers are discovering that there is
a better way to do business\--accounting for the full and relevant, as
appropriate, costs of a business enterprise, measuring the success (or
failure) of the performance of each activity, good, and service, and
linking the budget with cost data derived from a cost accounting and
reporting system. This section and the case studies presented in Part II
of this Guide, provide insights into the way some federal agencies are
employing internal cost reports to their advantage.

This section is intended to be descriptive, depicting the many benefits
associated with employing cost accounting and reporting in an entity's
day-to-day operations. It should not be construed as prescriptive or
authoritative, requiring other agencies to duplicate illustrated cost
systems, operations, and reports in their implementation of cost
accounting.

## Characteristics of Internal Cost Reports

The characteristics and attributes of good internal cost reports are
critical for making cost information understandable. The list below is
not all-inclusive; rather, it highlights a few of the many important
aspects of internal cost reporting.

[Link Budget Goals to Outputs]{.underline}

Assigning federal resources to outputs is the process of using the
budget to establish goals for entity functions, based on the estimated
number and cost of activities, goods, and services to be produced. This
process directly ties cost accounting to the budget and internal cost
reporting. In addition, this information can be used to measure actual
performance against established goals for more effective
decision-making.

It is important for preparers and users of internal cost reports to
understand the relationship of cost accounting to the more traditional
areas of financial accounting, financial reporting, and budgeting. Cost
is a key element in performance measurement. Linking costs to outputs is
essential for determining the financial efficiency of a given task. When
managerial cost accounting is used to supply information for the
preparation and review of budgets, cost data should be consistent with
the basis of accounting and measurement used.

[Capture the Full and Relevant Costs of Outputs Produced]{.underline}

As required by SFFAS No. 4, reporting entities should report the full
cost of outputs in financial reports. The full cost of an output
produced by an entity is the sum of (1) the costs of federal resources
consumed that directly or indirectly contribute to the entity's
activity, good, or service, and (2) the costs of identifiable supporting
functions provided by other responsibility segments within the reporting
entity, and by other reporting entities. Relevant costs are those costs
that are appropriate to the specific use of the cost information.

Consistent and reliable internal cost reports should be provided to help
users determine the full and relevant costs of providing activities,
goods, and services and the composition of, and changes in those costs.
Examples of where relevant cost are used is in budgeting where
Congressional action dictates how costs are captured for budgetary
formulation and execution, which may be different than full cost as
defined by FASAB, and in making contracting-out decisions which follow
OMB Circular A-76 rules when making cost comparisons. These reports
provide management with both an understanding of the federal resources
allocated to outputs and the costs incurred to produce each activity,
good, and service. These reports also assist managers in making
decisions concerning where, when, and how to most effectively employ
their available federal resources. Decision-makers must focus on
managing processes and costs as they relate to established budget goals.
They need to recognize that full and relevant cost information can lead
to better, more informed decision-making. By relating costs to outputs,
producers and customers become aware of the resource utilization of
activities, goods, and services. Internal cost reporting provides
information for establishing strategic goals and measuring performance.

[Provide Variance Analysis Information]{.underline}

Using planned cost goals as a benchmark against the actual cost of an
output enables managers to perform variance analysis. Variance analysis
is a managerial accounting technique used, for example, to determine the
difference (or variance) between actual operating results (actual cost
per output) and projected results (planned cost goals) or benchmark
against other similar activities in the public or private sectors. This
analysis helps management understand where and why differences occur. In
conducting variance analysis, different aspects of actual cost per unit
output (input costs, quantity of output, and productivity) can be
compared with the planned cost goal (the \"should cost\"), and to target
expected input costs, planned output, and planned productivity. When
properly executed, variance analysis provides the information necessary
to target production processes in need of management attention. If, for
example, lower than expected output is achieved and unit cost exceeds
the planned cost goal, management will need to evaluate the following:
why output is low; whether output will increase later in the accounting
period; why costs exceed budgeted projections; and whether the problem
lies with the process or the goal.

An examination of a Bureau of Engraving and Printing (BEP) internal cost
report in Figure 3 shows how variance analysis can be reported and used
by management.

+-----------------------------------------------------------------------+
| #### Figure 3 {#figure-3 .unnumbered}                                 |
|                                                                       |
| #### Bureau of E                                                      |
| ngraving and Printing {#bureau-of-engraving-and-printing .unnumbered} |
|                                                                       |
| MONTHLY COST OF PRODUCING CURRENCY                                    |
|                                                                       |
| MONTH OF JUNE                                                         |
|                                                                       |
| \-\-- COST/1000 \-\-- - FAVORABLE (UNFAVORABLE) VARIANCE -            |
|                                                                       |
| [OPERATION]{.underline} [STAND.]{.underline} [ACTUAL]{.underline}     |
| [TOTAL]{.underline} [EFFIC.]{.underline} [RATE]{.underline}           |
| [VOLUME]{.underline} [SPEND]{.underline}                              |
|                                                                       |
| PAPER \$3.37 \$3.35 \$0.02 \$0.00 \$0.02 \$0.00 \$0.00                |
|                                                                       |
| BACK INK 1.02 0.95 0.07 0.05 0.02 0.00 0.00                           |
|                                                                       |
| FACE INK 0.73 0.69 0.04 0.03 0.01 0.00 0.00                           |
|                                                                       |
| PRINT BACK 0.98 0.94 0.04 (0.01) (0.01) 0.07 (0.01)                   |
|                                                                       |
| PRINT FACE [1.00]{.underline} [0.97]{.underline} [0.03]{.underline}   |
| [(0.02)]{.underline} [(0.01)]{.underline} [0.07]{.underline}          |
| [(0.01)]{.underline}                                                  |
|                                                                       |
| [\$7.10]{.underline} [\$6.90]{.underline} [\$0.20]{.underline}        |
| [\$0.05]{.underline} [\$0.03]{.underline} [\$0.14]{.underline}        |
| [\$(0.02)]{.underline}                                                |
|                                                                       |
| EXAMINE 1.40 1.38 0.02 0.02 (0.01) 0.01 0.00                          |
|                                                                       |
| OVERPRT 1.96 1.75 0.21 0.06 0.00 0.08 0.07                            |
|                                                                       |
| VAULT [0.22]{.underline} [0.21]{.underline} [0.01]{.underline}        |
| [0.00]{.underline} [0.00]{.underline} [0.00]{.underline}              |
| [0.01]{.underline}                                                    |
|                                                                       |
| [\$3.58]{.underline} [\$3.34]{.underline} [\$0.24]{.underline}        |
| [0.08]{.underline} \$[(0.01)]{.underline} [\$0.09]{.underline}        |
| [\$0.08]{.underline}                                                  |
|                                                                       |
| SPOILAGE 0.70 0.60 0.10 0.07 0.03 0.00 0.00                           |
|                                                                       |
| TOTAL \$11.38 \$10.84 \$0.54 \$0.20 \$0.05 \$0.23 \$0.06              |
+-----------------------------------------------------------------------+

The third operation being reported is "face ink" and the price is
expressed as \$/1,000 units. The standard cost for this operation is
\$0.73. For the month of June, the actual cost per 1,000 units was
\$0.69. Simply stated, the cost report compares the standard, \$0.73,
against the actual, \$0.69, and displays a favorable total variance of
\$0.04 of which \$0.03 is attributed to an efficiency variance (the
measure of how effectively an organization utilizes inputs in the
production of activities, goods, and services) and \$0.01 attributed to
a price variance (the measure of the difference between actual and
standard prices multiplied by the actual quantity).

Favorable and unfavorable variances are only attention directors, not
answer givers. The variance analysis process does not end with
calculating and reporting variances; management must seek explanations
for the existence of those variances. A favorable rate variance of
\$0.01 reported by BEP for its "face ink" operation may be caused by a
number of factors including general economic conditions and favorable
price changes. Also, a number of tools such as buying in economical
lots, taking advantage of cash discounts, and selecting the most
economical means of delivery are available to management to control
price variances. Responsibility for controlling price variances
generally rests with purchasing managers.

A favorable efficiency variance of \$0.03 reported by BEP for its "face
ink" operation may be caused by a number of factors including efficient
labor or using superior raw material that results in less spoilage. An
unfavorable efficiency variance may be caused by improper handling of
materials, inferior quality of materials, or poor workmanship. The
responsibility for controlling efficiency variances rests with
production managers.

The question of when to investigate variances rests on the subjective
judgment of management because it may not be easy to decide when a
variance is significant enough to warrant management's attention. For
some items, a small deviation may prompt follow-up. For other items, a
minimum dollar amount or a certain percentage deviation from budget may
be necessary before investigations commence. A 4% deviation in a \$10
million material cost may deserve more attention than a 20% variance in
a \$10,000 repair cost.

######## Provide Management Data at Various Entity Levels {#provide-management-data-at-various-entity-levels .unnumbered}

Internal cost reports are a useful management tool at all levels of the
entity. At each level, the focus on full and relevant costs provides
useful information for managing the specific responsibility segments of
an entity. It helps the entity make the decisions necessary at each
level of the organization to ensure that federal resources are
efficiently and effectively used. A suborganization of the federal
government may be a reporting entity in itself and, at the same time, it
may also be a responsibility segment of a higher-level reporting entity
to which it belongs. For entities that consist of components engaging in
diverse functions, it is desirable to provide management reports that
display information for significant components individually and for the
entity in its entirety. Some entities may find costs accumulated by
responsibility segments useful in support of financial reporting by
components. For example, internal cost reports are used to manage
operations at various levels: (1) entity-level, (2) management
headquarters-level and (3) provider/producer or activity-level.

*Entity-Level*

Entity-level internal cost reporting should provide pertinent and
reliable cost information to assist executives in making decisions about
allocating federal resources, authorizing and modifying activities,
goods, and services, evaluating performance, and ensuring consistency
between costs reported in external financial reports and costs reported
internally to managers. Internal cost reports at the entity-level should
provide reliable and relevant information for financial and budgetary
accounting, allow senior officials to assess how well an organization
has met its expectations, and enable senior officials and analysts to
determine the total cost of each of the various activities, goods, and
services. Managerial cost reports should also provide an indicator of
performance among producers of similar activities, goods, and services.
It should not be the only measure of performance; other measures of
performance, such as quality and timeliness, are equally important.

*Management Headquarters-Level*

Internal cost reports used at the management headquarters-level provide
the managers of support functions with the ability to view total cost as
it relates to total work accomplished, across and among individual
processes. The distributed cost per unit output goal provides a
financial benchmark for support area managers to evaluate subordinate
processes\' performance. Consistent and regular internal cost reporting
is essential for determining the costs of specific activities, goods,
and services and the composition of and changes in those costs.

*Provider/Producer or Activity-Level*

Internal cost reports encourage managers to focus on both the full and
relevant costs of producing the activity, good, or service and the
production process. The manager can review the cost of federal resources
that directly or indirectly contribute to the production of activities,
goods, and services. This focus on full and relevant costs encourages
consideration of alternate methods of production and provides a
consistent benchmark for evaluating a process over an extended period of
time.

Internal cost reports must also meet the specific objectives of the
organization. Such reports will drive cost policies and affect operating
procedures. The degree to which costs are controllable or uncontrollable
may affect the presentation of cost information.

######## **Benefits of Internal Cost Reports** {#benefits-of-internal-cost-reports .unnumbered}

Federal internal cost reporting should provide information that helps
users determine: (1) full and relevant costs of specific activities,
goods, and services and the composition of and changes in, those costs;
(2) efforts and accomplishments associated with activities, goods, and
services and their changes over time in relation to costs; and (3)
efficiency and effectiveness of the government\'s management of its
assets and liabilities.

One of the most important aspects of internal cost reporting is
performance evaluation. Measuring and reporting actual performance
against established goals is essential to assessing government
accountability. Cost information is necessary in establishing strategic
goals and measuring and relating service efforts to accomplishments. The
importance of cost information in relation to performance measurement
and performance reporting has been recognized in the Statement of
Federal Financial Accounting Concepts No. 1, *Objectives of Federal
Financial Reporting*, which states \"The topics of cost and performance
measurement are related because it is by associating costs with
activities or cost objectives that accounting can make much of its
contribution to reporting on performance.\"[^31]

Cost information is essential to effective financial management and
should play an important role in federal financial reporting. Managerial
cost accounting processes are the means of providing cost information in
an efficient and reliable manner. To perform managerial cost accounting
on a \"regular basis\" means that entities should establish procedures
to accumulate and report costs continuously, routinely, and consistently
for management information purposes.

Internal cost reports are as varied as the operational missions of an
entity. Each reporting entity should determine the appropriate detail
for its internal cost reporting processes and procedures based on
several factors. These include the: (1) nature of the entity\'s
operations; (2) precision desired and needed in cost information; (3)
practicality of data collection and processing; (4) availability of
electronic data handling facilities; (5) cost of installing, operating,
and maintaining the cost accounting processes; and (6) any specific
information needs of management.

Sample reports from the BEP and the Department of the Treasury's
Financial Management Service (FMS) are presented in Part II of this
Guide.

Internal cost reports provide decision-makers with the flexibility to
look at their operations from many different angles. Cost components
essential for one type of analysis may not be appropriate for inclusion
in the analysis of a different aspect of a process. For example, a
manager may wish to determine the level to which an output's costs are
affected by an organization's central office support costs. The relevant
report should include a breakdown of the central office costs in
relation to the full and relevant costs of the output. However, if a
manager wishes to determine the relative efficiency of two production
facilities manufacturing the same product, the central office support
costs would not be included, as neither facility has control of these
costs.

The flexibility of internal reporting provides managers with the
capability to focus their attention on specific pieces of a process, and
to view an operation from many different levels. Each federal agency
must make its own determination of which pieces and what levels are most
important to its own mission and objectives.

**Using Internal Cost Reports Makes Sense**

As a financial management tool, internal cost reports focus the
attention of managers and employees on both the process of producing
activities, goods, and services as well as the full and relevant costs
incurred in producing these activities, goods, and services. This is a
necessary and fundamental shift in focus from managing inputs to
managing the production/operation processes and increasing cost
awareness.

Managerial cost accounting information empowers managers, but does not
make management decisions. Internal cost reports are not a substitute
for informed management; however, enlightened managers will see the
usefulness of employing cost information. Providing cost information to
every level of a function enables employees to participate actively in
process improvement. Unit cost encourages, complements, and reinforces
the use of other modern management and accounting tools.

Using internal cost reports and cost accounting principles challenges
the entire work force as we recast the way we do business and make
decisions. Success at improving the government will happen only with
active participation from all levels. Management information specialists
at all levels, committed to instilling cost accounting principles in
their workplace culture, will help their organizations realize more
value for each dollar spent. Yes, managing with and using internal cost
reports makes sense.

**[External Reporting]{.underline}**

Financial statements are formal presentations of an entity's costs,
revenues, and other financing sources for specific periods of time, and
assets and liabilities at a specific point in time. They are a primary
means of achieving accountability to the public for the federal
resources accumulated and consumed, and the resulting state of the
government's financial position.

The financial statement reporting requirement specifies the use of SFFAS
No. 4 's definition of full cost. FASAB recognizes that the objectives
of financial statements may be different depending upon the reporting
entity's level and the scope of its responsibilities. The costs of
certain federal central agencies are included in the consolidated
governmentwide financial statements, but are not separately shown on
each federal agency's financial statements.

Financial statements prepared by federal agencies must be prepared in
accordance with OMB Bulletin 97-01, *Form and Content of Agency
Financial Statements* (or successor bulletins). Three of the statements
required by this Bulletin are pertinent to reporting performance results
and emphasize the importance of both budgetary accounting and managerial
cost accounting.

## Statement of Net Cost

Fiscal Year 1998 is the first year that agencies are required to prepare
a Statement of Net Cost, though some prepared it for Fiscal Year 1997.
The Statement of Net Cost is designed to show separately the components
of the net cost of the reporting entity's operations for the period. The
Statement of Net Cost and related supporting schedules classify revenue
and cost information by suborganization or responsibility segment and to
the extent practicable, within each classification by major program.
Suborganizations are considered to be generally equivalent to
responsibility segments. One key objective of using a full cost approach
in the Statement of Net Cost is to more closely relate program
performance to gross and net costs incurred for such programs.

The net cost of operations is the gross cost incurred by the reporting
entity less any exchange revenue earned from its activities. The gross
cost of a program consists of the full cost of the outputs produced by
that program plus any non-production costs that can be assigned to the
program (non-production costs are costs linked to events other than the
production of goods and services). The net cost of a program consists of
gross cost less related exchange revenues. By disclosing the gross and
net costs of the entity's programs, the Statement of Net Cost provides
information that can be related to the outputs and outcomes of the
programs and activities.

Some costs, specifically inter-entity costs funded from another agency's
appropriation, included in the Statement of Net Cost, may not be covered
by the reporting entity's appropriation. In other cases, costs such as
unfunded future retirement benefits may not be covered by any agency's
appropriation. But, because they are part of the actual costs of the
federal resources that were utilized during the accounting period by the
programs, they are to be measured, recognized, and reported as costs of
the program.

## Statement of Budgetary Resources 

The Statement of Budgetary Resources provides information about how
budgetary federal resources were made available and their status at the
end of the period, and illustrates the information reported on the
Report of Budget Execution (SF-133). Recognition and measurement of
budgetary information reported on this statement should be based on
budget terminology, definitions, and guidance contained in OMB Circular
A-34, *Instructions on Budget* *Execution*.

The Statement of Budgetary Resources should be aggregated to reflect the
activity of the reporting entity for the year covered by the financial
statements. Prior year information may be presented to allow the reader
to make appropriate comparisons with prior periods.

Monitoring of budget execution is at the individual account level.
Accordingly, budgetary information aggregated for the Statement of
Budgetary Resources should be disaggregated for each of the reporting
entity's major budget accounts and presented as supplementary
information. Small budget accounts may be aggregated.

## Statement of Financing

The Statement of Financing reconciles the financial (proprietary) net
cost of operations in the Statement of Net Cost with obligations in the
Statement of Budgetary Resources. Accrual-based measures in the
Statement of Net Cost differ from the obligation-based measures used in
the Statement of Budgetary Resources. In order to understand these
differences, information is needed to reconcile the financial
(proprietary) net cost of operations with the obligations of budget
authority. This reconciliation also ensures that there is a proper
relationship between proprietary and budgetary accounts in the reporting
entity's financial management system. The Statement of Financing is
designed to report those differences and facilitate the reconciliation.

the "true" costs of providing governmental activities, goods, and
services.

# Marketing Managerial Cost Accounting

Implementation of a managerial cost accounting process requires support
from all layers in an organization. This section focuses on developing a
plan to market managerial cost accounting (MCA). There are three basic
topics that should be covered to successfully complete this task. The
first addresses developing a support strategy; once the support strategy
is in place, the second topic focuses on identifying MCA customers and
their needs relevant to the initiative; and the final topic concentrates
on educating customers about MCA and its benefits.

## Developing a Support Strategy for Managerial Cost Accounting

The development of a support strategy for marketing MCA will be
difficult, time-consuming and critical, but it will prove to be the
foundation of your marketing plan. The purpose of developing a
successful support strategy is to gain the full support and commitment
for the initiative from senior management. Having them take
responsibility for the initiative will in turn encourage support and
acceptance from the staff. Without senior management support, a new
initiative may be derailed before it gets started. Listed below are five
areas of consideration for developing a support strategy.

#### Gaining a Working Knowledge of MCA and its Benefits

A working knowledge of MCA and its benefits will greatly enhance your
ability to successfully market MCA. There are many excellent articles,
books, case studies, and videotapes about MCA. Appendix D lists several
references for your information. In addition to this reference list, the
Association of Government Accountants (AGA) and the Federal Accounting
Standards Advisory Board (FASAB) hold seminars and conferences on MCA.
There are also other federal entities currently implementing MCA that
should be tapped as informational resources. Planning, training, and
technical assistance from experienced specialists, whether internal or
contracted, can ensure that you are well versed on MCA. Once a working
knowledge of MCA and its benefits have been obtained, you will begin to
understand how valuable this tool is to managers. It will allow you to
focus on marketing the value-added benefits of MCA, and to "work
smarter, not necessarily harder" to create a government that does more
and costs less.

An important aspect of your working knowledge of MCA is an understanding
of the legislative history mandating MCA for federal entities. Your
knowledge of and ability to convey the Congressional intent of this
legislation will help gain the support of senior management. The
Introduction in Part I of this Guide has more information on the federal
statutory requirements and how they apply to federal entities.

**Understanding the Work Environment**

Understanding the work environment and the uniqueness of your entity is
essential to developing a successful support strategy for marketing MCA.
Find out how other similar major initiatives were successfully
implemented within your organization. Discovering how those were
implemented as well as who was involved with the initiatives may serve
your support strategy for marketing MCA well. Researching successful MCA
initiatives of other federal entities may also benefit your marketing
process. Appendix H lists other federal organizations currently
implementing MCA initiatives.

#### Natural Resistance to Change

Most new initiatives like MCA require some changes in responsibilities
or patterns of work. These changes, small and large, generally cause a
certain amount of fear among the affected employees. Any type of change,
however beneficial, almost always meets with some degree of resistance
because of the human tendency to maintain the status quo. This fear can
generate a ripple effect of resistance to the new initiative. This is
natural and is to be expected. Be aware of this, but also be sensitive
to it. Do your homework up front and identify how MCA will benefit your
personnel in their work environment. Chapter 3 offers additional details
on how other companies have dealt with resistance to change relative to
MCA.

#### Finding a Champion of MCA

Finding a champion of MCA is critical to the support strategy for
marketing MCA. A champion is someone who has enough organizational
influence to effectively implement MCA changes in the work environment.
This person must understand the value of MCA and support that value
throughout the implementation process. The ideal person may not
necessarily come from the financial community, but from a major program
or operational area. Having a champion from a program or operational
area will advance the idea that MCA is not just another
financial/accounting initiative. Chapter 2 presents additional ideas for
gaining management support including finding a champion.

#### Conduct a Pilot Program

Conducting or assessing a successful MCA pilot, that produces accurate
and relevant cost information, is an excellent tool for demonstrating
the benefits of MCA and can be instrumental in gaining support for MCA.
You can either use the results of a pilot implemented in your entity or
use the results of another organization's pilot. Using the results of
another organization's pilot involves having it demonstrate the benefits
that MCA has afforded. Initiating a pilot program within your entity
involves several actions. These actions include selecting a sponsor who
would be willing to let the department or functional area be used as the
pilot site, selecting a project team responsible for designing and
implementing an MCA pilot within that department or functional area, and
identifying specific criteria and measurements for the pilot in order to
measure the success and value of MCA. A successful pilot is pivotal in
marketing MCA, so great care should be taken to select a segment of your
organization most likely to succeed. Chapter 3 offers additional details
for conducting a successful MCA pilot. Appendix I contains case studies
about two agencies that have successfully implemented an MCA pilot.

Developing a support strategy will require much perseverance and
patience. However, with a support strategy in place, the focus for your
marketing plan can shift to the second topic of identifying MCA
customers and their needs. Your support strategy has set the stage for
completing the marketing plan.

**[Identifying Your Customers]{.underline}**

With your support strategy in place, you can focus on the second topic
of the marketing plan\--identifying MCA customers and their needs. MCA
customers are internal and external. Every entity should take special
care in identifying those customers unique to its organization. Once the
types of customers are identified (e.g., program managers, finance
staff, etc.), you can develop an appropriate marketing strategy for
each.

**Internal Customers:**

### *[Senior Management]{.underline}*

Gaining full support and commitment from senior management may be the
single most important element in implementing MCA. If they learn the
value-added benefits of MCA, they can use cost information to help them
make decisions, discuss cost information with their subordinates, and
make MCA a regular part of operations. If they are persuaded to support
MCA, the effort will have achieved a solid foundation on which to begin.

### *[Program and Mission Support Managers]{.underline}*

Program and mission support managers are the primary users of cost
information. They are responsible for carrying out program objectives
with the resources entrusted to them. Reliable and timely cost
information helps them ensure that resources are spent to achieve
expected results and outputs. This information will also alert them to
waste and inefficiency. Gaining their support for this initiative is
vital because they are the people who will incorporate MCA in day-to-day
operations and make MCA a reality in the workplace.

### *[Core Business Systems Owners]{.underline}*

If business process reengineering (BPR) efforts are under way, obtaining
the support of your core business systems owners is similar to gaining
senior management's support. It is essential for both parties to form a
partnership and demonstrate a clear endorsement of MCA implementation,
because they are responsible for the existing systems from which MCA
will extract data. In addition, the core business systems owners are
involved in the future system designs of your organization, so you want
their support for MCA to ensure smooth transitions between future system
implementations and MCA. Because of the overall benefits that MCA can
provide, MCA should be viewed as an entity-wide support system, not just
another finance system.

### *[Financial Management and Budget Staff]{.underline}*

MCA, if successfully designed and implemented, has the ability to
transform financial management because it builds on the existing
financial systems and processes. In order to have this opportunity, MCA
must be successfully marketed to financial management staff to ensure
that all budget and financial system requirements are identified and
satisfied within the parameters of MCA. A strong selling point to the
financial management staff is the prospect of Congress mandating
performance based budgeting. MCA can effectively enhance the budgeting
effort by providing detailed cost information about your entity's
resource use among its different programs. Supplying Congress with
actual cost information will support your budget proposals. MCA can also
provide financial management staff with cost information that will
provide additional accuracy in the pricing of products, services, and
user fees, increased cost awareness, focus on customer satisfaction,
improved efficiency and effectiveness, and continuous business
improvement.

[External Customers]{.underline}

Congress, OMB, and FASAB all have varying degrees of influence over
government agencies. Congress passed the Government Performance and
Results Act (GPRA) of 1993 requiring federal agencies to prepare annual
plans setting performance goals and to report annually on actual
performance compared to those goals. FASAB was named by the National
Performance Review (NPR) to set standards for federal cost accounting.
OMB has control of an agency's budget and oversight of program outputs
as well as the responsibility for prescribing the form and content of
financial statements. MCA should be developed to provide your entity
with the relevant cost information necessary to satisfy the needs and
requirements of these external customers. MCA users will have the
ability to gather cost management information from the system, use that
information to better manage operations, and provide the information
required by their external customers. Successfully implementing MCA will
satisfy the applicable recommendations issued by OMB and FASAB and
provide pertinent costing information for Congressional inquiries and to
justify future budget requests.

## Educating Customers on MCA and its Benefits

Having identified MCA customers and their needs, you can now focus on
the final topic\--educating those customers on the benefits of MCA. The
amount of time devoted to training MCA customers will vary according to
the size of your entity and the funds available. For each type of
customer, a training needs assessment should be conducted to identify:

1\. the appropriate level and type of training needed;

2\. the resources required to accomplish the training (i.e., in-house or
contracted); and

3\. the customer requirements that MCA needs to satisfy.

Chapter 4 offers detailed information on preparing a training needs
assessment.

Once this is completed, you can design a training plan appropriate to
meet your customer needs. Whether you present in-house training classes
using overviews and/or videos, or travel off-site, make sure your
training material caters to the particular customers you are training.
They must see the value-added benefits of MCA. Training should be viewed
as on-going and, if possible, in two phases, addressing both short- and
long-term objectives. The short-term training should focus on promoting
MCA awareness and its benefits. The long-term training should focus on
performance measurement and continuous improvements. Be sure your
training plans have management approval.

#### Senior Management

Training for senior management should focus on presenting a high level
overview of MCA. The training should stress the legislative mandates and
their objectives for federal entities. MCA pilot results should be used
to the extent possible to demonstrate how MCA will help organizations
and programs achieve mandated objectives. Senior management must have a
good understanding of MCA\--why it is a useful managerial tool, and the
benefits it affords.

While the implementation of MCA requires long-term commitment, senior
management also needs to see immediate benefits. They have to answer
tough cost questions from OMB and Congress by demonstrating how MCA can
provide immediate benefits. Benefits should emphasize results measured
in process improvement, cost savings, and better service to customers.

One way to introduce senior management to MCA and its benefits is by
presenting case studies about agencies that have successfully
implemented MCA (Appendix I). In addition to case studies, there are
also many excellent articles, books, and videos that provide detailed
information on the cost benefits MCA has afforded different operations.
You should research these options and find examples that relate to your
mission. Circulate the material among your senior management with notes
explaining its importance and relevancy to your organization. These
examples should stress the value-added benefits that MCA can offer.
Provide dates of future MCA demonstrations (FASAB, AGA, etc.) or offer
to discuss MCA and its benefits in greater detail.

**Program and Mission Support Managers, Core Business Systems Owners,
and Financial Management Staff**

This level of training should offer a more detailed level of MCA terms,
concepts, and benefits. MCA pilot results should be used to demonstrate
how MCA would provide decision support information to enable these
customers to better perform their jobs. For example, glean the pilot
results to show how MCA can provide improved resource allocation
decisions, increased accountability for program delivery and cost
effectiveness, and justification of fees, and focus on performance
measurements.

Marketing MCA to these customers should mimic the marketing plan used
for senior management, except there should be additional detailed
information on the actual operational benefits of MCA. Using appropriate
articles, books, videos, and case studies employing the results of a
successfully implemented MCA pilot will provide them with detailed
illustrations of MCA benefits. MCA can provide managers with the cost
information needed to provide accurate pricing of products and services,
increase cost awareness, and focus on customer satisfaction. It can also
provide opportunities to improve efficiency and effectiveness promote
continuous business improvement, and focus on performance measures.
Providing the opportunity for managers to see the benefits that MCA can
provide for daily business operations will greatly increase their
support for the initiative.

Although marketing MCA may be difficult, it is imperative that
government agencies incorporate initiatives to ensure more efficient
operations for the future.

**Introduction to Project Management**

In order for cost accounting to be successful, implementation must be
both well planned and well managed. What follows is a brief introduction
to project management including the role of the project manager. Many
articles and textbooks have been written on the subject of project
management. (A listing of material used in this Chapter follows the
text.)

**[Project Management Defined]{.underline}**

In order to understand project management, one must begin with the
definition of a project. A project can be considered to be any series of
activities and tasks that:

-   have specific objectives to be completed within certain
    specifications;

-   have defined start and end dates;

-   have funding limits; and

-   consume resources (e.g., money, time, equipment)

    A project can be thought of as an allocation of resources directed
    toward a specific objective following a planned, organized approach.
    Because project objectives can be and often are vaguely defined, a
    strategy (a.k.a. road map) defining how the objectives are to be
    accomplished is needed to support the objectives. In turn, the
    project strategy should be documented in the project plan, which is
    a living document that constantly changes as the project progresses.

    Project management for implementing a successful cost accounting
    system is defined as the management and direction of time, material,
    personnel, and costs to complete the system in an orderly,
    economical manner; and to meet established objectives in time,
    dollars, and technical results. It is a managerial function
    responsible for:

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-   determining what kind of data you want from your cost accounting
    system (Refer to Appendix F for a Sample User Needs Questionnaire);

-   identifying the costing methodology which best meets those needs
    (See Chapter 6);

-   breaking down the required work into component activities;

-   determining the sequential details;

-   determining the procedures, resources, and requirements;

-   determining the project\'s organizational structure;

-   devising a schedule by estimating the time required for activities;

-   calculating the resource schedule;

-   considering improvements by resource allocation methods;

-   communicating the plan to those involved;

-   controlling and monitoring the progress of the project;

-   comparing actual to predicted results;

-   making adjustments as necessary;

-   updating and revising the plan and schedule as necessary; and

-   decision-making based upon experience and judgment.

    Successful project management can be defined as having achieved the
    project objectives on time; within budget; at the desired
    performance/technology level, and while utilizing the assigned
    resources effectively and efficiently.

    **[The Role of the Project Manager]{.underline}**

    The project manager is responsible for coordinating and integrating
    activities across multiple, functional lines. In order to do this
    successfully, the project manager needs strong communication and
    interpersonal skills; familiarity with the operations of each line
    organization; and at least a general knowledge of the technology
    involved.

    In the project environment, everything revolves around the project
    manager. Because the project organization is a temporary,
    task-oriented entity, which depends on the permanent organization
    for its resources and support, the project manager walks a fine line
    between the two organizations. The term *interface management* is
    used to describe this role, which can be defined as:

-   managing human interrelationships within the project organization,
    as well as between and among project personnel and support
    personnel;

-   coping with the risks associated with project management;

-   maintaining an appropriate balance between technical and managerial
    project functions; and

-   surviving organizational and resource constraints.

    The ideal project manager should:

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-   have a thorough understanding of the project goals;

-   be capable of understanding staff needs;

-   have a good head for details;

-   be willing to put in long hours;

-   be able to cope with setbacks and disappointments;

-   possess good negotiating skills;

-   be results oriented, but practical in expectations;

-   be cost conscious and possess basic analytical skills;

-   be politically savvy, i.e., perceptive of power relationships; and

-   have a high tolerance for ambiguity, and an unfailing optimism in
    the project.

**Success vs. Failure**

When project success is measured in terms of achieving the expected
results on time and within budget, a majority of projects are not deemed
successful. Today\'s continuing challenge is to do more with less. Yet,
when projects fail, already scarce resources are wasted. Contrary to
popular belief, primary responsibility for failed projects rests with
management, not the project leader. In fact, in many instances project
failure occurs in spite of the best efforts of skilled project leaders.

The typical scenario begins when management directs that a project be
initiated. The responsibility for planning, implementing, tracking, and
evaluating the project is delegated to an appointed project leader.
Later, when the desired project results are not accomplished, milestones
are missed, or significant budget overruns develop, the project manager
gets blamed. Other than conducting an occasional project status review,
management in most organizations washes its hands of the project in the
belief that the project manager is capable of magic, or at least doing
whatever it takes to achieve the expected results. That, of course, is a
recipe for disaster.

Although it is not common practice, both management and the project
leader are responsible for ensuring project success. The responsibility
for project success cannot and should not be borne by the project
manager alone. This is not to say that the project manager is not to be
held accountable for getting things done. The organization, and more
specifically, management, is equally responsible for providing support
and resources to the project manager to at least allow for the
possibility of success. To be consistently successful, both the project
manager and management must accept responsibility for doing everything
necessary to ensure a project\'s success.

**Reference Materials Used in This Chapter:**

Harold Kerzner

*Project Management*

Van Nostrand Reinold Co., 1984

*Handbook of Management by Projects*

Editor: Roland Gareis, 1990

J. Davidson Frame

*The New Project Management*

Jossey-Bass Publishers, 1994

San Francisco, CA

Bennett P. Lientz/Kathryn P. Rea

*Project Management for the 21st Century*

Academic Press, 1995

Jeffrey S. Leavitt/Phillip C. Nunn

*Total Quality Through Project Management*

McGraw-Hill Publishing Co., 1994

*Project Management Demystified*

No author named

Geoff Press, 1991

Strategy for Implementation

The intent of this Chapter is to outline the six steps that should be
considered when implementing a managerial cost accounting process.

# Step 1: Obtain Management Support

The success of any new improvement method is greatly enhanced by
management\'s visible support. This support may take some time and
effort to cultivate. It is critical that management be shown that a need
for the MCA information exists and that the current cost information
provided is inaccurate or insufficient to aid in decision-making in the
organization. Chapter 1 of this Guide addresses marketing managerial
cost accounting.

# Step 2: Have Clear Objectives

In order for the MCA initiative to progress and succeed, objectives of
the implementation plan must be clearly stated. Once the objectives have
been defined, they must be approved by management. The objectives, if
not defined by a management steering committee, must require its
concurrence. The approval process is an integral part of the management
buy-in phase noted above. It is also recommended that the objectives be
incorporated into a team charter. See

Step 5 and Appendix B for more discussion on a team charter.

The objectives should define why the MCA initiative is being undertaken
and how the information from a new cost system will be used by the
organization. Other questions that may help define the MCA objectives
include:

-   Should the MCA process be integrated with existing accounting
    systems?

-   Who will be responsible for updating the final process and its
    related data?

-   What amount of detail is required? (for full, agency, and avoidable
    costing)

-   What degree of precision is necessary?

#  {#section-9 .unnumbered}

**[Step 3: Conduct A Pilot Study]{.underline}**

When implementing an entity-wide MCA process, it is preferable to start
with a pilot study. In this approach a specific segment of an
organization is chosen to implement an MCA program best suited to its
needs. The pilot may concentrate on a major business or product line of
the entity, a particular classification of activity (e.g.,
manufacturing, distribution, etc.), or a cost object (e.g., a type of
client). Management will also have to determine if the pilot should be
conducted at one site or multiple sites.

Management should take special care in selecting its pilot study. *A
pilot site should be chosen where it is perceived to have a good chance
for success*. A significant factor to consider when selecting a pilot
site is the type of management at the facility. For example, a
progressive management team, one that is not adverse to change, may
offer support rather than resistance to the MCA process. However, being
able to deal with resistance inside the organization is also an
important aspect of any pilot program.

Some causes of resistance documented by entities that have implemented
new MCA processes include:

-   fear that the new process may change the existing power structure;

-   fear that inefficient practices hidden by traditional cost
    accounting systems may be revealed;

-   fear of anything new;

-   fear of added work required to implement a new MCA process; and

-   fear that it will be used to reduce the work force.

Even though many of these fears may have little or no basis, they are
perceived by the employees and must be dealt with by the organization.
The consequences of not dealing with these issues could be detrimental
to the pilot study.

Chrysler Corporation and Safety-Kleen (a mid-sized waste-recycling
company) used the following approach to deal with resistance[^32]

1.  Critical employees were persuaded to give the new managerial cost
    process a try and ultimately to embrace the process;

2.  Major educational programs on the principles and mechanics of MCA
    were conducted for employees at all levels; and

3.  MCA was implemented at one facility and based on its success, was
    then implemented throughout the organization. Both companies made
    sure local managers and employees were actively involved in the
    process.

Chrysler had a technical team that linked the new MCA model with the
general ledger, its manufacturing planning system, and other support
systems.

Safety-Kleen was able to streamline and automate its accounting
procedure after its processing plants had been converted to the new MCA
process. Even though more data is being collected, reported, and
analyzed, the monthly closing of the accounting records is being done as
quickly as before.

This approach has served as a model for other entities implementing a
new MCA process.

# 

# Step 4: Establish an MCA Project Team

The next step would be to establish a project team, which would be
responsible for designing and implementing an MCA process for the
selected pilot program.

Guidelines for the organizational composition of the project team are as
follows:

-   The team should be headed by a project manager who is knowledgeable
    about the organization and various costing methodologies. It may be
    inadvisable for a financial person to head the MCA initiative,
    because the project may be viewed as an accounting activity only and
    not as a managerial decision-making initiative.

-   The project manager should report directly to a management steering
    committee on a regular basis. This will help to keep management\'s
    interest focused on the initiative and ensure that the
    organizational objectives are being followed.

-   The project team should consist of individuals from all the
    functional areas affected by the MCA process, including those
    familiar with information systems, accounting, and operational
    (program) areas of the organization. These individuals may be
    full-time or part-time members depending on the needs of the team.
    Refer to Appendix C for an example of a cost accounting position
    description.

-   Detailed cost management analyses require appropriate systems and
    expert support staff. This expertise must be developed/acquired,
    often with considerable time requirements. Appendix F contains a
    sample User Needs Questionnaire to help ascertain the organization's
    system needs, capabilities, and requirements.

-   The utilization of outside consultants can be valuable to the team.
    Appendix E provides example Statements of Work that can be used in
    obtaining consultants. Their knowledge and experience can help the
    organization successfully meet its objectives. Consultants should
    facilitate management taking ownership of the MCA initiative. The
    project team should also ensure that an adequate amount of
    information is shared between the consultants and the team members.
    However, the team members should be cautious of consultants imposing
    solutions from previous client engagements rather than finding
    answers for the current engagement.

-   The project team must also spend time educating its members on cost
    accounting concepts and methodologies. This will provide a basis for
    the team to evaluate which MCA process might be most appropriate for
    them. In making these evaluations, the team must keep the objectives
    of the initiative in mind. Computer-based training exercises can be
    utilized to help provide hands-on experience in the design
    requirements of various cost methodologies.

    **[Step 5: Prepare an MCA Project Schedule]{.underline}**

    Once the MCA project team has been selected, the task of
    implementing an MCA process for the designated pilot should begin.
    Following are guidelines for the tasks to be performed by the
    project team:

-   Develop a project schedule, which lists the tasks to be performed in
    sequential order, and the time requirements for each. This schedule
    may initially take the form of a team charter. Refer to Appendix B
    for a sample team charter.

-   Collect financial and non-financial data on the activities of the
    various work sites, including the following:

a.  organization\'s resources

b.  organization\'s activities

c.  how the resources relate to activities

d.  cost drivers for the activities

e.  organizational cost objects

f.  relationship of activities to cost objects

g.  performance measures for the organization

h.  relationship of performance measures to activities

i.  analysis of direct labor and materials

j.  composition of overhead

k.  activities driving the overhead

-   In partnership with management of the pilot site, be responsible for
    designing the MCA model. The MCA process should assist management in
    making proper decisions and not just providing financial
    information.

-   After development of the model, assign cost data to the activity
    classification, cost objects, or any other breakout for which the
    pilot study is being conducted.

-   Have the business unit managers from the test site validate the
    results prior to analyzing the information developed in the cost
    assignment step.

-   Have managers and employees, along with team members, conduct an
    analysis of the cost findings. This analysis may include product or
    service costs; cost associated with servicing different clients;
    cost-of-quality; and value analysis. However, it is recommended that
    any value analysis be conducted by individuals who possess
    cross-functional experience, special training, and extreme
    objectivity.

-   Formally present the team's findings. Ensure that the key players
    involved in the initiative are invited. This will allow those
    involved in the project the opportunity to view its results and will
    demonstrate to management how serious an undertaking the program
    actually was.

The team should remember that some of the findings may be quite
surprising. To avoid items that may be too surprising or embarrassing
for some individuals, it is recommended the items be shared with the
corresponding business unit prior to the presentation. This will give
the team another opportunity to validate its findings. It may also be
advisable for the project team to brief all the unit managers involved
in the project and the executive sponsors of the project on the
highlights of the findings prior to the formal presentation.

## Step 6: Consider Entity-Wide Implementation

Based upon the success of the pilot study, the benefits of an MCA
process should be evident enough for management to expand its scope,
hopefully toward a phased-in entity-wide implementation.

A phased-in approach is the converting of various program or work areas
to MCA in a sequential order. It may be prudent not to convert the
entire organization to MCA at the same time. This is especially true
with large agencies. A phased-in approach will generally be less
disruptive to ongoing operations and less taxing on limited resources of
the organization. In Step 3 we briefly discussed how two separate
corporations dealt with the internal resistance of implementing a new
MCA process. They both elected to do the phased-in approach and realized
success. This is not to say that an entity-wide implementation done
without a pilot program and/or a phased-in approach would not be
successful; however, such an approach is generally conducted by smaller
organizations.

Assessing Current Environment

# Conduct a User Needs Assessment

## The Importance of a User Needs Assessment

It cannot be over emphasized that the basic purpose of managerial cost
accounting in the federal government is to provide cost information to
government managers at various levels. The information should help
managers in making decisions and in improving operating efficiency and
cost-effectiveness. SFFAS No. 4, *Managerial Cost Accounting Concepts
and Standards for* *the Federal Government*, identified government
managers as the primary users of cost information, because:

\"They are responsible for carrying out program objectives with
resources entrusted to them. Reliable and timely cost information helps
them ensure that resources are spent to achieve expected results and
outputs, and alerts them to waste and inefficiency.\"

Assessing user needs for cost information is an indispensable step in
the very early stage of designing a managerial cost accounting (MCA)
process. Knowledge of user needs obtained through the assessment should
guide the design of an MCA process. Without a clear understanding of
user needs, there is no assurance that the managerial accounting system
will be properly designed to produce cost information to meet the
information needs of government managers. The resources spent to develop
the system will be wasted if the system fails to produce information
that meets the needs of its users.

In the federal government, most entities are comprised of complex
organizations and sub-organizations. They perform a variety of
activities. The type of cost information needed by managers may differ
among various types of organizations, programs, and activities. For
example, the cost information useful to managers of a health care
program may differ from information helpful to the manager of a loan
guarantee program. The information needs may also differ among
functional managers. For example, the information needs of budget and
planning managers may differ from those of program managers.

Thus, only through user needs assessments, can the system designer
acquire detailed knowledge about the operating processes of various
components of the organization, the decision-making patterns used by
managers at various levels, and the specific cost information that can
guide the managers in making those decisions and in saving resources and
improving operating results.

**Objectives of a User Needs Assessment**

The results of the cost information user needs assessment form a
foundation for the design of an MCA process. Those who conduct the
assessment should strive for the following objectives:

-   [Identify User Groups and Rank Their Priority]{.underline} - The
    assessment should identify managers and their staffs in various
    functions and at different levels who use cost information in
    performing their duties. However, it may not be feasible for an MCA
    process to satisfy the needs of all potential users. This would be
    true particularly in the early stages of system development. Thus,
    the designer may rank the users in terms of their priorities. In the
    initial phase, the system may be designed to meet the information
    needs of top priority users, and expand the clientele to other users
    as the system is further developed.

-   [Ascertain Specific Needs of Each User Group]{.underline} - For each
    group surveyed, the assessment should attempt to identify (a) users
    of cost information, (b) specific cost data needs, (c) how cost
    information will be analyzed and used, and (d) how timely or
    frequently cost data is needed. The assessment should gather
    information on performance measures being used and how managerial
    cost accounting can support and improve the performance measures.
    Information developed through the assessment can help in designing
    the format and contents of managerial cost reports that the MCA
    process will produce to meet the user's specific needs.

-   [Assess Capabilities of Users]{.underline} - The assessment should
    also gather information on user knowledge and experience in using
    cost information. This will include experience in operating computer
    software and hardware, the type of reports with which they are
    familiar, their knowledge about various cost concepts, and their
    experience in using cost information in measuring performance,
    setting prices, and making other managerial decisions. Results of
    this assessment will also help in determining training needs.

## Scope and Approaches {#scope-and-approaches .unnumbered}

The scope of an assessment depends on the scope of the system design. If
an entity-wide system is designed, the user needs assessment would be
entity-wide in scope. However, some federal organizations such as the
U.S. Departments of Agriculture, Interior, and Transportation, are very
large and complex. For those agencies, it would be very difficult to
perform an entity-wide assessment of user needs and would be advisable
to conduct a user needs assessment for a segment of the organization no
bigger than a Bureau, Office, or Administration.

The user needs assessment may include a questionnaire, followed by an
invitation to potential users to participate in interviews and group
discussions. However, individual interviews remain the most effective
approach in developing a detailed understanding of user needs.

The cost information developed from a potential user group through
questionnaires, discussions, and interviews may include the following
items:

-   a description of the user group\'s mission, operating process, and
    specific activities;

-   resources used in the user group\'s operations and expected outputs
    and outcomes;

-   user perception of accountability for costs incurred, and ability to
    control the costs;

-   typical decisions managers make in their operations and how cost
    information may be used as input in those decision-making processes;

-   user plans to implement GPRA;

-   user perception of how costs should be assigned to their operations
    and activities; and

-   training needs.

    The IRS used a questionnaire to survey user needs in its efforts to
    design an MCA process. The questionnaire is included as Appendix F
    of this Guide.

## Examples of Potential Users {#examples-of-potential-users .unnumbered}

The following are some potential user groups within a typical federal
entity.

-   [Top Management]{.underline} - may use cost information to (a)
    evaluate the overall performance of the programs they oversee, (b)
    assess future resource requirements in making department-wide
    financial plans and budgets, and (c) support their proposals to the
    President and Congress on resource allocations and program
    expansion, modification, or downsizing.

-   [Program Managers]{.underline} - may use cost information to (a)
    effect cost control, (b) make resource acquisition decisions, (c)
    evaluate and improve efficiency and cost-effectiveness of various
    program activities, and (d) make budget and planning proposals to
    agency heads and Congress.

-   [Financial Managers]{.underline} (including accountants and budget
    analysts) - may use cost information to help top management and
    program managers to better manage limited resources by (a)
    calculating unit costs of outputs and explaining how and why they
    increased or decreased, (b) formulating standard costs, (c)
    calculating and analyzing cost variances, (d) compiling period
    financial reports, and (e) analyzing the cost behavior to quantify
    variable, fixed, and/or incremental costs with respect to certain
    time periods which may influence managerial decisions on whether to
    contract-out, buy/lease, etc.

-   [Franchise Activity Managers]{.underline} - may use cost information
    for the same purposes as program managers. In addition, they will
    also use cost information to set prices or reimbursements for the
    goods or services they provide.

    **[Perform a Financial Management System' Assessment]{.underline}**

    The Joint Financial Management Improvement Program (JFMIP) requires
    federal agencies to meet its *Core Financial Management System
    Requirements*, and to maintain the Standard General Ledger Accounts
    (SGL). It is a common belief that a good general financial
    accounting system provides a sound foundation upon which to develop
    a managerial cost accounting system. The design team should keep in
    mind that the MCA process is a part of the agency's financial
    management system, and it should interact with financial accounting,
    budgeting, and performance measurement. The ultimate goal is to
    integrate the MCA process with financial accounting, budgeting, and
    performance measurement systems (See page 15, SFFAS No. 4).

    However, financial management systems of federal entities vary in
    completeness and sophistication. An analysis of an entity\'s system
    may find that the system falls into one of the following situations:

-   It already has a managerial cost accounting system in operation that
    needs only minor modifications and improvements in order to meet
    user needs and SFFAS No. 4 requirements;

-   It has a managerial cost accounting system which does not provide
    reliable cost information and thus requires major overhaul and
    reconstruction;

-   It uses a traditional costing methodology, such as job order or
    process costing, which is no longer considered adequate, and needs
    to change to a new methodology such as Activity-Based Costing (ABC);

-   It has a complete accounting system that supports general financial
    reporting, but does not include a managerial cost accounting system;
    or

-   It has an incomplete general accounting system that does not meet
    *JFMIP Core Financial Management System Requirements*.

Each of these situations requires a different approach to a system\'s
evaluation and assessment. The following discussion addresses two
general situations.

## Entities with Existing Managerial Cost Accounting Systems

Entities, which have a managerial cost accounting system, should assess
the system to determine whether the system produces cost information
that meets user needs, SFFAS No. 4 requirements, and JFMIP's *System
Requirements for Managerial Cost Accounting*. From the standpoint of
system output, the assessment may determine (a) whether the system
provides the full costs of goods and services as required by SFFAS No.
4, (b) whether it provides unit costs or activity costs for performance
measurement, (c) whether it supports cost control purposes, and (d)
whether the cost information is responsive and timely for managerial
decision-making. From the standpoint of system structure, the assessment
may examine whether the system correctly correlates with the
organization\'s responsibility segments, responsibility centers,
operating processes, functions, or activities. The assessment should
also examine whether the system is closely linked with the general
financial accounting system and the budgeting systems.

From the standpoint of system methodology, the assessment should examine
how cost data are collected (captured) and accumulated, and how the
accumulated costs are assigned to cost centers, activities, and ultimate
outputs (goods and services produced or mission tasks performed.) The
designer should test the system to determine whether the methodology is
appropriate in light of the organization's operating processes and
whether it produces accurate and reliable cost information. The
assessment will show whether the computer software or hardware, if used,
need to be modified or improved in order to meet user information needs
and the managerial cost accounting standards.

## Entities with No Managerial Cost Accounting System

Some agencies may have a core financial system to satisfy their
financial reporting needs, but not a managerial cost accounting system.
In this situation, if an agency decides to develop a managerial cost
accounting system to meet managerial needs, it should take steps to
determine whether its core financial system can be linked or expanded to
an MCA process. The assessment should determine (a) whether the system
completely captures the costs of resources in accordance with federal
accounting standards, (b) whether the expenses are properly classified
according to SGL requirements, and most importantly, (c) whether it is
feasible to make changes to the core financial system so that it can be
expanded to an MCA process. It is important to note that the core
financial system provides primary source data, particularly, the expense
data that can be used in cost accounting.

Some organizations may need to: expand the existing core financial
system; replace it with a new core financial system; or implement a new
cost accounting module that is not part of the core financial system,
but is integrated with it. In either case, they should be able to
interface the new or expanded core with subsidiary financial and program
systems without serious modifications to the software.

# Develop Practical Requirements - A Summary

Both the user needs assessment and the system assessment discussed in
Parts I and II of this chapter are necessary steps in designing and
developing an MCA process. (Those assessments may be combined into one
assessment project.) Results obtained from the assessments should guide
the system design. Federal agencies should consult JFMIP's *System
Requirements for* *Managerial Cost Accounting* as a starting point for
developing requirements.

Organizational Analysis

**[Define Components/Responsibilities]{.underline}**

Most federal entities can be segmented according to their principle
missions, processes, products, or business activities. In the majority
of cases, each of the segments is overseen by a manager who has the
responsibility for decision-making within his segment and who must
control costs according to delineated budget constraints. Managerial
cost accounting should be performed at this level.

As indicated in FASAB's *Managerial Cost Accounting Concepts and
Standards for the Federal* *Government*, "Segmentation can facilitate
performance measurement since each segment is responsible for a mission,
or a line of activity to produce a certain type of output. Information
on costs, outputs, and outcomes related to each segment can be used to
measure its performance against its goals."

**[Create the Activity/Output Dictionary]{.underline}**

Government entities have entered into a new era by holding managers
accountable for making cost effective decisions. Almost all government
reforms have placed an emphasis on cost effectiveness. Of special note
are the Chief Financial Officers Act of 1990 and the Government
Performance and Results Act of 1993 as well as the *Managerial Cost
Accounting Concepts and Standards for the Federal Government* (SFFAS No.
4). Within these mandates, managers are challenged and required to
provide better cost information for a more cost-effective government.
One method of providing this is through Activity-Based Management.
Managers do not manage costs of their organizations directly, but
instead manage the activities that consume the resources and thus
produce desired outputs.

Organizations are hierarchies of many activities. Improvement happens
when you change some part of an activity, such as its inputs,
transformation components, or outputs. Therefore, it is critical that
activities are carefully defined and analyzed. Even without cost
figures, activity information shows the relationships of activities to
each other, to outputs, and to customers. An activity dictionary is one
of the building blocks of activity costing and management.

**Activities**

An [activity]{.underline} is a unit of work that has an identifiable
starting and ending point and that consumes *resources* (inputs) and
produces *outputs*. Activities are essential to develop, make, sell,
deliver, or support an entity's products and services. Analyzing
activities is key to understanding how resources are consumed, how costs
are incurred, and in improving the ways in which activities are
performed. An activity dictionary lists and describes the different
activities performed in an organization. Its purpose is to define each
activity. Compiling activity dictionaries allows a manager the
opportunity to assemble data needed to determine how the organization
generates costs.

A dictionary is also referred to as a chart of activities. An activity
dictionary lists activities in general terms; organizes them by process,
department, or function; and defines each activity and process. It can
also include other information about an activity. The activity
dictionary is usually based on the following model:

I N P U T → → O U T P U T

**Outputs**

[Outputs]{.underline} are products, services, and or information
produced as a result of the activities performed. There are two types of
outputs\--*external* and *internal*. External outputs affect customers
and are directly related to the overall mission and objectives. Internal
outputs are those that provide or support the creation of an output to
an internal or external customer. When we focus on the output, we can
analyze our effectiveness. After determining the effectiveness of the
output, we can then focus on the efficiency of the activities that
created the outputs. Outputs provide a useful indicator and measurement
on the overall performance of the activity.

**The Activity/Output Dictionary**

In creating the activity/output dictionary it is critical to first focus
on outputs, i.e., the desired products, services, or information needed
to be produced by an entity. The *activity/output dictionary* will
assist in defining the correct activities for each part of the
organization. First define the outputs and interview employees to find
out what they do. The outputs for an organization should be
\"significant\" and homogeneous. \"Significant\" is defined as requiring
more than five per cent of an individual's time or whatever percent the
organization determines necessary. For each output, establish an
activity/output dictionary. (Note: Because generic dictionaries are
available, it is not always necessary to start from scratch to develop a
dictionary such as the ***Activity Dictionary*** by Tom Pryor, Inc.)

Components of each section of the activity/output dictionary are as
follows:

Activity: A description of the activity of the function. (Examples -
Process veteran's benefit claim, develop training program, create an
external report, attend meeting.)

Function: Perform a common purpose or mission. Functions are
departments, cost centers, work centers or [activity
centers]{.underline}. (Examples - Accounting, Payroll, Security.)

Process: The series of activities performed by more than one function.

Activity Definition: A short description of the activity.

Inputs: Physical documents, electronic data or any request that triggers
an activity. An activity may have more than one input. (Example\--a
claim for veterans' benefits.)

Outputs: The products, services, or information produced from an
activity. An output is what internal or external customers receive and
what the functional unit produces. (Example\--a veteran's benefit
check.)

Output Measure: A quantifiable measure for the output of an activity. It
describes how many times the activity is performed. (Example\--the
number of veterans benefit checks issued.)

Characteristics: The classification of activities to facilitate
comparison and analysis.

-   A [Primary]{.underline} Activity contributes directly to the main
    purpose of a unit.

-   A [Secondary]{.underline} Activity supports the performance of the
    unit's primary activities. Secondary activities are usually of an
    administrative nature.

-   A [Value Added]{.underline} Activity contributes to the achievement
    of an entity's goals and objectives.

-   A [Non-Value Added]{.underline} Activity represents waste. Non-Value
    Added Activities are not essential to achieve objectives.

-   [Other possible activity classifications]{.underline}: Strategic or
    Non-Strategic, Life Cycle versus Non-Life Cycle, Discretionary
    versus Mandatory, and Repetitive versus Non-Repetitive.

Cost Drivers: Factors that have a direct influence on the cost of
activities and processes. Activities usually have more than one cost
driver (cause). Cost drivers are frequently outside of the control of
people who perform the activity. (Example\--the accuracy of the
submitted veteran's benefit claim. If the claim is not completed
properly, it will take additional staff processing time.)

Two examples of entries in an Activity/Output Dictionary for an
accounting office follow:

Process veteran's benefit claim

Program Management Division

Accounting

> The process of obtaining a request for veterans' benefits, reviewing
> the request, approving the request, processing the data, and issuing
> the check.
>
> A veteran's benefit application
>
> claim form

A benefit check

The number of benefit checks issued

Primary

Value Added

Required

Accuracy of completed

veteran's benefit claim form

**Reference Materials Used in This Chapter**

Tom Pryor

*Activity Dictionary*

Kehoe, Dodson, Reeve & Plato

*Activity-Based Management in Government*

Department of the Treasury's Internal Revenue Service

*Cost Management Desk Guide to Process Value Analysis*

Various Costing Methodologies and Methods

**for Assigning Costs**

**[Various Costing Methodologies]{.underline}**

The following chapter of various costing methodologies is meant to give
a brief overview of several of the more widely used costing
methodologies. The intent is to provide information that will guide
managers in choosing a specific methodology. Many books dealing with the
implementation of each methodology have been published. It is
recommended that these books be thoroughly reviewed prior to final
selection and implementation. Several methods are available for costing
goods and services. Four widely used methods, which are not mutually
exclusive and can be used in combination, are described below.

**Job Order Costing**

Job order costing systems are used by organizations that produce unique
products or special order products. Each product or service consumes a
different amount of direct material, direct labor, and indirect costs.
Job order costing may also be utilized for assignments that differ in
duration, complexity, or input requirements. Costs are accumulated and
assigned to the individual products or services.

In a job order costing system, different products with varying degrees
of production time and different amounts of direct materials consumed
are tracked separately by work orders. Indirect costs are first assigned
to departments and then assigned to specific outputs often based upon a
measure such as direct labor hours consumed. Examples of situations when
job order costing is used in the federal sector include when the Federal
Bureau of Investigation (FBI) does specific investigative work (with and
without reimbursement agreements) for the Department of State, or when
the Department of Veterans Affairs costs specific medical procedures
such as open heart surgery. Job order costing could also be used in the
following situations: General Counsel legal cases; Office of Inspector
General (OIG) audit assignments; research projects conducted by the Food
and Drug Administration and Environmental Protection Agency; and law
enforcement cases conducted by the Drug Enforcement Administration and
Central Intelligence Agency.

[Some of the Benefits]{.underline}[^33] [of a Job Order Costing System
are:]{.underline}

-   it works well with diverse product lines;

-   product profitability determinations are possible by comparing
    actual cost with planned cost; and

-   a lower investment in equipment is required.

An example of job order costing follows: (Note, in this example indirect
costs are assigned to jobs based upon the number of direct labor hours
spent on the particular job.)

[Performance of a Specific OIG Audit Assignment:]{.underline}

Direct labor (400 hours at \$30 per hour) \$12,000

Direct materials (supplies, travel) 2,200

Indirect costs (400 hours at \$2 per hour) 800

Total cost of specific OIG audit assignment \$15,000

**Process Costing**

Process costing is a system used for a large volume of similar products
that go through the same continuous processes. Costs are accumulated and
assigned to processing divisions prior to the assignment to products or
services. Often costs are assigned to products by dividing the
department's total costs by the number of units produced by that
department. Examples of federal entities that use process costing are
VA's Veterans Benefit Administration (VBA), which processes thousands of
benefit checks, and the FBI which does fingerprint and name checks for
the 100,000 plus immigrant applications submitted by the Immigration and
Naturalization Service.

[Several of the Benefits of a Process Costing System are:]{.underline}

-   it works well with a homogeneous product;

-   product-profitability determinations are possible by comparing
    actual cost with planned cost; and

-   there are lower labor costs.

The main differences between process costing and job order costing are
that in process costing, costs are first assigned to departmental cost
pools and then to products, whereas in job order costing, costs are
first assigned to products. In process costing there is usually a
greater number of units produced than in job order costing. An example
of process costing is: (Note that direct and indirect costs are
accumulated by department and then allocated to products.)

[Production of VBA Benefit Checks:]{.underline}

Direct labor for check processing department \$800,000

Direct materials for check processing department 50,000

Indirect costs allocated to check processing department 25,000

Total costs for checks processing department \$875,000

Divided by 700,000 checks processed equals

Unit cost per check processed \$1.25

**Activity-Based Costing**

Activity-Based Costing (ABC) is a management process that examines how
an entity's activities consume resources and relate to its outputs. ABC
is an approach used to break down an organization's processes into
activities, and measure each activity's cost and performance
effectiveness. This is accomplished by assigning costs to the related
activities based on use of resources, and then by assigning costs to
cost objects, such as products or customers, based on use of activities.

The costs that cannot be directly traced to activities or outputs are
then assigned to outputs based on a cause-and-effect relationship or
through cost assignment.

Many private sector and several federal sector entities that have
implemented ABC have chosen to designate activities as either value
added or non-value added activities. Value added activities are those
activities that cannot be excluded without negatively affecting the
quality of the output. Non-value added activities can be excluded
without affecting the quality of the output. Resource costs are assigned
to activities. Next, activity costs are assigned to outputs. The costs
that can not be specifically traced to activities or outputs are then
allocated to outputs.

[There are Many Benefits to ABC. It Enables Management to:]{.underline}

-   improve product costing, because all costs are reviewed to ensure
    proper assignment to cost objectives;

-   see how activities correlate to one another and to outputs;

-   identify the full cost of performing and non-performing activities
    and outputs;

-   analyze value added and non-value added activities as an option;

-   institute performance measures and gauge actual performance against
    these measurements;

-   require a cross-functional look at resource consumption;

-   integrate cost management with other initiatives, e.g., GPRA and CFO
    Act;

-   see opportunities for business process improvement and
    re-engineering in accordance with NPR;

-   provide external parties with cost information; and

-   provide quantitative decision support information on timeliness,
    quality, and costs to assist management in evaluating program
    results and determining user fees/rates.

    An example of ABC:

    [The unit cost of a veteran's benefit check processed for
    the]{.underline}

    [Compensation and Pension (C&P) Service by the Finance
    Department.]{.underline}

-   Direct labor incurred by the Fin. Dept. in processing 700,000 C&P
    checks \$700,000

-   Direct materials \" \" \" \" \" \" \" \" \" 20,000

-   Indirect materials are assigned to C&P based upon C&P's share of
    total

> checks processed by the Finance Department. Assume that the Finance
>
> Department processed 1,000,000 checks during the fiscal year, 700,000
>
> of which belonged to C&P, and that total indirect expenses incurred by
>
> the Fin. Dept. during the current fiscal year were 500,000
>
> Therefore, C&P's assignment of indirect costs is 350,000
>
> Total expenses assigned to C&P for processing 700,000 checks are
> \$1,070,000
>
> divided by 700,000 checks processed for C&P equals
>
> Unit cost of one check processed by the Finance Dept. for C&P \$1.53

In traditional federal accounting, costs are accumulated by object class
categories such as salaries and benefits, office supplies, travel, and
equipment. With ABC, costs are calculated by activity or process such as
conducting biennial user fee reviews, writing cost accounting policy,
teaching cost accounting, and participating in cost accounting work
groups.

**Standard Costing**

Standard costing can be used with job order, process, or activity-based
costing. The purpose of standard costing is to have a standard cost per
product, which can be viewed as a goal, e.g., an industry standard, to
which actual costs can be compared. Standard costs can be useful for
performance measurement because they enable the analysis of favorable
and unfavorable variances between actual and standard costs. Standard
costing can be done for such components as direct materials, direct
labor, and indirect costs. It is important that these standards be
reviewed periodically to ensure they are up-to-date.

In many situations, an entity adopts a hybrid of two or more of the
costing methodologies mentioned above. For example, ABC may be used to
assign direct costs whereas process costing can be used to assign
indirect costs.

**[Methods for Assigning Costs]{.underline}**

There are three methods available for assigning costs to products and
services\--direct tracing, cause-and-effect, and allocation. The choice
of an appropriate method should be based upon the availability of
information as well as the resources required to provide this data.
Often, a cost- benefit analysis drives the decision of which assignment
method to use. All these assignment methods can be used with any of the
above costing methodologies.

**Direct Tracing Method**

Direct tracing is the process of assigning costs based upon a clear
relationship between the costs incurred and the products/services that
are produced. This is the most precise method of assigning costs to
outputs. However, direct tracing can be time-consuming and necessitates
that costs be charged to specific activities and outputs based upon a
method such as transaction coding or counting. An example of direct
tracing is General Counsel's tracking of the number of hours spent
addressing issues for a specific department such as Human Resources.

**Cause-and-Effect Method**

The premise of the cause-and-effect method is that in order for outputs
to be produced, certain activities need to be consumed. With this
method, costs that cannot be directly traced to specific outputs are
assigned to activities and then to the final outputs based on what
causes the costs to be incurred. If ABC is used, costs must still be
traced to an activity and then to an output. An example of this method
is assigning costs to activities such as billing collection functions
and next assigning these billing collection costs to the final outputs,
e.g., insurance companies or Medicare, based upon the insurer's number
of claims for health services.

**Allocation Method**

The allocation method is used when the cost or time to trace dollars to
cost objects is more expensive than the benefits derived. This method is
relatively easy to use but is not as accurate as the direct tracing
method or the cause-and-effect method. Examples of costs that are often
allocated are general and administrative costs. Costs are allocated
based upon a common denominator such as direct labor hours or direct
labor dollars. The following two methods can be used in conjunction with
either the cause-and-effect method or the allocation method.

[Step-Down Method]{.underline}

The step-down method is a method that accumulates costs by cost centers,
departments, or activities. The cost centers, departments, or activities
are ranked in descending order beginning with the department that
provides the most service (both production and support departments).
Next, the general and administrative costs for each department are
assigned to the other departments that have been ranked below it
according to the ratio of and combination of each department's general
and administrative costs, along with the costs from the other
departments that have been allocated to it, to the total of all
remaining unassigned costs for all departments. This process continues
until the costs for the support department that provides the least
amount of service to the other departments have been assigned. Once a
department's costs have been assigned, no costs from other departments
are assigned back to it.

[Simultaneous Equation Method]{.underline}

The simultaneous equation method, also called the reciprocal allocation
method, is the most complex procedure for assigning costs. It takes into
account the reciprocal activities between service departments. This
method allows for the full reflection of interdepartmental relationships
into the service cost allocations. The advent of computer programs to
solve these simultaneous equations has greatly reduced the time required
in utilizing this method.

Building a Managerial Cost Accounting Process

## Introduction: Obtain Detailed Systems Requirements 

The focus of all managerial cost accounting (MCA) processes should be
the information and reports made available for decision-making. Cost
accounting software itself should not be the primary focus, but should
be viewed as a facilitator for accumulating data and making it readily
available. In recent years cost accounting software has gained new
emphasis with the proliferation of personal computers and front-end
mainframe/mini-computer applications. Software automates many of the
time-consuming steps involved in implementing and using cost data. A
good MCA process will greatly enhance the distribution of completed
cost/process data accumulation and analysis; however, a great MCA
process will not improve weak cost/process data accumulation and
analysis.

As stated in Chapter 2, managerial/senior executive sponsorship is a key
ingredient for successful managerial cost accounting implementation.
This sponsorship will pay significant dividends in the attempt to
implement a costing process. Implementation will require gaining
down-loads and/or access to other organizational information systems
(sometimes an internally sensitive issue), disseminating information
through application mediums not owned by the sponsor, and collaborating
to meet all the agency information technology and processing standards.
In addition to the sponsor, educating the entire management chain
(through classes, memos, newsletters, and electronic mail) about
managerial cost accounting and the cost implementation process will
prove to be valuable.

This Chapter is intended primarily for the team of program, finance, and
information technology personnel implementing an MCA process. Detailed
"process" requirements are discussed, at most, at a high-level. The
Joint Financial Management Improvement Program (JFMIP) is in the process
of issuing the *System Requirments for Managerial Cost Accounting*
document, that provides the baseline requirements expected of an MCA
process. The CASR builds upon various costing requirements in OMB
circulars, CFO Act, Clinger-Cohen Act, and GPRA that have an impact on
how and what to cost. The CASR specifies at a low-level the information
and functional processing requirements needed to accumulate and assign
cost/process data.

Chapter 3 of this Guide suggests two options for implementation; (1) the
use of pilots to gain support and overall understanding on the way to
entity-wide implementation, and (2)an entity-wide implementation
(without pilots) that might be considered acceptable for smaller
organizations. Predictably, most agencies fall into the first category
and will use a phased approach for implementation. However, agencies in
the second category will find this Chapter useful as well. As shown in
Figure 1, implementation of an MCA process does not necessarily require
new source data capture systems, unless those data capture systems are
deemed inadequate or insufficient.

## Getting Started: Conduct a Systems Requirements Analysis

All MCA processes start with acquiring data from, for example, the
general ledger, labor distribution system, payroll interfaces, and
program systems. (See Figure 1.) How you get data from your program
systems is subject to your individual implementation. This Chapter
describes the non-technical aspects of interfacing with general ledger
and payroll interfaces and includes a brief mention of interfacing with
program systems. Up-front time should be spent determining what cost
information is needed, how it will be used, and what level of detail
(precision of assignment) is appropriate. At a minimum, an information
process that allows you to identify and track process/activity costs and
performance measures, generate standard and ad hoc reports, and provide
users with timely data that has the highest integrity possible is
desireable.

Either with Chapter 4 of this Guide or separately, a systems
requirements analysis must be conducted. This analysis helps determine
the current hardware and software environment of users, data needs of
users, and available capacity. The systems requirements analysis,
together with JFMIP requirements, should significantly define the
application needs of your organization. Requirements gathering should
have three phases: project planning, analysis, and reporting. All of
these phases require meeting with systems users to determine
implementation alternatives and develop a feasibility report.

**Incorporating the Necessary Data**

## Financial Data

Most entities have developed financial statements for the overall
responsibility segment(s). In some situations sub-components of the
segment may not have separate financials and therefore need additional
analysis. Integrating with the system(s) that provides this financial
data is critical to the successful development of an MCA process. The
financial statements should provide all the labor, support, and
facilities costs for each major segment and sub-component. Outside the
sub-component's labor, facilities, and support costs, many expenses are
paid at a national and/or regional level (e.g., telecommunication
costs). To adhere to FASAB's doctrine of "full cost", all costs that are
material, must be identified and included.

Based on the assignment methods you decide to employ, general ledger
resources (dollars) are assigned or "driven" to activities/outputs. At a
very high-level, this can be done by using cost center codes and
assigning labor hours to the outputs produced in each respective
division/function/program. Through process-analysis, costs can be
further driven down to the process and ultimately to activities. Two key
drivers are the number of times an activity is performed and the cycle
time required to perform an activity. Cycle time is a primary activity
driver in most government agencies because of labor intensive processes.
Once labor has been assigned, facilities and support costs can be
assigned through comparable analysis to establish cause-and-effect
relationships between resources and outputs/products. The illustration
below, based on ABC, reflects how costs flow through processes to
measures. To see how this illustration applies to job order and process
costing, simply replace activities with cost pools to accumulate
resources, prior to product/service assignment.

## Labor Data

In addition to including the most obvious salary expense, labor data
should include unemployment compensation, workers compensation, and
accrued leave liability. The full cost doctrine, as defined by FASAB,
includes employee pension liability. After being entered into the cost
software, all these resources categories must be assigned to
activities/cost pools and then to outputs/products. Assignment of salary
expense is discussed below. The other costs mentioned here should be
assigned to the organizational units where employees worked.

Most entities do not track labor costs according to processes,
activities, or completed outputs, i.e., through a labor distribution
system. Many private sector businesses choose not to implement such
costly source capture systems. Statistically valid sampling techniques
are used to have employees complete detailed time sheets or use surveys
to gather estimates on employee time by process, activity, or output. In
either of these cases, a matrix can be generated to migrate labor hours
from the functional view to the process/activity/output view. Since
labor costs are the single highest line item for many federal agencies,
the cost center codes will be a great source of data to assign labor
resources to processes/activities/outputs. Again, questionnaires and
surveys work well to gather data to use for resource and activity
assignment.

[Facilities and Support Data]{.underline}

The goal is to understand why costs for these resources are incurred and
which outputs/products benefit from these costs. Inasmuch as each of
these costs is treated according to its level of significance or
materiality, you should spend more time analyzing resource and output
relationships for the higher-impact items. In your software, you will
establish assignment methods for each object and/or sub-object class.

Facility costs typically include rent, utilities, telecommunications,
personal property, building alterations, and maintenance and repairs.
Assignment examples for some facility items include allocation of rental
costs by using square footage and call or line usage for
telecommunications.

Support costs typically include program support costs, travel, moving
and relocations, training, printing, postage, health services, supplies,
software, and equipment rental. Assignment examples include direct
tracing from support accounts to activities/processes/outputs. For
example, a piece of equipment is rented to perform a specific
activity/process and produce a specific output, so the support account
is directly assigned to the activities/processes/outputs.

## Performance Measures/Program Data

Incorporating program performance measures is the safest way to garner
the support of program offices. Integrating cost information with
program data is what makes modern day managerial cost accounting an
improvement from the 1970s. This integration moves the cost accountants
away from the traditional raw materials, work-in-process, and finished
goods concept into an approach that identifies cost consumption by
program-initiated work steps (activities). This sounds relatively
simple, but in fact is the basis for moving costing information away
from a historical reporting effort to a decision-making support process.

As the costing implementation team gathers data for process definitions
and flowcharts, the desired results of the process, its
products/services, customers, and customers' needs and values should
have already been determined. One way to ensure that products and
services meet the overall agency objectives, organizational, and
customer needs, is to regularly measure how well the process meets those
needs and the overall agency mission and objectives. Quality experts
state that measurements serve two basic purposes: to keep score and to
improve the score.

As measures have been developed over time, it is apparent that those
imposed on employees have a substantial impact on the process and the
customer. This is a natural opportunity to accomplish the requirements
of GPRA while facilitating the construction of your MCA process.

Some sources of current performance measure information are agency
strategic objectives, business master plans, concepts of operation,
annual operating plans, local operating procedures (i.e., management
memos, desk guides), internal manuals, and memoranda. The development of
meaningful performance measures is directly on-target with the NPR goal
of trying to improve government program efficiency and effectiveness.
After taking an inventory of the current

process and resulting performance measures, this data will be loaded
into the costing software and ultimately used to help provide dynamic
reports for program personnel.

As current or proposed performance measures are loaded into the costing
software, ensure that performance measures are aligned with the
following key points:

-   associated with overall entity objectives and tracked accordingly;

-   tied to customer needs;

-   readily identifiable in any process flowcharts;

-   operationally definable;

-   not too numerous or cumbersome, therefore losing their
    resourcefulness;

-   quantifiable;

-   obtainable from reliable sources; and

-   indicative of progress or lack thereof.

## Reporting the Results {#reporting-the-results .unnumbered}

Reporting will vary according to the needs of program and financial
personnel in your organization. In addition to a host of standard
reports, the costing process should allow for ad hoc reporting
capabilities. Several guidelines published by FASAB, OMB, and JFMIP
recommend what standard reports might include. By far, a unit cost
report is most often suggested along with OMB's required Statement of
Net Cost.

In order for cost information to assist in process improvement, current
process measures must be developed and calculated to serve as a
baseline. This baseline information can be accumulated in the costing
software and reported with current cycle data for trend analysis,
including comparisons to budget estimates. Additionally, this baseline
information can be incorporated when developing "standard costs."

**[Summary: Steps in Building a Cost Model]{.underline}**

Once a software application has been selected, the team of program,
financial, and technology personnel will need to plan the specifics of
how to build the software structure and how to load data. The software
application is the primary tool that will be used to capture cost,
resource, and activity information and provide the results to entity
personnel. The above-mentioned financial

and program data must be loaded into the costing software, using
electronic file import and export interfaces where possible to minimize
manual intervention.

Most costing applications require that the organizational or
departmental structure be manually created within the software.
Depending on the costing methodology you choose (ABC, process, or job
order), process and activity information might be required. Many
software applications permit user defined data attributes such as value
added/non-value added activities, cost of quality, and root cause cost
driver analysis. Additional data might be required if you plan to
perform "what-if" modeling of the impact workload and staffing changes
would have on capacity.

The following information summarizes the steps involved in
building/using costing software. (These steps are intended to
accommodate pilot software applications, but they also create the basis
for a longer term entity-wide implementation.):

-   enter basic information (i.e., chart of accounts,
    Department/Organizational structure, Output Profile/Core Business
    System structure, and functions);

-   enter data according to the lowest organizational unit planned for
    data accumulation and analysis (typically office, branch, section,
    or unit);

-   enter labor, facilities, and support resource information by the
    lowest organizational unit (can be loaded through automated
    interfaces);

-   trace general ledger costs to resources categories;

-   as required, enter activity/task information and other attributes
    (output, activity/task name, value added/non value added, volume,
    cost of quality, output measure, customer information, total cycle
    time, live processing time, activity notes, improvement opportunity
    notes, root cause information);

-   develop assignment methods to drive resource dollars to activities
    or cost pools (for labor costs this could include developing a
    matrix of organizational position codes by cost object, activity, or
    output);

-   develop assignment methods to drive activity or cost pool dollars to
    outputs/products (creating business process maps can be beneficial
    in linking activities, processes, and outputs); and

-   prepare reports for organizational personnel; many applications
    today use a report writer or export data to spreadsheet/data base
    software for report generation (reports can then be produced that
    showing information on branch costs, process costs, volume of
    outputs, and cost per output).

*(Following is a sample departmental cost accounting policy. It briefly
summarizes the pertinent legislative mandates as well as the FASAB
[Managerial Cost Accounting Concepts and Standards for the Federal
Government]{.underline}. In addition, this sample policy outlines many
of the cost accounting roles and responsibilities within a federal
department.)*

# Managerial Cost Accounting Policy

## Purpose and Applicability

This report establishes departmental policy for managerial cost
accounting. It applies to all offices within the department, which have
a use for cost information, as described in the \"Background\" section
below.

## Background

Managerial cost accounting is the process of accumulating, measuring,
analyzing, interpreting, and reporting cost information useful to both
internal and external groups concerned with the way in which the
organization uses, accounts for, safeguards, and controls its resources
to meet its objectives.

Cost information is used for many different purposes that can be
generally classified into five types: 1) performance measurement; 2)
cost reduction and control; 3) determination of reimbursement and fee or
price setting; 4) program authorization, modification, and
discontinuation decisions; and 5) decisions to contract out work or make
other changes in the methods of production or delivery of services.

The Office of Management and Budget (OMB) in conjunction with FASAB and
the General Accounting Office (GAO) established managerial cost
accounting concepts and standards to provide reliable and timely
information on the full cost of federal programs, their activities, and
outputs. Determining the cost of an agency\'s specific programs and
activities is essential for effective management of government
operations. Congress and the President have deemed cost accounting
important and have enacted several mandates to insure effective cost
accounting. These include:

-   **The Chief Financial Officers Act of 1990**, which includes among
    the functions of the Chief Financial Officer (CFO) the development
    of an integrated financial management system which provides for the
    development and reporting of cost information, and the systematic
    measurement of performance;

-   **The Government Performance and Results Act (GPRA***)*, which
    mandates performance measurement by the federal agencies;

-   **The National Performance Review (NPR***)*, which includes a
    recommendation to require OMB to issue a set of cost accounting
    standards for all federal activities; and

-   **The Clinger-Cohen Act**, which requires defining all technology,
    related activities, their costs, and measurements. This Act requires
    cost benefit analysis before IT acquisition decisions are made
    concerning building systems internally or pursuing commercial
    off-the-shelf options.

## Users of Managerial Cost Accounting Information

Managerial cost accounting is intended for three primary user groups:

-   **Government Managers**, who are responsible for carrying out
    program objectives with the resources entrusted to them. Cost
    information will help ensure that resources are spent to achieve
    expected results and outputs, and will help alert managers to waste
    and inefficiency.

-   **Congress and Federal Executives**, who make policy decisions and
    authorize funding for federal programs. These officials use cost
    information to make the authorization decisions by assessing
    cost-benefits and program performance.

-   **The Public**, who is concerned with the costs and results of
    federal programs affecting them.

## Departmental Policy

The departmental policy for managerial cost accounting states that the
agency must comply with FASAB's Cost Accounting Standards (Statement No.
4) issued by OMB. Assistant secretaries may institute additional cost
accounting policy for their offices, provided they do not conflict with
Statement No. 4.

## Managerial Cost Accounting Standards

FASAB established and OMB issued five managerial cost accounting
standards that provide specific guidance for all federal agencies. These
standards, as they apply to the department, are described below.

1.  **Requirement for Cost Accounting - For management information
    purposes, costs of the department\'s significant activities are to
    be accumulated and reported on a regular basis.**

"On a regular basis" means that program offices, working in conjunction
with the accounting office (where applicable), should establish
procedures to accumulate and report costs continuously, routinely, and
consistently for management information purposes. Consistency begins
with the utilization of a common data source of information. The cost
accounting practices in estimating or budgeting an activity must be
consistent with the practices in accumulating its cost. Appropriate
procedures and practices should be established to enable the collection,
measurement, accumulation, analysis, interpretation, and communication
of cost information. This can be accomplished through the use of a cost
accounting system, cost finding techniques, and other cost studies and
analyses.

> A cost accounting system is a continuous and systematic cost
> accounting process. It may be designed to accumulate and assign costs
> to a variety of objects routinely or as desired by management.
>
> However, a sophisticated system to perform detailed cost accumulation
> and assignments is not required. Costs can be determined and analyzed
> through special cost studies and analyses. Use of a combination of a
> formal cost accounting system supplemented by cost finding techniques
> and studies is acceptable. Each reporting entity should determine the
> appropriate detail for its cost accounting processes and procedures
> based on several factors. Some of these factors include the:

-   nature of the reporting entity\'s operations;

-   precision desired and needed in cost information;

-   practicality of data collection and processing;

-   availability of electronic data handling facilities;

-   cost of installing, operating, and maintaining the cost accounting
    processes; and

-   specific information needs of the reporting entity.

2.  **Responsibility Segments - Management of each reporting entity
    should define and establish responsibility segments.**

> A responsibility segment is a component of a reporting entity that is
> responsible for carrying out a mission, conducting a major line of
> activity, or producing one or a group of related products or services.
> In addition, a responsibility segment usually possesses the following
> characteristics: 1) its managers report directly to top management,
> and 2) its resources and results of operations can be clearly
> distinguished from those of other responsibility segments.
>
> The purpose of dividing a reporting entity into responsibility
> segments is to determine and report the costs of services and products
> each segment produces and delivers, or contributes to (for outputs
> produced by other responsibility segments). For each segment,
> managerial cost accounting should:

-   define and accumulate outputs, quantifying them in units or
    equivalent units if possible for work in process;

-   accumulate cost and quantitative units of resources consumed in
    producing outputs; and

-   assign cost to outputs, and calculate the cost per unit of each type
    of output.

> Dividing entities into segments also helps facilitate cost control and
> management, as well as performance measurement.

3.  **Full Cost - Reporting entities should report the full cost of
    outputs in general purpose financial reports.**

> The full cost of an output produced by a responsibility segment is the
> sum of (1) the costs of resources consumed by the segment that
> directly or indirectly contributes to the output, and (2) the cost of
> identifiable supporting services provided by other responsibility
> segments within the reporting entity and by other reporting entities.
> Direct and indirect costs are defined as follows:
>
> Direct costs are costs that can be specifically identified with an
> output. All direct costs should be included in the full cost of
> outputs. Typical direct costs in the production of output include:

-   salaries and other benefits for employees who work directly on the
    output;

-   materials and supplies used in the work;

-   various costs associated with office space, equipment, facilities,
    and utilities that

    are used exclusively in the output; and

-   costs of goods or services received from other segments or entities
    that are used to

> produce the output.
>
> Indirect costs are costs of resources that are jointly or commonly
> used to produce two or more types of outputs. Typical examples of
> indirect costs include costs of general administrative services,
> general research and technical support, security, rent, and utilities.

4.  **Inter-entity Costs - The full cost of a reportable entity\'s
    outputs should incorporate the full cost of goods and services that
    it receives from other entities.**

The organization providing the goods or services has the responsibility
to provide the receiving organization with information on the full cost
of such goods or services either through billing or other advice.

> All significant inter-entity costs should be recognized. This is
> especially important when the goods and services received from a
> providing organization may eventually be incorporated into an output
> (product) that is sold or provided to a non-federal entity. The costs
> of inter-entity goods and services need to be factored into the
> overall costs of products to determine an appropriate user fee or
> product price.
>
> Materiality is another factor that must be considered when determining
> which inter-entity transactions are to be recognized. Inter-entity
> transactions must be evaluated individually rather than as a whole.
> Materiality is considered in terms of importance of the inter-entity
> transactions to the receiving entity. OMB proposes the following
> factors in judging materiality:

-   Significance to the entity. The cost of a good or service is large
    enough that management should be aware of the cost when making
    decisions.

-   Directness of relationship to the entity\'s operations. The good or
    service provided is an

    integral part of and necessary to the output produced by the entity.

-   Identifiability. The cost of the good or service provided to the
    entity can be matched to

> the entity with reasonable precision.
>
> Accounting for inter-entity costs requires that the entity providing
> the goods or services recognize the full cost of such services in its
> accounting records. The full cost of these services must also be
> reported to the receiving entity.
>
> However, if such cost information is not provided, or is only
> partially provided, a reasonable estimate of the full cost may be used
> by the receiving entity. This estimate may be based on the perceived
> fair market value of the goods or services received. Should the
> reimbursement for the goods and services paid by the receiving entity
> be less than full cost, the receiving entity should recognize the
> difference in its accounting records as a financing source.
>
> These inter-entity accounting transactions will be eliminated in any
> consolidated financial statements covering both entities.

5.  **Costing Methodology - Each reporting entity should utilize
    appropriate costing methodologies to accumulate and assign costs to
    outputs.**

The cost of resources consumed by responsibility segments should be
accumulated by the type of resource. Outputs produced by responsibility
segments should be accumulated and, if practical, measured in units. The
full cost of resources that directly or indirectly contribute to the
production of outputs should be assigned to outputs through costing
methodologies or cost finding techniques that are most appropriate to
the operating environment of the segment and should be followed
consistently.

### *[Cost Assignment]{.underline}*

> Costs should be assigned to outputs in one of the following methods
> (listed in the order of OMB preference). No single methodology is
> required for all cost accounting applications.

1.  *Directly Tracing Costs to Outputs* applies to resources that are
    directly used in the production of an output. These resources are
    also referred to as direct charges. The method of tracing direct
    costs usually relies on the observation, counting, and/or recording
    of the consumption of resource units.

    Direct cost tracing is a very accurate method of cost assignment.
    However, it can be relatively costly to establish and maintain. It
    should only be applied to resources that account for a substantial
    portion of an output, and only when economically feasible. The cost
    of accumulating and accounting for cost information should not
    exceed the expected benefit.

2.  *Assigning Costs on a Cause-and-Effect Basis* is for those costs not
    directly traced to outputs. For those costs, intermediate
    activities/products that contribute to the outputs can be
    established. The costs can then be assigned to these intermediate
    products/activities.

    An example of an intermediate activity is that which is provided by
    a computer technology office to provide technical support to other
    offices inside an agency. This may be done on a two-step
    cause-and-effect basis. In the first step, costs are assigned to the
    various activities within the technology office (e.g., hardware
    installation and maintenance, software design and installation, or
    program adjustments). The second step involves the assignment of
    these costs to departments that actually utilize their technical
    service.

3.  *Allocating Costs to Responsibility Segments or Outputs on a
    Prorated Basis* may be a preferable method of assigning costs when
    it is not economically feasible to directly trace costs, or assign
    them on a cause-and-effect basis. Allocated expenses include
    management and support costs, depreciation, rent, maintenance,
    security, and utilities associated with facilities commonly used by
    various responsibility segments.

The ideal allocation of these costs should reflect the best correlation
of cost to output. For example, personnel department costs can be
allocated to a responsibility segment based on a percentage of the FTE
costs of that responsibility segment versus the total FTE costs of the
reporting entity.

> However, many times there is little correlation between an indirect
> cost and an allocation base. Default methods of cost allocation may
> then be developed. For example, the allocation of costs may be based
> on number of employees, square footage of office space, or the amount
> of direct costs incurred in segments. General administrative expenses
> (personnel department, security, office rent, depreciation, utilities,
> etc.) are often allocated in this manner.
>
> Cost allocation is a relatively simple method of assigning indirect
> costs to responsibility segments and outputs. Unlike the other cost
> allocation methodologies, however, it has the greatest potential for
> distorting product (output) costs due to arbitrary allocations.
>
> [Costing Methodology]{.underline}
>
> Costing methodologies are systems used to accumulate and allocate
> costs to specific outputs. The cost accounting standards issued by OMB
> do not recommend which cost systems are best for specific types of
> operations. As the agencies become more experienced with the concept
> of cost accounting, they may find a preferred costing methodology for
> their operations. Input of program managers will be integral in
> selecting the type of costing system that will best meet the agency's
> needs. Chapter 6 of this Guide discusses several costing
> methodologies.
>
> No one cost methodology is required for all operations. A costing
> system used for one type of operation may not be appropriate for
> others. However, once a system is selected for a particular operation,
> it is to be used consistently for that operation.

## 

## Roles and Responsibilities

Specific roles and responsibilities are set forth for the Office of the
CFO, Assistant Secretaries, Comptrollers, and Program Managers as
follows:

**The Office of the Chief Financial Officer (CFO)** is responsible for
the following:

-   oversight of the implementation of the departmental cost accounting
    policy;

-   coordinating the development of a cost accounting reporting system,
    with the Assistant Secretaries;

-   review of all cost accounting procedures developed or revised by
    each Assistant Secretary\'s organization for consistency with
    departmental policy;

-   review of outputs identified by the agency\'s Assistant Secretaries
    (or their designees), for which costs should be accumulated, and
    assigned. Part of this review process may be to ensure a
    relationship between such outputs/activities, and the performance
    measures identified by the Program Assistant Secretaries for
    inclusion in the Presidential Performance Agreement, and the OMB
    Circular A-11 Budget submission;

-   working with each assistant secretary's organization to identify the
    specific resources to be accumulated for each output and activity,
    and the proper assignment methodology; and

-   identification of significant inter-entity costs to ensure that all
    significant costs of producing an output/activity are included.

    **Assistant Secretaries (or Designees)** have overall responsibility
    for:

-   the design and implementation of a cost accounting system for its
    designated responsibility center(s);

-   identifying their outputs and activities for which this cost
    accounting standard is applicable;

-   final approval of the identification of the resources applicable to
    their outputs/activities, and a proper cost assignment methodology;

-   providing certain necessary management information (such as output
    information) not maintained by the CFO; and

-   final determination of the scope (nature and frequency) of reporting
    cost accounting information applicable to their outputs/activities.

    **Comptrollers (or Designees)** are responsible for implementing
    this policy within their respective organizations. Responsibilities
    include:

-   serving as a technical source to the Assistant Secretaries in
    implementing cost accounting within their respective organizations;

-   providing oversight on implementation of cost accounting within
    their respective areas;

-   identifying information needed to effectively implement cost
    accounting within their respective organization, and taking the
    actions necessary to obtain this information;

-   identifying, with program managers, the organization\'s outputs
    (activities, products, and services) for which this standard is
    applicable, and quantifying such outputs on a timely basis;

-   determining whether the appropriate cost accounting procedures can
    be accomplished through the use of a cost accounting system, cost
    finding techniques, or other cost studies and analyses; and

-   ensuring that the general ledger is the basis for cost data (when
    the comptroller has responsibility for general ledger maintenance).

    **Program Managers** have the following responsibilities:

-   taking partial if not full ownership of the cost accounting system
    and its related data information;

-   identifying, in conjunction with the Assistant Secretaries,
    outputs/activities being produced by the organizations;

-   ensuring that outputs and other management information are
    consistently quantified on a timely basis to their designated
    comptroller;

-   informing the Comptrollers of the nature of the cost accounting
    reports they believe would be useful to them.

**Team Charter**

A team charter is a written document that describes the agreement
between the appropriate oversight authority and the team\'s leadership
regarding the management of the assignment or project. At a minimum, a
team charter should establish the scope, objectives, deliverables,
schedule, organization, responsibilities, funding, management
milestones, and methods of operation of the team. All team members
should participate in the development of the charter.

Reduced to its basics, a team charter is essentially a contract between
the approving authority and the team which details the results-oriented
expectations of the chartering authority and the commitments made by the
team to produce the expected results. A description of the resources
(time, money, and personnel) that the approving authority intends to
provide to the team is also an integral part of the team charter.

What follows is a fairly typical list of items which comprises a
complete team charter, as well as a sample managerial cost accounting
project team charter. The sample charter is not intended to encompass
all possible charter elements, but can be employed as a starting point
for further development of a managerial cost accounting team charter
which takes into account the particular circumstances and needs of the
organization sponsoring a managerial cost accounting team.

**[Components of a Team Charter]{.underline}**

# Responsibility

The project team manager, with assistance from the members of the team,
is responsible for preparing the team charter and for presenting it to
the appropriate review board or panel for approval.

# Objective

The team charter will encompass all of the documentation required to
initiate the project including the necessary managerial approvals.
Suggested project team charter elements follow. Not all requirements
will apply in every situation.

**Charter Components Outline:**

> 1\. Project title
>
> 2\. Project personnel
>
> 3\. Objectives
>
> a\. Intent - a general statement of intent
>
> b\. Objectives of the project
>
> c\. Contents - what must be included in design considerations
>
> 4\. Scope
>
> a\. Installation requirements
>
> b\. Functions included
>
> c\. Functions excluded
>
> d\. Other
>
> 5\. References
>
> 6\. General authorities and reporting relationships
>
> 7\. Responsibilities and authorities of the Project Manager
>
> 8\. Project management guidelines
>
> a\. Development of methodologies and quality assurance
> requirements/standards
>
> b\. Management milestones/critical review points
>
> c\. Process for updates and modifications of charter
>
> d\. Process for resolution of disputes and technical questions
>
> 9\. Project Analysis
>
> a\. Project proposal
>
> b\. Mission needs statement and priority analysis
>
> c\. Relationships and interfaces to other projects
>
> d\. Functional/data interfaces
>
> e\. Cost/benefit analysis methodology
>
> f\. Hardware/telecommunication interfaces
>
> g\. Security requirements
>
> 10\. Deliverables
>
> 11\. Project Resources
>
> a\. Funding
>
> b\. FTE and skill types
>
> c\. Contracting requirements
>
> d\. Equipment
>
> e\. Materials
>
> f\. Facilities

**Charter**

**Managerial Cost Accounting Team**

# Title

(Agency) Managerial Cost Accounting Team

# Mission

To design and implement an agency-wide managerial cost accounting system
that measures and reports on the (agency\'s name) cost of doing
business. The outputs generated by the managerial cost accounting system
will provide the means to measure and report on the efficiency with
which scarce budgetary resources are consumed.

# Objectives

**The objectives of the managerial cost accounting system are to:**

-   improve the efficiency and effectiveness of the (agency\'s name) by
    furnishing program managers with cost-based performance information
    that is accurate, timely, meaningful, and most importantly, triggers
    a cycle of continuous improvement in the (agency\'s name).

-   contribute analytical cost-based inputs to the strategic plans and
    performance reports required by the Government Performance and
    Results Act (GPRA) and the Chief Financial Officers Act (CFO).

    **The objectives of the team project are to:**

-   design and implement a cost accounting system that captures the full
    cost of doing business and that allows management to make cost-based
    resource allocating decisions.

-   design and implement a cost accounting system which complies with
    the requirements of the Federal Accounting Standards Advisory
    Board\'s (FASAB) Statement of Recommended Accounting Standards No.
    4*, Managerial Cost Accounting Concepts and Standards for the
    Federal Government*.

    **Project Guidelines/Principles:**

    [Collaborative Leadership]{.underline}\--The team will collaborate
    with internal customers and stakeholders in the development and
    implementation of entity-level cost measurements and ensure that
    effective collaboration is built into the process of developing cost
    measures at all other levels of the organization.

    [Cost Effectiveness]{.underline}\--All cost measurements devised by
    this system will be developed within the confines of the existing
    agency accounting system. Every effort will be made to draw
    cost-based data from existing management reporting systems, and to
    hold any new field-based data collection requirements to a minimum.

    [Integration into Key Management Systems]{.underline} \--The cost
    accounting system cannot function in isolation from other management
    systems that establish objectives and/or deal with results. The
    managerial cost accounting system will be integrated with other
    major management performance reporting systems and will form an
    effective link between and among major management control systems
    such as resource management planning, budgeting, and evaluation. The
    team will coordinate early and often with other teams seeking to
    improve these systems.

# Approach {#approach .unnumbered}

The initial mission-level strategic cost accounting objectives and
associated measures will be developed by a sub-set of the (agency\'s)
Executive Leadership Team working with the Managerial Cost Accounting
Team. A facilitator will lead the groups through the process of
identifying objectives and measures. At the completion of the exercise,
the group will critique the results and discuss how they might be
applied throughout the agency.

At a separate session, customers and stakeholders will be asked to
review and comment on the proposed cost accounting objectives and
measures and will also be asked to assist in designing the algorithms
necessary to capture costs.

It is important that those who will be held accountable for the results
be actively involved. Thus, the approach will be to have those being
held accountable for achieving results define what those cost-based
results should be. The team will supply the processes necessary to
develop cost objectives and measures. Facilitation will be provided
throughout the cost definition process as well as technical advice and
assistance in identifying and understanding cost accounting concepts,
terminology, and methodologies.

# Deliverables {#deliverables .unnumbered}

**The project team will deliver:**

-   [a process system]{.underline} for capturing costs. The process will
    be cyclical and will provide for systematic re-evaluation and
    refinement of cost-based objectives and measures.

-   [the means]{.underline} to perform cost/benefit analyses which
    report on the efficiency as well as the effectiveness with which
    management has allocated scarce budgetary resources to the
    performance of the agency\'s mission.

**[Timeframe]{.underline}**

FASAB recommends that the cost accounting standards specified in FASAS
Statement No. 4 become effective for fiscal periods beginning after
September 30, 1997.

# Contact

(Team leader\'s name, telephone/fax number(s), and e-mail address)

Cost Accounting Position Description

*(Following is a sample position description for a cost
accounting/management specialist at the GS-11/12/13 grade level. It
outlines duties and responsibilities; knowledge required by the*
*position; job complexity; and other rating factors.)*

Position Description

Cost Accounting/Management Specialist GS-11/12/13

Cost Accounting/Management Office/Division/Branch/Section/Team

NOTE: This is a career ladder position. This position description covers
each grade level in the career ladder. We understand that all incumbents
will progress through the intermediate levels (GS-11/12) before reaching
the full performance level of GS-13.

# Introduction

The incumbent serves as a cost accounting/management specialist for the
(Office/Division/Branch/Section/Team). The incumbent is responsible for
the plan, design, coordination, development, implementation, and
maintenance of all cost accounting/management related activities and any
other cost related activities that may come under the purview of the
(Office/Division/Branch/Section/Team), including policy and standards
related to cost accounting/management. Further responsibility includes
performing business process value analysis, utilizing system evaluation,
cost management, and cost accounting techniques.

# Duties and Responsibilities

At the full performance level, the incumbent functions as a cost
accounting/management specialist. The incumbent also:

-   formulates and recommends policies that affect the financial
    management components, e.g., management control, asset management,
    financial systems, and other financial priority programs within the
    agency.

-   plans, develops, and coordinates the agency's managerial cost
    accounting policy and guidance for financial management improvements
    as required by the Chief Financial Officers (CFO) Act, Federal
    Managers' Financial Integrity Act (FMFIA), Cash Management
    Improvement Act, Deficit Reduction Act, Prompt Payment Act, Debt
    Collection Act, Government Performance and Results Act (GPRA),
    Government Management Reform Act (GMRA), Federal Acquisition
    Streamlining Act (FASA), and OMB Circulars related to these Acts.
    This includes development of criteria and procedures for assessing
    the effectiveness and efficiency of the organization's financial
    management systems.

-   coordinates and assists in planning business process value analysis,
    activity-based processes, product costing, work measurement studies,
    and surveys that cross organizational lines and involve the
    interrelationship of work processes in several operating segments;
    performs analyses of operations to evaluate efficiency; observes
    actual work flow and processes; and provides technical advice and
    support to solve complex problems in assigned functional areas.

-   coordinates and participates with central guidance agencies in the
    extremely complex process of implementing cost systems.

-   recommends new or modified managerial cost accounting policies and
    procedures.

-   seeks and defines improvements for cost systems that will increase
    the efficiency and effectiveness of the agency.

-   develops procedures for monitoring, coordinating, and facilitating
    the implementation of governmentwide programs, objectives, policies,
    standards, and systems in assigned areas of responsibility.

-   instructs and assists employees in the application of business
    process value analysis, work-flow analysis, activity analysis, cycle
    time analysis, financial analysis, root cause identification,
    improvement opportunity analysis, performance/process measure
    analysis, and activity-based costing.

-   provides leadership as a change agent by marketing core
    organizational financial management systems, continuous business
    improvements, and cost accounting/management concepts as building
    blocks for organizational changes.

-   reviews new cost accounting regulations issued by the General
    Accounting Office (GAO), OMB, and the Department of the Treasury,
    and provides comments to the issuing authority.

-   researches, analyzes, interprets, and provides technical advice on
    new and pending legislation, regulations, GAO, OMB, and the
    Department of the Treasury guidelines and requirements.

-   provides leadership in the formulation, coordination, guidance, and
    implementation of cost accounting policies, standards, and/or
    systems.

-   provides liaison and coordinates with other organizations and the
    agency on matters related to managerial cost accounting.

-   conducts orientation or training and prepares supplementary
    information that is necessary to facilitate implementation of the
    regulations in the agency.

-   develops or revises user manuals, handbooks, and training materials
    relating to cost accounting/management techniques to insure
    effective implementation of programs and systems being
    designed/modified.

-   prepares responses to requests for cost accounting/management
    information from the Office of the Chief Financial Officer or other
    internal and external sources.

-   provides leadership in the conduct of reviews, analyses, and studies
    of obligations and revenue in user fee programs, and recommends
    corrective action when programs deviate from full cost recovery.

-   assists procurement officials in selecting contractors by reviewing
    and evaluating proposals. Reviews work submitted by contractor to
    ensure that project objectives are completed in a timely manner.
    Keeps supervisors/procurement officials informed of progress and
    brings significant problems to their attention.

-   performs other duties as assigned.

# Factors {#factors .unnumbered}

#### Factor 1 - Knowledge Required by the Position

The position requires the following knowledge, skills, abilities, and
other characteristics:

-   professional knowledge of the federal statues and governmentwide
    policies, rules and regulations, theories and concepts, principles
    and standards, processes, and precedent-making decisions affecting
    managerial cost accounting.

-   comprehensive professional knowledge of the principles, standards,
    practices, concepts, rules, regulations, policies, theories, and
    procedures related to managerial cost accounting, including in-depth
    knowledge of financial management principles as applied to the
    federal government; and accounting principles, standards, and
    related requirements.

-   comprehensive knowledge of cost accounting theories, principles, and
    standards and the ability to apply knowledge to establishing and
    managing new approaches in applications of cost accounting
    techniques.

-   general knowledge of the organizational structure of federal
    departments, agencies, bureaus, and offices; their programs and
    administrations.

-   expert knowledge of research and analytical techniques, continuous
    business improvement and business process value analysis concepts,
    objectives, and methods for assisting and training personnel in
    these activities.

-   ability to accommodate/integrate rapid and unanticipated changes in
    programs, policies, legislative requirements, and regulations
    promulgated by Congress and other government agencies.

-   comprehensive professional knowledge and skills in communication and
    public relations techniques to represent and serve as principal
    spokesperson for areas of responsibility with agency/bureau/office
    heads, other federal government agencies, and the private sector.

-   ability to effectively present and discuss financial and operational
    information, issues, and proposals and to engage in negotiations
    regarding the cost of operations and ways to improve operational
    efficiency and effectiveness.

-   ability to articulate policies, regulations, and procedures related
    to cost accounting to ensure that views of the organization are
    fully considered in any governmentwide efforts to establish changes,
    or eliminate such policies, regulations, and procedures. Many
    important decisions with respect to policy and strategy must be made
    at the incumbent\'s initiative under intense pressures, such as
    those prevailing during high-level meetings with top officials of
    the agency.

-   comprehensive professional knowledge and ability to plan,
    coordinate, and direct projects to ensure efficient conduct of
    managerial cost accounting programs.

-   expert professional knowledge of accounting, program analyses, and
    management techniques, concepts, and principles; ability and
    experience in planning, organizing, leading, controlling, and
    evaluating managerial cost accounting programs.

-   excellent oral and written communication skills that are necessary
    to translate and present financial and technical findings in a clear
    and concise manner, using meaningful terminology to both financial
    and non-financial, program and non-program, and technical and
    non-technical personnel at all levels of the organization.

-   knowledge of ADP equipment (PC, micro, mini, and mainframe) and
    software packages such as electronic spreadsheets and graphical
    presentation packages, to capture, restructure, and present data,
    etc.

-   ability to identify problems, generate methods of improving
    operations, and ascertain the financial and operational implications
    of proposed improvement opportunities.

-   ability to consider the various components of developing,
    implementing, and maintaining a core financial management system;
    generate potential solutions for problems; and communicate the
    recommendations clearly and precisely.

-   ability to gather, assemble, interrelate, and analyze raw data,
    originating from financial and workload measurement systems and draw
    conclusions.

-   ability to develop and conduct formal training classes on the use of
    financial and accounting systems and interpretation of financial and
    operational data, as well as various computer software tools.

-   ability to function independently as a specialist and as a member of
    the staff/project team.

**Factor 2 - Supervisory Controls (For supervisory position only.)**

The incumbent works under the general administrative and broad policy
guidance of the supervisor(s). At developmental levels, supervision will
range from close to intermediate. At the full performance level, the
incumbent will work independently on activities/projects for which
methods are well established. The supervisor(s) will make assignments in
terms of broadly defined missions, functional goals, and objectives.

At the full performance level, the incumbent is responsible for carrying
out established program priorities, analyzing resource needs, and
ensuring fulfillment of courses of action to achieve goals. The
supervisor(s) is advised of controversial issues and matters having
broad programmatic impact. The incumbent is expected to exercise
initiative and judgment in solving day-to-day problems. The incumbent
has full authority to make important decisions on matters relating to
assigned functional areas. Guidance from the supervisor(s) comes in the
form of policy objectives.

The incumbent assists in planning work assignments, determining the
nature and extent of coordination needed, and advises the supervisor or
management of progress and/or controversial issues.

Completed work is technically authoritative and accepted without
significant change.

Review by the supervisor(s) is concentrated on the accomplishment of
program/project objectives.

## Factor 3 - Guidelines

At the full performance level, the incumbent will use judgment to select
and apply information from a variety of sources. The incumbent works
under broad policy guidance, applicable statutes, agency regulations,
and existing general operating standards. Guidelines include laws,
rules, standards, requirements, and directives of Congress, the
President, OMB, GAO, GSA, FASAB, JFMIP, the Department of the Treasury
(hereafter referred to as Treasury), and other agencies of the federal
government. Other sources of guidelines include various internal
management and/or operational documents, handbooks, instructions,
directives, and other nationally recognized cost accounting and
management techniques.

Broad judgment and considerable ingenuity are required to interpret
existing guidelines, and prepare policies and procedures not previously
established for financial management activities.

Creativity is required to develop guidelines and policies for the
diverse needs of an agency.

## Factor 4 - Complexity

At the full performance level, assignments are extremely complex and
require extensive professional knowledge, skills, and abilities in the
areas of assigned functional responsibility (including accounting,
budgeting, and financial systems). A significant variety of tasks,
methods, functions, projects, and programs is required to successfully
design, develop, and implement the agency\'s expanding management
controls, asset management, and financial systems programs. The
incumbent is responsible for planning and analyzing a wide range of
activities and for recommending changes and improvements by various
functional areas within the organization. Exceptionally close
coordination and open lines of communication with agency staff spanning
a wide range of programs must be continually maintained.

Assignments require performing a broad range of management duties
involving program administration, development of unique policies and
guidelines, evaluating program effectiveness, developing new and revised
systems and techniques, and providing technical expertise to a diverse
population of federal and non-federal officials with different and often
conflicting viewpoints.

The incumbent provides innovative and creative solutions to highly
complicated technical managerial issues. Initiative, originality, and
sound judgment are required. The incumbent must formulate and recommend
far-reaching proposals, many of which have no precedent. Policies are
critical in their implications and are of major importance. Work is
often performed under tight deadlines and stressful conditions.

### Factor 5 - Scope and Effect

At the full performance level, the work will affect the quality and cost
of financial management systems serving the organization. It involves
planning, organizing, leading, controlling, analyzing, and evaluating
the overall effectiveness, economy, and efficiency of the agency's
programs in assigned functional areas to assure that they respond to the
organization's needs, and comply with the policies of national and
central guidance agencies (OMB, GAO, GSA, Treasury, OIG, FASAB, JFMIP,
and Congress) on subjects related to assigned cost accounting/management
responsibilities.

The assignments performed by the incumbent are essential to the mission,
objectives, and programs of the agency. The work has a continuing and
long-term effect on program activities, cost of operations, and morale
of employees. They will increase effectiveness and efficiency of
financial management systems, reduce costs, and increase productivity.

## Factor 6 - Personal Contacts

At each of the three grade levels, contacts are made with employees at
all levels of the organization. At the full performance level, personal
contacts are made with a wide range of high-level policy officials and
financial managers inside and outside the government. Contacts include
Assistant Secretaries, agency heads, private contractors, and
staff-level officials of OMB, GAO, GSA, Treasury, FASAB, JFMIP, and OIG.

**Factor 7 - Purpose of Contacts**

At all grade levels, the purpose of the contacts is to give or exchange
information; gather facts; define, explore, and resolve problems;
provide services; motivate or influence people; negotiate for approval
of recommendations; or justify, defend, or settle highly significant,
controversial, and often very sensitive issues, such as realignment of
basic policies. Typically, those contacted have diverse viewpoints or
opinions concerning significant policies, procedures, practices,
precedents, and objectives of assigned responsibilities. Extensive
negotiations are often required to achieve a mutually satisfactory
conclusion. In some instances, the incumbent deals with people who,
because of different viewpoints, goals, and/or objectives, are
skeptical, uncooperative, and unreceptive.

## Factor 8 - Physical Demands

At all grade levels, the work is typical \"office\" work, generally
involving considerable desk time with attendant walking, bending, and
carrying light items. There are no special physical demands. Changes in
work priorities and deadlines produce situations that can result in a
great deal of mental stress for the incumbent.

## Factor 9 - Work Environment

The work takes place in a typical office setting. Travel to other
offices is required.

Bibliography of Costing Literature

**[Standards and Principles]{.underline}**

Cost Accounting Standards Board, \"Statement of Objectives, Policies,
and Concepts\", [Cost]{.underline} [Accounting Standards
Guide]{.underline}, July 1992.

[Federal Financial Management Improvement Act of 1996]{.underline}, P.L.
(104-208), Sept. 1996.

General Accounting Office, [Survey of Cost Accounting Practices at
Selected Agencies]{.underline}, GAO/AFMD 90-17, Feb. 1990.

[Government Performance and Results Act of 1993]{.underline}, 31 USC
1101-1115, P.L. 103-62, Aug. 1993.

Joint Financial Management Improvement Program, [Exposure Draft: Core
Financial System]{.underline} [Requirements]{.underline}, FFMSR-1, Dec.
1993.

National Association of Accountants, [Statements on Management
Accounting]{.underline}, Englewood Cliffs, New Jersey: Prentice-Hall,
1990.

National Association of Accountants, [Supplement 1: Statements on
Management Accounting]{.underline}, Englewood Cliffs, New Jersey:
Prentice-Hall, 1990.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 1:]{.underline} [Accounting for Selected Assets
and Liabilities]{.underline}, March, 1993.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 2:]{.underline} [Accounting for Direct Loan
Guarantees]{.underline}, July, 1993.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 3:]{.underline} [Accounting for Inventory and
Related Property]{.underline}, July 1993.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 4:]{.underline} [Managerial Cost Accounting
Concepts and Standards for the Federal Government,]{.underline} July
1995.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 5:]{.underline} [Accounting for Liabilities of
the Federal Government]{.underline}, Sept. 1995.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 6:]{.underline} [Accounting for Property, Plant
and Equipment]{.underline}, Nov. 1995.

Office of Management and Budget, [Statement of Federal Financial
Accounting Standards No. 7:]{.underline} [Accounting for Revenue and
Other Financing Sources and Concepts for Reconciling]{.underline}
[Budgetary and Financial Accounting]{.underline}, May 1996.

Office of Management and Budget, [Statement of Federal Financial
Accounting Concepts No. 1:]{.underline} [Objectives of Federal Financial
Reporting]{.underline}, Sept. 1993.

Office of Management and Budget, [Statement of Federal Financial
Accounting Concepts No. 2:]{.underline} [Entity and
Display]{.underline}, June 1995.

Office of Management and Budget, [Circular A-25: User
Charges]{.underline}, July 1993.

**[Handbooks]{.underline}**

Ernst & Young, [The Ernst & Young Guide to Total Cost
Management]{.underline}, New York: John Wiley & Son, 1992.

Kaplan, Robert S., [Advanced Management Accounting]{.underline},
Englewood Cliffs, New Jersey: Prentice-Hall, 1982.

Keller, Donald E., James Bulloch, and Robert L. Shulties, eds.,
[Management Accountants]{.underline} [Handbook]{.underline}, 4th ed.,
New York: John Wiley & Sons, 1992.

**[Cost Accounting Systems]{.underline}**

Bernheim, Richard C., "The Right Way to Design a Cost Accounting
System", [Management]{.underline} [Accounting]{.underline}, Sept. 1983,
pp. 63-65.

Cooper, Robin, and Robert S. Kaplan, [The Design of Cost Management
Systems]{.underline}, Englewood Cliffs, New Jersey: Prentice-Hall, 1991.

Gauntt, James E., and Grover L. Porter, eds., "Management Information
Systems", [Management]{.underline} [Accounting]{.underline}, April 1985,
pp. 74.

Grady, Michael W., "Is Your Cost Management System Meeting Your Needs?"
[Journal of Cost]{.underline} [Management]{.underline}, Summer 1988, pp.
11-15.

Kaplan, Robert S., \"One Cost System Isn\'t Enough\", [Harvard Business
Review]{.underline}, Jan.-Feb. 1988, pp. 61-66.

Sourwine, Darrel A., \"Does Your System Need Repair?\", [Management
Accounting]{.underline}, Feb. 1989, pp. 32-36.

**[Cost Allocation]{.underline}**

Blanchard, Garth A., and Chee W. Chow, "Allocating Indirect Costs for
Improved Management Performance", [Management Accounting]{.underline},
March 1983, pp. 38-41.

Bost, Patricia, "Do Cost Accounting Standards Fill a Gap in Cost
Allocation?", [Management]{.underline} [Accounting]{.underline}, Nov.
1986, pp. 34-36.

Brunton, Nancy M., "Evaluation of Overhead Allocations", [Management
Accounting]{.underline}, July 1988, pp. 22-26.

Cardullo, J. Patrick, and Richard A. Moellenberndt, \"The Cost
Allocation Problem in a Telecommunications Company\", [Management
Accounting]{.underline}, July, 1987, pp. 22-26.

Carman-Stone, Marie Sandra, \"Unabsorbed Overhead: What To Do When
Contracts are Canceled\", [Management Accounting]{.underline}, April
1987, pp. 55-57.

Cook, Ian, and Angela M. Burnett and Paul N. Gordon, \"CMP and Managing
Indirect Costs in the Eighties\", [Journal of Cost
Management]{.underline}, Spring 1988, pp. 18-28.

Cornick, Michael, William Cooper, and Susan B. Wilson, \"How Do
Companies Analyze Overhead?", [Management Accounting]{.underline}, April
1988, pp. 41-43.

Johnson, Douglas, Steven Kaplan, and Bill B. Hook, \"Looking for Mr.
Overhead: An Expanded Role for Management Accountants\", [Management
Accounting]{.underline}, Nov. 1983, pp. 65-68.

Schwarzbach, Henry R., \"The Impact of Automation on Accounting for
Indirect Costs," [Management Accounting]{.underline}, Dec. 1985, pp.
45-50.

**[Activity-Based Costing]{.underline}**

Anderson, Bridget M., \"Using Activity-Based Costing for Efficiency and
Quality,\" [Government]{.underline} [Finance Review]{.underline}, June
1993, pp. 7-9.

Brimson, James A., [Activity Accounting]{.underline}, New York: John
Wiley & Sons, Inc. 1991.

Brimson, James A. and John Antos, [Activity-Based
Management]{.underline}, New York: John Wiley & Sons, Inc. 1994.

Cooper, Robin and Robert S. Kaplan, \"Activity-Based Systems: Measuring
the Costs of Resource Usage", [Accounting Horizons]{.underline}, Sept.
1992, pp. 1-13.

Cooper, Robin and Robert S. Kaplan, Lawrence Maisel, Eileen Morrissey,
and Ronald Oehm, [Implementing Activity-Based Cost
Management]{.underline}, Montvale, NJ: Institute of Management
Accountants, 1992.

Harr, David J., \"How Activity Accounting Works in Government\",
[Government Accountants]{.underline}, Winter 1992, pp. 15-24.

Kaplan, Robert S., \"In Defense of Activity-Based Cost Management\",
[Management Accounting]{.underline}, Nov. 1992, pp. 58-63.

Keohoe, Joseph, William Dodson, Robert Reeve, and Gustav Plato,
[Activity-Based Management]{.underline} [in Government]{.underline},
Coopers & Lybrand, 1995.

Keys, David E., \"Tracing Costs in the Three Stages of Activity-Based
Management", [Journal of]{.underline} [Cost Management]{.underline},
Winter 1994, pp. 30-37.

Rotch, William, \"Activity-Based Costing in Service Industries", [Cost
Management]{.underline}, Summer 1990, pp. 4-14.

Staubus, George J., [Activity Costing for Decisions]{.underline}, New
York: Garland Publishing, Inc. 1988.

**[Other]{.underline}**

Anthony, Robert N., and David W. Young, [Management Control in Nonprofit
Organizations]{.underline} 3rd ed., Homewood, IL: Richard D. Irwin,
1984.

Brinker, Barry J. ed., [Emerging Practices in Cost
Management]{.underline}, Boston: Warren, Gorham & Lamont, 1992.

DeBruine, Marinus, and Parvezz R. Sopariwala, \"The Use of Practical
Capacity for Better Management Decisions", [Journal of Cost
Management]{.underline}, Spring 1994, pp. 25-31.

Harr, David J. and James T. Godfrey, \"The Total Unit Cost Approach to
Government Financial Management\", [Government Accountants]{.underline},
Winter 1992, pp. 15-24.

Horngren, Charles T., and George Foster, [Cost Accounting: A Managerial
Emphasis]{.underline}. 7th ed., Englewood Cliffs, New Jersey:
Prentice-Hall, 1991.

Shank, John K. and Vijay Govindarajan, \"Transaction-Based Costing for
the Complex Product Line: A Field Study\", [Journal of Cost
Management]{.underline}, Summer 1988, pp. 31-38.

Example Statements of Work

Attached are three Statements of Work related to implementing cost
accounting concepts, standards, and systems in federal agencies. The
first relates to reviewing and/or developing a cost assignment plan.
Many agencies have some sort of cost accounting for fees, services, and
reimbursable agreements already in place. From time to time, each agency
looks at how these costs are accumulated and calculated for reporting
and pricing purposes. The first Statement of Work (SOW) provides an
outline of what an agency might prepare in order to have its current
cost accounting plan reviewed or a new cost assignment plan developed.

The second SOW relates to conducting process value analysis and cost
accounting development of pilot products and processes. Several agencies
have taken a pilot approach to implementing managerial cost accounting
with current reengineering, process analysis, and Total Quality
Management (TQM) initiatives. This SOW attempts to blend CFO-initiated
cost accounting implementation with other program improvement
initiatives already or soon to be started in an agency. The goal is to
support and help integrate program [and]{.underline} financial
management objectives.

The third SOW shows the development and implementation of an entity-wide
managerial cost accounting system. While the cost of such an undertaking
might be prohibitive in one procurement, some smaller entities should
consider this a sound option. As stated in the SOW, this option promotes
FASAB and JFMIP requirements while exercising the appropriate judgment
in meeting specific agency mandated needs. Predictably, this SOW will
include significant involvement from program, financial, and information
systems personnel during the delivery of contractual services.

In summary, all three Statements of Work can and should be blended
together as appropriate to meet the specific needs of an entity. Each
federal agency's approach to implementing managerial cost accounting
will and should vary. One of the most practical approaches includes
blending the SOW on the Cost Assignment Plan with the pilot Process
Value Analysis to form the foundation for entity-wide implementation
(the third SOW).

The attached SOWs fall within the scope of GSA's TQM contract
GS-22F-0000. This procurement vehicle will help incorporate managerial
cost accounting initiatives with other agency initiatives and provide a
reasonably ready medium for acquiring contractor services.

*(NOTE: As your needs vary, so will your approach to implementing
managerial cost accounting. It is recommended that you review this
Appendix in its entirety and make appropriate modifications for your
specific needs. Some duplication may exist between this Appendix and
other chapter/appendices within this Guide. This occurred because the
content of this Appendix is intended to be an example of how you might
develop a Statement of Work for your agency.)*

**Statement of Work**

# Background

Presently, Department X provides administrative support to various U.S.
Government entities. The current system used to account for the costs of
these services is the Administrative Financial System (AFS). AFS was
introduced in 1977 as a general ledger system to provide overall
financial management services and help identify costs incurred by
Department X for providing these administrative support services. AFS
data has been criticized by personnel inside and outside Department X
because of the complexity related to using the system, untimely
management reports, and what is perceived as inaccurate cost and pricing
data. Moreover, under AFS, the operating units within Department X have
borne disproportionate shares of the cost of delivering the
administrative support services to Department X's customers.
Additionally, as part of NPR, the President's Management Council (PMC)
and FASAB recommended that the concept of a full cost recovery system be
implemented to streamline and reduce the overall government cost of
providing administrative support services.

As a result, Department X is seeking to have its overall cost assignment
plan reviewed. While the Department feels confident of several cost
assignments, it recognizes the need to develop more precise cost
assignment plans for several key production areas. This SOW is intended
to review and improve Department X's cost assignment plan, through an
inter-entity effort, to improve the delivery of administrative support
services by:

-   providing all entities the opportunity to influence support activity
    decisions in pursuit of higher efficiency and greater effectiveness;

-   identifying and acting upon opportunities for cost management by
    bringing more competition and market pricing into service provision;

-   providing an equitable distribution of costs among units within the
    Department with a simple, effective, transparent, and rational
    costing process;

-   providing managers of all entities more accessible and transparent
    information about the cost of all support operations, to better
    inform them about their priorities and choices; and

-   defining performance standards for support services.

    Department X uses all three of the following cost assignment
    methods. The review of the Department's assignment plan must include
    an assessment of how and if our use of the methods is appropriate.
    Department X's goal is not to expend significant resources to
    develop an assignment plan that is so precise it accounts for
    pencils and paper, while the cost of developing such a plan exceeds
    the value to the Department's managers.

    Purpose and Objectives

    The contractor shall review all components of Department X that
    assist in providing administrative services. Under our current cost
    recovery system, these costs come from our operating/program units
    only. No cost is currently included for preparing and collecting
    bills. All of our costs are funded entirely by the budget for
    Department X. The major categories of costs are: (1) building
    operating expenses for government owned/long-term leased properties;

    \(2\) local guard programs (non-residential); (3) community liaison
    offices; and (4) core administrative support, e.g., photocopying.
    The Department is considering offering other support services to our
    customers.

# Contract Requirements {#contract-requirements .unnumbered}

The contractor will survey our three major customers and all internal
components as to the level of satisfaction associated with AFS-related
costing and management data. The survey should determine if our cost
assignment system is easy to use and equitable, and whether it provides
information to support fee for services charges to our customers.

The contract requirements are:

-   review the concepts underlying and basis for the AFS cost accounting
    system and provide a report covering the following:

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-   does AFS provide the cost information to support the bill given to
    customers for use in the budget process?;

-   does AFS provide a reasonable accumulation of costs from our
    internal operating units?; and

-   does the AFS cost assignment plan accurately distribute costs from
    the Department's activities and processes to our products?;

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```
-   develop any recommended changes to the AFS system and the cost
    assignment model;

-   validate the costing for our three major customers' Departments X,
    Y, and Z; and

-   compare the Department's cost assignment methodology to FASAB and
    related JFMIP requirements, and report areas of compliance and
    non-compliance.

# Deliverables {#deliverables-1 .unnumbered}

The following is a proposed schedule for the consecutive completion of
the tasks set forth within

this Statement of Work. \"X\" denotes the date of the kick-off meeting.
All numbers refer to

business days. The Department has 5 business days to review all
"Drafts", the contractor has 3

business days thereafter to incorporate the Department's comments into
"Final" deliverables.

The kick-off meeting must be held within 15 business days of the
contract award date.

[Date]{.underline} [Deliverable Product/Milestone]{.underline} [Task
\#]{.underline} [Deliverable \#]{.underline}

x+20 Draft Report on A A.1 1

x+28 Final Report on A A.1 2

x+30 Draft Report on B B.1 3

x+38 Final Report on B B.1 4

x+25 Draft Report on C C.1 5

x+33 Final Report on C C.1 6

x+35 Draft Report on D D.1 7

x+42 Final Report on D D.1 8

## [Expertise]{.underline} {#expertise .unnumbered}

The contractor shall provide established, current technical expertise in
cost assignment and accounting in similar large, labor intensive,
service-oriented environments. Contractor representatives must have
experience in the federal government's Standard General Ledger, FASAB's
Managerial Cost Accounting Concepts and Standards, and JFMIP's *System
Requirements for Managerial Cost Accounting*.

# Work Locations {#work-locations .unnumbered}

The primary on-site location is the departmental headquarters in
Washington, DC. It is anticipated the contractor will provide at least
two full-time on-site analysts during the length of the project.

# Travel {#travel .unnumbered}

No travel is anticipated.

**[Technical Contact]{.underline}**

Mr. X

\(202\) 555-5555

Chief, Office of Cost Management

Business Support Office

First Street, NW

Washington, DC 00000

**Statement of Work**

**(Process Value Analysis)**

# Background {#background-2 .unnumbered}

Department Y launched a quality program in 1986 following a difficult
1984-5 production season and the acknowledged erosion of external
confidence and internal morale. The Commissioner assembled a Quality
Council for research purposes that same year. In 1987, full employee
involvement was sought through coordination with the National Employees
Union (NEU). The Joint Quality Improvement Process (JQIP) emerged from
this collaboration. In the following years, Joint Quality Councils with
the power to form JQIP Teams were established in each of our 80 field
offices and each functional area in the National Office. Successful JQIP
Teams in the ensuing years have focused on areas ranging from production
processing in service centers, to enforcement in the district, to
personnel systems in headquarters. JQIP Team efforts have resulted in
millions of dollars in cost savings and increased revenue.

Despite the numerous successes of the original quality system, a need
was identified by senior management of the Department to revise and
reenvision the approach to quality. Greater emphasis was needed on
cross-functional efforts and continuous improvement. As a component of
the overall Total Quality Management implementation effort at the
Department, and in preparation of establishing an environment of
[continuous]{.underline} quality planning, control, and business
improvement, the CFO is facilitating the process analysis of *core
business systems* in the field offices and developing decision-support
business and costing information.

This element of the new quality initiative (to include all business
systems identified from the customer's perspective) is estimated to
require several years for full completion. This SOW is for contractor
assistance in the implementation of process value analysis at the
Baltimore District Office site. This analysis is being coordinated with
the overall quality and core business process

**[Purpose and Objectives]{.underline}**

The purpose of this Statement of Work is to obtain technical expertise
and on-the-job training in the continuous development and implementation
of a service quality initiative. Particularly, this SOW requests
contractor assistance in providing the Baltimore District Office with
business process value analyses of a portion of the core business
systems. This contract, as with core business processes as a whole, is
intended to develop a better focus within the Department on customer
values.

It is anticipated that the contractor and Department personnel will work
as a team in completing the process value analysis. This working
relationship will provide the Department on-the-job process value
analysis training while specifically completing a quality initiative
that directly supports core business processes and the implementation of
total quality. As described in the following section, the contractor
deliverables and tasks have been outlined to better meet Departmental
needs in conveying contractor knowledge to the Baltimore Office. At the
conclusion of this contract, the Baltimore District Office will be
better able to complete quality initiatives like process value analysis.

This contract will include teaching the team assigned to the Baltimore
project how to complete process definitions, block diagrams, activity
analyses, system architecture, activity-based costing, process costing
rates, identification of District products, and product costing. Through
these tasks, the team will gain insight on how to identify departmental
products. Product identification is a fundamental requirement for a
total quality organization, and the Department continues to strive to
develop a product catalog.

This contract will provide Baltimore Office managers and staff with a
better understanding of total quality management concepts and their
role, as employees, in quality improvement. A commitment to continuous
business improvement will be further cemented, while management actions
are identified to continue movement toward quality goals.

# Deliverables {#deliverables-2 .unnumbered}

The following deliverable products are directly related to this process
value analysis of the Department's total quality implementation. The
purpose of these deliverables is to provide the contractor and the
Department a forum that promotes project completion while simultaneously
providing on-the-job training for the Department's process analysis
team.

All written deliverable products will be submitted in draft and final
versions. The Department shall review all deliverables in accordance
with the following narrative and attached schedule. If a deliverable is
not accepted, the contracting office's technical representative will
notify the contractor in writing, within 10 business days, and provide
an explanation of any deficiencies. The contractor will have 5 business
days to resubmit the deliverable and still meet the due dates in the
attached schedule.

The Department has up to 5 business days, after the date of acceptance,
to provide the contractor comments to be incorporated in the final
deliverable. The Department will canvass other locations to get comments
on the draft deliverables, ultimately distributing final deliverables
Department-wide.

# Business Process Value Analyses {#business-process-value-analyses .unnumbered}

The contractor shall provide detailed business process analyses and
costing of the business processes within the Department at the Baltimore
District Office. These analyses will assist the Department in
identifying District products and will recommend business improvement
opportunities with their associated costs. In addition to providing the
deliverables, the contractor will ensure the team's ability to complete
future process value analyses with minimal outside support. Below is the
outline of the business processes.

-   **Develop Process Information Worksheets** - These worksheets will
    state process outputs, customers, high-level activities, impact, and
    sources. The draft process worksheets report will be reviewed by the
    Department within 5 business days after acceptance, at which time
    Department comments will be provided for inclusion in the final
    deliverable.

-   **Prepare Block Process Diagrams and Flowcharts -** These diagrams
    and flowcharts must accurately map activities within the process and
    require interviewing District Office personnel, analyzing
    Departmental organizational/informational material, and validating
    these results with process walk-throughs. The draft block process
    diagram and flowchart reports will be reviewed by the Department
    within 5 business days after acceptance, at which time Departmental
    comments will be provided for inclusion in the final deliverable.

-   **Perform Activity, Value, Cycle Time, Cost Driver and Improvement
    Opportunity Analyses** - These analyses include coordination with
    Department-wide efforts in the core business processes approach,
    performance measurement, activity-based costing, and cost of quality
    methodologies. The activity value analyses include identifying value
    added and non-value-added activities, providing recommendations for
    eliminating/minimizing non-value added cost drivers, and optimizing
    value added cost drivers. These analyses will include a matrix
    associating drivers, non-value added tasks, effects, improvement
    opportunities and their costs, and measures. Improvement
    opportunities will be identified in the short-term (implementation
    within 12 months) and long-term (longer than 12 months) categories.
    The draft activity analysis and improvement opportunity reports will
    be reviewed by the Department within 5 business days after
    acceptance, at which time Departmental comments will be provided for
    inclusion in the final deliverable.

-   **Develop Activity-Based Costing Architecture -** A cost flow paper
    and personal computer (PC) based model is required as well as
    identification of activity cost pools. General ledger analysis must
    be performed to gather source data and consolidate/condition these
    accounts. The contractor will complete a high-level software
    comparison and evaluation and recommend cost accounting software to
    best fit the needs of the Department. It is expected that contractor
    owned software will be used to complete this project, while the
    Department pursues software acquisition. The draft costing
    architecture report will be reviewed by the Department within 5 days
    after acceptance, at which time Departmental comments will be
    provided for inclusion in the final deliverable.

-   **Complete Activity-Based Costing Rates** - The contractor will
    identify activity drivers and availability of data on these drivers;
    the driver data will then be collected and activity-based costing
    relationships must be developed. The draft activity-based costing
    rates will be reviewed by the Department within 5 business days
    after acceptance, at which time Departmental comments will be
    provided for inclusion in the final deliverable.

-   **Complete Product Costing** - The contractor will review the
    Department's core business process model, recommending appropriate
    changes, to identify activities and associated costs for selected
    products and related processes. Bills of activities will be created
    including itemized activities, related output measurements, cost per
    unit measure, and total activity-based costs, and will be
    coordinated with the above activity-based costing architecture. The
    draft costing will be reviewed by the Department within 5 business
    days after acceptance, at which time Departmental comments will be
    provided for inclusion in the final deliverable.

-   **Consolidate Final Products** - At the conclusion of the project,
    the contractor will provide the Department 30 hard copies of the
    consolidation of all final deliverables. Additionally, one
    electronic copy of each final deliverable is to be provided to the
    Department. The contractor will participate in the presentation of
    the final deliverables to Department executives and managers.

# Deliverable and Milestone Schedule

The following is a proposed schedule for the consecutive completion of
the tasks set forth within this SOW. \"X\" denotes the date of the
kick-off meeting. All numbers refer to business days. The kick-off
meeting must be held within 15 business days of the contract award date.

**Date** **Deliverable Product/Milestone** **Task** **Deliverable \#**

### *[Business Process]{.underline}*

x+20 Draft Process Worksheets Reports 1.1 1

x+35 Final Process Worksheets Reports 1.1 2

x+20 Draft Block Diagram Process & Flowchart Reports 2.1 3

x+35 Final Block Diagram Process & Flowchart Reports 2.1 4

x+35 Draft Activity Analysis Reports 3.1 5

x+50 Final Activity Analysis Reports 3.1 6

x+35 Draft Activity-Based Costing Architecture 4.1 7

x+50 Final Activity-Based Costing Architecture 4.1 8

x+40 Draft Activity-Based Costing Rates 5.1 9

x+55 Final Activity-Based Costing Rates 5.1 10

x+45 Draft Product Costings 6.1 11

x+60 Final Product Costings 6.1 12

x+60 Consolidated Final Products 7.1 13

# Expertise

The contractor shall provide established, current technical expertise in
conducting process analysis/activity-based costing systems in similar
large, labor intensive, department-oriented environments. Contractor
representatives must have over two years experience in hands-on
implementation of such analyses, including activity definitions; cycle
time definition and analysis; activity value definition and analysis;
cost driver definition and analysis; process improvement measurements;
improvement opportunities; identifying best practices; identifying cost
and process efficiencies; and general ledger conditioning.

The contractor is required to use the following software applications:
Word Perfect, Lotus 123, Microsoft Access, and ABC Flowcharter.

# Work Locations

The primary on-site location is the District Office in Baltimore,
Maryland.

# Travel

The project will entail extensive work in the Baltimore District Office
with local contractor personnel support to minimize travel costs.

# 

# Technical Contact

Mr. X

\(202\) 555-5555

Chief, Office of Cost Management

Business Support Office

First Street, NW

Washington, DC 00000

**Statement of Work**

**(Development and Implementation of Managerial Cost Accounting
System)**

# Background

The agency was created in 1986 to be a centralized provider of
administrative services for over 10,000 employees located at the three
Washington headquarters buildings. Services provided include
procurement, personnel management, worklife wellness, building
management, printing, graphics, library, learning and development,
security, space management, ADP systems development and information
technology operations, and computer center and telecommunications.

Staffing consists of about 320 people and funding is about \$115
million. Fund accounting is provided by another agency from Washington
using the Departmental Accounting and Financial Information System
(DAFIS), which is maintained in Oklahoma City. Most of the funding is
done under a business capital fund with an annual limited appropriation.
At the present time, some additional funding is provided through other
appropriations.

Cost accounting and billing for most of the services are done on a
simple assignment formula, and costs are totally recovered each month.
Detailed cost accounting records are, however, maintained for the
information technology operations. In addition, a very-simplified unit
pricing system is being used for printing.

# Purpose and Objectives

The scope of this SOW covers services that are required to identify
DAFIS improvements and off-the-shelf managerial cost accounting system
alternatives to satisfy the agency's requirements. The purpose of this
SOW is to a have the contractor review the agency's current cost
accounting practices, assignment, and ad hoc systems, and subsequently
develop an action plan for agencywide implementation of a managerial
cost accounting system. The objectives include complying with the
requirements of appropriate governing bodies and corresponding
regulations, e.g., FASAB, JFMIP, and OMB.

#  Specific Work Requirements

The agency was created as a self-financing business enterprise to
deliver support services on a fee-for-service basis. While there are
several service activities in the agency, only two now operate on a
fee-for-service basis. They are the computer center and printing. All
other services activities are billed to customers using a relatively
simple cost assignment formula.

The computer center has a standalone cost and billing system that
provides monthly billing detail to DAFIS for manual input. The in-house
printing operation maintains a unit pricing system, which also
interfaces with DAFIS. While DAFIS does have some cost accounting
capability, it is presently used by the agency solely for financial
accounting and billing purposes.

To satisfy its intended purpose, the agency must be accountable to its
customers. Charges

for services must be supportable, and should be allocated in a cost
effective manner while providing the appropriate level of cost
incentives for customers to use the services wisely. Accordingly, a
needs assessment and market survey need to be completed so that
managerial cost accounting alternatives can be fully examined before any
system investment decision is made. Ideally, the system decided will be
implemented as close to October 1, 199X as possible.

The tasks to be completed under this contract are summarized in the
following paragraphs.

**Task 1-**-Survey and document the existing systems used to accumulate
and assign costs and prepare bills. This is to be a general
familiarization survey of the computer center and printing \"systems.\"
It is not intended to be a detailed and formal systems documentation
effort. The contractor is expected to provide a briefing to the
Contracting Officer\'s Technical Representative (COTR) on the results of
this survey.

**Task 2-**-Conduct managerial cost accounting needs assessment. Sources
to be contacted include:

## [Need]{.underline} [Contact]{.underline}

Managerial ADP Agency Heads of \"Lines of Business\"

Systems The Office of Systems

Development and Information

Technology Operations

Executive Agency Director

Decision-making

Board of Directors Secretary's Management Council

Oversight

Generally Accepted Department's Chief Financial Officer

Cost Accounting

Principals

Billing Customers/Clients to include program,

budget and finance officers

Interface with the Administration

Existing Agency

Financial Accounting

System

The contractor is not expected to do an extensive amount of research.
Material will have already been gathered by the COTR from the sources
noted above, and provided to the contractor. The contractor is expected
to add its own list of needs for a managerial cost accounting system
from JFMIP requirements as well other appropriate sources, and is
expected to prioritize the needs into those \"required\" and those
\"desired.\" This information is to be presented to the COTR in writing
along with any conditions and assumptions.

**Task 3-**-Review of all the organization's activities to determine how
they should be accounted for and billed. At issue is whether all
activities should be "fee-for-service" and fully supported with detailed
cost accounting, or only selected activities would warrant cost
accounting with the remainder billed on a simple assignment formula.
Extensive research and analysis are not required. The COTR will provide
information and recommendations already gathered from the agency's
customer organizations. The contractor shall report its recommendations
and conclusions in writing to the COTR.

**Task 4**\--Using the products generated in Tasks 1 through 3, the
contractor shall review the DAFIS cost accounting system to determine
whether it can satisfy all \"required\" needs. Each \"required\" and
\"desired\" need shall be matched against the DAFIS cost accounting
system to determine whether the system can satisfy the need. In all
instances where the contractor determines the need cannot be satisfied,
the contractor is requested to provide specific reasons. The contractor
is also asked to offer suggested alternatives to satisfying the agency's
requirements (still using DAFIS), including time and cost estimates.

Using the products generated in Tasks 1 through 3, the contractor shall
perform a general survey of other federal cost accounting systems and
off-the-shelf commercial systems. The contractor shall compare agency
needs (both required and desired) with the capabilities of the systems
selected for a representative market survey.

The contractor shall provide a report of its findings to the COTR. The
report shall contain the contractor\'s assessment of whether DAFIS will
satisfy each of the agency's managerial cost accounting needs,
\"required\" and \"desired.\" If the contractor considers DAFIS capable
or potentially capable, the contractor shall provide time and cost
estimates to incorporate the agency's managerial cost accounting within
DAFIS. The report shall also contain the results of the survey.
Alterative systems that can satisfy the agency's requirements shall be
presented along with cost (one-time and recurring) and time estimates.
No recommendations can be made for products or systems the contractor
owns or markets.

**Task 5-**-After the department decides on what managerial cost
accounting system to implement, the contractor will provide an
implementation plan and on-site support to manage implementation of the
system.

**[Deliverables and Schedule]{.underline}**

Required Tasks:

**Task 1\--**A briefing of the contractor\'s assessment of the present
means of accounting for and managing costs in the agency.

### Due Date: 1 week after award

**Task 2\--**A report listing detailed needs/requirements for a
managerial cost accounting system. These requirements will be arranged
in priority order under two categories\--required and desired.

### Due Date: 2 weeks after award

**Task 3\--**A list of all the agency's activities with the contractor's
cost accounting recommendations for each activity, specifically whether
the activity should be \"fee-for-service,\" a simple assignment,
detailed cost accounting, or some variation or combination of the above.

[Due Date: 2.5 weeks after award]{.underline}

**Task 4\--**A report of: 1 ) Capability of DAFIS to provide managerial
cost accounting for the agency; and 2) the results of the general market
survey. The report shall contain cost and time estimates for each cost
accounting alterative.

[Due Date: 8 weeks after award]{.underline}

**Task 5\--**If required, the contractor shall provide a detailed action
plan for full implementation of the selected system.

[Due Dates]{.underline}*:* Draft Implementation Plan*:* [2 weeks after
task award]{.underline}

Final Implementation Plan*:* [3 weeks after task award]{.underline}

Progress reports*:* [Weekly]{.underline}

**[Roles and Responsibilities]{.underline}**

**Business Support Office** \-- The COTR for this contract. This office
provides for the planning, budgeting, and resource management of
services and oversees the day-to-day financial management of the center.

**Lines of Business** \-- will identify operational management cost
accounting requirements. These offices are the actual providers of
operational services.

**Office of Systems Development and Office of Information Technology
Operations** \-- will identify ADP systems interface requirements for
the managerial cost accounting system.

**Administration, Office of Budget and Financial Management** \-- will
identify business process interface requirements with the existing
financial accounting and billing systems. This office now provides
financial accounting services to the agency.

**Secretary\'s Management Council** \-- provides executive departmental
oversight of the agency.

**Financial Management Council** \-- provides guidance and
recommendations on departmental financial and accounting systems.

# Expertise

All contractor professional staff must have extensive knowledge and
experience in managerial cost accounting, charge back, business process
analysis, and business systems implementation. The team leader must have
prior experience in conducting market surveys and implementing
off-the-shelf managerial cost accounting systems and the integration of
these systems with other corporate systems in a revolving fund
environment.

# Work Locations

Task performance shall be primarily at the Agency, First Street, NW,
Washington, DC 00000. No travel outside the Washington, DC, metropolitan
area is anticipated. The government will provide space and telephone for
one (1 ) person identified as the team leader and two team members. The
team leader must be resident at the agency for the duration of the
contract.

# Technical Contact

Mr. X

\(202\) 555-5555

Chief, Office of Cost Management

Business Support Office

First Street, NW

Washington, DC 00000

**User Needs Questionnaire**

*(The following user needs questionnaire was developed by the Internal
Revenue Service in its efforts to build a managerial cost accounting
system. The names of individuals and organizational units have been
deleted. It is provided here as an illustration of how a questionnaire
can be used to assess user needs for cost information. For more
discussion, please refer to Chapter 4, Assessing Current Environment.)*

**DEPARTMENT XYZ**

**WASHINGTON, D.C. 20224**

MEMORANDUM FOR: All Board Covered Executives

> Chief Counsel
>
> Regional Counsel
>
> Associate Chief Counsel

FROM: John Smith

SUBJECT: Managerial Cost Accounting System, \"User Needs Questionnaire\"

Enclosed is the cost management \"User Needs Questionnaire.\" We are
requesting your completion of this questionnaire. Additionally, we
encourage you to make a copy of the questionnaire and distribute it to
your managers for their simultaneous completion. All responses are
requested by March 20, 199x.

Your responses to the questionnaire are sought as a critical step in
developing an effective cost management system and are essential in
identifying the need for cost management information. Upon return of all
questionnaires from service-wide distribution, the results will be
tabulated, and a \"User Needs Report\" will be prepared this summer for
your distribution.

If you have any additional questions or comments, please do not hesitate
to contact xxx (names and phone numbers provided).

**[Introduction]{.underline}**

**The Assistant Commissioner (Finance)/Controller is requesting your
participation in an entity-wide survey of managers to determine user
needs for a managerial cost accounting system. We are taking a
\"teamwork\" approach toward developing this cost management system, and
as a manager and user of cost information, your input is extremely
important. The Financial Management Division in the Controller's
organization manages this cost project. Cost management is a key portion
of the current effort to implement improved financial management systems
in our organization. All responses to the attached questionnaire will be
used in developing the managerial cost accounting system. We are
distributing the questionnaire directly to board-covered executives and
counsel, requesting that copies of the questionnaire be given to
managers within your organization for their simultaneous completion.
Please return completed questionnaires to the address provided on the
following page by March 20, 199x.**

**[Objectives and Timetable]{.underline}**

The primary objectives of a managerial cost accounting system are to:
(1) gather financial and operational information that reflects the
performance of activities; and (2) supply management with additional
relevant information to plan, manage, control, and direct the activities
of our business. Traditional cost systems emphasize the *cost* part of
cost management; our objective is to focus on the *management* part. Our
purpose is to provide management with relevant information needed to
judge how well cost management efforts are working. Are we as an
institution improving processes?

Our short-term goal is to test a prototype cost management system in the
XYZ Regional Office by September 30, 199x. A second short-term goal is
to develop a similar prototype for district offices in 199y. The
ultimate goal is to start service-wide implementation of the managerial
cost accounting system during fiscal year 199z.

We have contracted the consulting team of (names of consulting company)
to assist in developing the managerial cost accounting system.
Controller staff and the consulting team will be conducting interviews
with a representative sample of the questionnaire respondents,
evaluating all responses, and then issuing a summary report. Managerial
cost information needs will be integrated with concepts employed by
comparable public and private sector organizations. A resulting cost
accounting methodology report will be issued in the summer of 199x. The
consulting team will provide cost accounting support and guidance as we
develop the XYZ Regional Office prototype. The resulting managerial cost
accounting system will be integrated with the new general ledger and
budget execution systems that are currently being installed by XYZ (name
of a consulting company). In fact, we plan to use that firm\'s cost
management module for our system.

**[Specific Instructions]{.underline}**

• Please complete the questionnaire from the perspective of your
immediate work group (the organizational unit you manage and the people
you supervise).

• We recommend previewing the questionnaire in its entirety before
responding to individual questions.

• Answers will be used only to assist in the development of a managerial
cost accounting system; they will not affect you or your work group.

• We are seeking responses from a large cross-functional representation
of managers; therefore please distribute questionnaires to your managers
(e.g., division/office/branch chiefs) for their independent and
simultaneous completion.

• Please answer all questions. If you have no opinion or relevant
experience on a particular question, please indicate the \"N/A\" or
\"Not Sure\" response.

Due Date: Friday, March 20, 199x

Mailing Instructions: Please complete the questionnaire as soon as
possible, but not later than 3/20/9x, and return in the envelope
provided to: XXX.

Questions/Comments: If you have questions concerning this questionnaire
or the cost management project, please contact xxxxx, or xxxxx (names
and phone numbers provided). As a final note, if you have remarks or
comments concerning particular questions, space has been provided at the
back of the questionnaire for this purpose.

[Thank you in advance for your assistance in completing this
questionnaire]{.underline}.

**[General Questions]{.underline}**

1.  What is your:

    [Name]{.underline} (OPTIONAL)

    [Title]{.underline}

    [Phone Number]{.underline} (OPTIONAL)

2.  What is your organizational level? Please check the appropriate box.
    [Note:]{.underline} If you are responding to these questions in the
    place of another (action position), please check acting position or
    level and respond in that capacity to the questionnaire.

**[National Level]{.underline}**

1\. \[ \] CIO, CFO, Assistant to the Commissioner, Assistant to the

Deputy Commissioner, Chief Inspector, AREO, Program Manager (TSM)

2\. \[ \] Chief Counsel, Deputy Chief Counsel, Associate Chief

Counsel, National Director of Appeals

3\. \[ \] Assistant Commissioner

4\. \[ \] Division, Program, or Computing Center Director

5\. \[ \] Branch or Office Chief

6\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**[Regional Level]{.underline}**

7\. \[ \] Regional Commissioner, Assistant Regional Commissioner,

Regional Inspector

8\. \[ \] Regional Counsel, Deputy Regional Counsel, Assistant

Regional Counsel, Regional Director of Appeals

9\. \[ \] Division Chief

10\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**[District or Service Center Level]{.underline}**

11\. \[ \] Service Center Director, Compliance Center Director

12\. \[ \] District Director

13\. \[ \] Division, Branch, or Office Chief

14\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

3.  Estimate the following costs [and]{.underline} percentages of your
    immediate work group:

Labor \$\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_%

Support \$\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_%

Not Sure \$\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_%

TOTAL \$\_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_100%

4.  How important is cost management to your performance evaluation?

    Not Somewhat Extremely

    Important Important Important N/A

    1 2 3 4 5 6 7 8

5.  Should cost management be important to your performance evaluation?

1\. \[ \] Yes

2\. \[ \] No

3\. \[ \] N/A

6.  Should cost management be important in the performance evaluation of
    people you supervise?

    1\. \[ \] Yes

    2\. \[ \] No

    3\. \[ \] N/A

7.  A managerial cost accounting system can accumulate cost data based
    on predetermined products for which a separate measurement of costs
    is desired. What do you consider to be the primary products,
    programs, projects, or services of your immediate work group?

    PRODUCTS:

    PROGRAMS:

    PROJECTS:

    SERVICES:

    OTHER:

8.  What percentage of the total work effort of your immediate work
    group is directed toward the following items?

    1\. Products \_\_\_\_\_\_\_\_\_\_%

    2\. Programs \_\_\_\_\_\_\_\_\_\_%

    3\. Projects \_\_\_\_\_\_\_\_\_\_%

    4\. Services \_\_\_\_\_\_\_\_\_\_%

    5\. Other \_\_\_\_\_\_\_\_\_\_%

    6\. Not Sure \_\_\_\_\_\_\_\_\_\_%

    TOTAL \_\_\_\_\_\_\_100%

9.  Does your immediate work group currently use any guidelines to
    identify its products, programs, projects, or services?

    1\. \[ \] Yes

    2\. \[ \] No

    3\. \[ \] N/A

    If yes, please list the primary guidelines that come to mind:

10. Activities are aggregations of tasks (whether performed by people or
    machines) to satisfy the needs of internal or external customers.
    Please list five to ten [core]{.underline} activities of your
    immediate work group:

    1\.

    2\.

    3\.

    4\.

    5\.

    6\.

    7\.

    8\.

    9\.

    10\.

    **[Processing Questions]{.underline}**

11. What activities of your immediate work group are performed in an
    assembly line or \"pipeline\" manner?

12. What activities within your immediate work group are
    [infrequent]{.underline} and/or [unique]{.underline}, but
    significant enough to cost manage? (Examples: special or
    reimbursable projects).

13. If you have cost information, how valuable is the information?

Not Somewhat Extremely

Valuable Valuable Valuable N/A

1 2 3 4 5 6 7 8

14. If you do not have cost information, how valuable would it be?

    Not Somewhat Extremely

    Valuable Valuable Valuable N/A

    1 2 3 4 5 6 7 8

15. How valuable do you consider pre-established standards, by group, in
    assisting performance measurement and planning?

    Not Somewhat Extremely

    Valuable Valuable Valuable N/A

    1 2 3 4 5 6 7 8

16. What would be some useful bases upon which to develop standards for
    your immediate work group? Check ALL that apply.

    1\. \[ \] Labor hours

    2\. \[ \] Labor dollars

    3\. \[ \] Total cost (i.e., cost of all related efforts)

    4\. \[ \] Number of returns processed

    5\. \[ \] Number of telephone calls satisfied

    6\. \[ \] Number of cases completed

    7\. \[ \] Number of service requests processed

    8\. \[ \] Others:

    9\. \[ \] Measurement standards would not be useful

    10\. \[ \] N/A

    **[Allocation Questions]{.underline}**

    The following paragraph relates to questions 17 through 19:

    One concept of cost accounting is responsibility accounting. This
    approach provides activity and cost information by manager for those
    costs that directly impact their work group. Reports generated using
    this concept identify activities and costs that can be impacted by
    the managers\' influence (controllable costs).

17. How would you rate the difficulty of holding decision-makers
    responsible for costs of their immediate work group?

    Easy Moderate Difficult N/A

    1 2 3 4 5 6 7 8

18. How valuable would information about your immediate work group\'s
    controllable costs be?

    Not Somewhat Extremely

    Valuable Valuable Valuable N/A

    1 2 3 4 5 6 7 8

19. How clearly identifiable are controllable costs in your immediate
    work group?

    Not Somewhat Very

    Clearly Clearly Clearly N/A

    1 2 3 4 5 6 7 8

20. How valuable do you consider budget reprogramming ability?

    Not Somewhat Very

    Valuable Valuable Valuable N/A

    1 2 3 4 5 6 7 8

21. Do you agree or disagree that the costs of your immediate work group
    could be directly charged to its specific activities, and/or
    allocated based on pre-defined causal relationships?

    1\. \[ \] Strongly Agree

    2\. \[ \] Agree

    3\. \[ \] Not Sure

    4\. \[ \] Disagree

    5\. \[ \] Strongly Disagree

22. Are you aware of any significant costs that are currently charged to
    your immediate work group that might more appropriately be charged
    to other units based on causal relationships?

1\. \[ \] Yes

2\. \[ \] No

3\. \[ \] N/A

If YES, please list the type of cost and the associated activities
below.

23\. Are you aware of any significant services provided to your
immediate work group that are currently performed by other units that
should be included in the direct costing of your unit?

1\. \[ \] Yes

2\. \[ \] No

3\. \[ \] N/A

If YES, please list the type of services provided below.

**[System Questions]{.underline}**

24\. What existing information systems or other sources of information,
such as resource allocation and planning, do you primarily rely upon to
support decision-making?

Please check ALL responses that apply in Column A, and rate the
corresponding value of information in Column B.

[COLUMN A]{.underline} [COLUMN B]{.underline}

Not Somewhat Extremely

Valuable Valuable Valuable N/A

1\. \[ \] WP&C 1 2 3 4 5 6 7 8

2\. \[ \] TIMIS 1 2 3 4 5 6 7 8

3\. \[ \] EMIS 1 2 3 4 5 6 7 8

**[Quality Questions]{.underline}**

25\. Would cost management information that integrates quality measures
with quantity measures be valuable?

Not Somewhat Extremely

Valuable Valuable Valuable N/A

1 2 3 4 5 6 7 8

26\. What are the primary quality measures for the activities performed
by your immediate work group? Check ALL that apply.

1\. \[ \] Timeliness

2\. \[ \] Accuracy/Error Rate

3\. \[ \] Customer Satisfaction

4\. \[ \] Reliability

5\. \[ \] Reduction of Taxpayer Burden

6\. \[ \] Voluntary Compliance

7\. \[ \] Productivity

8\. \[ \] Rework

9\. \[ \] Scrap

10\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**[Reporting Questions]{.underline}**

27\. What are the relevant focuses and corresponding difficulty levels
for reporting cost information relating to your immediate work group?

Please check ALL responses that apply in Column A and rate the
corresponding difficulty of reporting in Column B.

[COLUMN A]{.underline} [COLUMN B]{.underline}

Not Somewhat Extremely

Difficult Difficult Difficult N/A

1\. \[ \] Products 1 2 3 4 5 6 7 8

2\. \[ \] Programs 1 2 3 4 5 6 7 8

3\. \[ \] Projects 1 2 3 4 5 6 7 8

28\. Would a report presenting the costs by major subcategories of your
immediate work group\'s

activities be valuable?

Not Somewhat Extremely

Valuable Valuable Valuable N/A

1 2 3 4 5 6 7 8

29\. What would be the most useful reporting frequency for cost
management information?

1\. \[ \] Daily

2\. \[ \] Weekly

3\. \[ \] Monthly

4\. \[ \] Quarterly

5\. \[ \] Yearly

6\. \[ \] N/A

7\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

30\. The cost management system should identify activities down to what
level of your organization? Check ONE.

1\. \[ \] Office level

2\. \[ \] Division level

3\. \[ \] Branch level

4\. \[ \] Section level

5\. \[ \] Group level

6\. \[ \] Post of Duty

7\. \[ \] N/A Other

8\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

**[Supplemental Questions-National Office]{.underline}**

31\. How similar are your cost management information needs when
compared to those of other National Office organizational units?

Not Somewhat Extremely

Similar Similar Similar N/A

1 2 3 4 5 6 7 8

32\. What differences in information needs do you anticipate as compared
to other National Office

organizational units? Check ALL that apply.

1\. \[ \] Frequency

2\. \[ \] Detail Level

3\. \[ \] Focus (i.e., product, geographic area, and appropriation)

4\. \[ \] Type of Report (i.e., budget vs. actual, variance)

5\. \[ \] No differences are expected

6\. \[ \] N/A

7\. \[ \] Other\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

33\. Please estimate the percentage of effort from your immediate work
group that is directly related to

supporting the activities of:

1\. National Office \_\_\_\_\_\_\_\_\_\_\_\_%

2\. Regional Offices \_\_\_\_\_\_\_\_\_\_\_\_%

3\. Service Centers \_\_\_\_\_\_\_\_\_\_\_\_%

4\. District Offices \_\_\_\_\_\_\_\_\_\_\_\_%

5\. Computing Centers \_\_\_\_\_\_\_\_\_\_\_\_%

TOTAL \_\_\_\_\_\_\_\_\_100%

34\. Do you agree or disagree that your costs should be specifically
identified and allocated to activities

of the organizational units on the previous page?

1\. \[ \] Strongly agree

2\. \[ \] Agree

3\. \[ \] Not sure

4\. \[ \] Disagree

5\. \[ \] Strongly disagree

Please explain your response:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

35\. Are there any specific topics that should be addressed in a
managerial cost accounting system

relating to the information needs of outside stakeholders such as
Congress, GAO, OMB, Treasury

Department, etc.?

**[Supplemental Questions-Regional Offices]{.underline}**

36\. Please estimate the percentage of effort from your immediate work
group that is directly related to

supporting the activities of:

1\. National Office \_\_\_\_\_\_\_\_\_\_%

2\. Regional Offices \_\_\_\_\_\_\_\_\_\_%

3\. Service Centers \_\_\_\_\_\_\_\_\_\_%

4\. District Offices \_\_\_\_\_\_\_\_\_\_%

5\. Computing Centers \_\_\_\_\_\_\_\_\_\_%

TOTAL \_\_\_\_\_\_\_100%

37\. Do you agree or disagree that your costs should be specifically
identified and allocated to activities

of the above organizational units?

1\. \[ \] Strongly agree

2\. \[ \] Agree

3\. \[ \] Not sure

4\. \[ \] Disagree

5\. \[ \] Strongly disagree

Please explain your response:

**[Supplemental Questions-District Offices]{.underline}**

38\. Please estimate the percentage of effort from your immediate work
group that is directly

related to supporting the activities of:

1\. National Office \_\_\_\_\_\_\_\_\_\_\_\_%

2\. Regional Offices \_\_\_\_\_\_\_\_\_\_\_\_%

3\. Service Centers \_\_\_\_\_\_\_\_\_\_\_\_%

4\. Your District Office \_\_\_\_\_\_\_\_\_\_\_\_%

5\. Other District Offices \_\_\_\_\_\_\_\_\_\_\_\_%

6\. Computing Centers \_\_\_\_\_\_\_\_\_\_\_\_%

TOTAL \_\_\_\_\_\_\_\_\_100%

39\. Do you agree or disagree that your costs should be specifically
identified and allocated to activities

of the above organizational units?

1\. \[ \] Strongly agree

2\. \[ \] Agree

3\. \[ \] Not sure

4\. \[ \] Disagree

5\. \[ \] Strongly disagree

Please explain your response:

**[Supplemental Questions-Service Centers]{.underline}**

40\. Please estimate the percentage of effort from your immediate work
group that is directly related to

supporting the activities of:

1\. National Office \_\_\_\_\_\_\_\_\_\_%

2\. Regional Offices \_\_\_\_\_\_\_\_\_\_%

3\. Service Centers \_\_\_\_\_\_\_\_\_\_%

4\. District Offices \_\_\_\_\_\_\_\_\_\_%

5\. Computing Centers \_\_\_\_\_\_\_\_\_\_%

TOTAL \_\_\_\_\_\_\_100%

41\. Do you agree or disagree that your costs should be specifically
identified and allocated to activities

of the above organizational units?

1\. \[ \] Strongly agree

2\. \[ \] Agree

3\. \[ \] Not sure

4\. \[ \] Disagree

5\. \[ \] Strongly disagree

Please explain your response:

42\. How valuable would it be to develop complexity factors since
product complexity may affect costs?

Not Somewhat Extremely

Valuable Valuable Valuable N/A

1 2 3 4 5 6 7 8

**[Ending Questions]{.underline}**

43\. How could cost information help you manage better (e.g., better
financial reports, and performance

bonuses/appraisals, critical success factors, retainage of savings,
reprogramming ability)?

44\. Do you have any comments concerning cost management or the
implementation of a managerial

cost accounting system?

45\. Would you like to be part of our cost management prototype effort?

1\. \[ \] Yes (Please make sure we have your name and phone number)

2\. \[ \] No

46\. Would you like to be interviewed as part of the User Needs
Assessment phase?

1\. \[ \] Yes (Please make sure we have your name and phone number)

2\. \[ \] No

**[Conclusion]{.underline}**

Thank you for taking the time to complete this questionnaire. Your
contributions are highly valued. We will keep you informed of our
progress throughout the project. If you have any questions or concerns
in the meantime, please feel free to contact us.

**Listing of Cost Accounting Software**

*(Following is a list of commercial off-the-shelf managerial cost
accounting systems software that might meet your needs. This list is
provided for informational purposes only and is not intended to be all
inclusive. None of the following software applications are endorsed by
either the Governmentwide Cost Accounting Committee or the CFO Council.
The sources of this list are [The Journal of Cost
Management]{.underline}, which annually reviews cost accounting/ABC
software; the 1997 GSA Financial Management Systems Software Schedule,
and responses to the JFMIP Commerce Business Daily (CBD) announcement
for parties interested in supplying cost accounting to the federal
government.*

*NOTE: As your needs vary, so will your approach to implementing
managerial cost accounting. It is recommended that you review this
Appendix in its entirety and select several applications for further
research to confirm that they meet your needs. All software evaluation
should be conducted in accordance with the JFMIP [System Requirements
for Managerial Cost]{.underline} [Accounting]{.underline}.)*

**Software Packages Evaluated in *The Cost Management Journal***
(reviewed in 1995 or 1996)

## ABC Management Budget Software Activa

CASSO CMS-PC

Cost Control DaCapo

EasyABC Plus HyperABC

NetProphet Oros Version 1.1

Process Manager Profit Manager

TR/ACM

# FMSS Multiple Award Schedule 

American Management Systems, Inc. Computer Data Systems, Inc.

Digital Systems Group, Inc. ICF Information Technology, Inc.

KPMG Peat Marwick LLP Keane Federal Systems, Inc.

Oracle Corporation Orion Microsystems, Inc.

Rel-Tek Systems & Design, Inc.

**JFMIP CBD Announcement** (Firms not listed above. Please note some
firms listed below offer only consulting services, not software.)

Advanced Solutions AMD

ARIAS Technologies, Inc. Automation Counselors

Bradson Corp. Computer Associates International, Inc.

Danial EKE and Assoc., PC Data Pro

Federal Sources Hyperion Software

Information Resource Associates Lieber Corp.

People Soft Plato Computer Corp.

Precision Analysis SAP America, Inc.

7-C Software Source Diversified, Inc.

Telstar Corp. T. Curtis & Company. PC

US Army Cost & Economic Analysis Center

**Agencies Which Have Initiated Managerial Cost Accounting**

**(as of Jan. 1, 1997)**

**[Type of Cost]{.underline}**

**[Contact]{.underline}** **[Agency]{.underline} [Telephone]{.underline}
[Methodology]{.underline}** **[Software]{.underline}**

+-------------+-------------+-------------+-------------+-------------+
| Jo          | U.S.        | 2           | ABC         | HyperABC    |
| Coh         | Treasury's  | 02-927-0310 |             |             |
| en-Langlois |             |             |             |             |
|             | Customs     |             |             |             |
|             | Service     |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Dave Rebich | U.S.        | 2           | ABC         | HyperABC    |
|             | Treasury's  | 02-874-7073 |             |             |
|             |             |             |             |             |
|             | Financial   |             |             |             |
|             | Management  |             |             |             |
|             | Service     |             |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Howard Katz | GSA         | 2           | ABC         | HyperABC    |
|             |             | 02-501-3348 |             |             |
+-------------+-------------+-------------+-------------+-------------+
| Leonard     | SSA         | 4           | Direct      | Homegrown   |
| Fique       |             | 10-965-8619 | Tracing     |             |
+-------------+-------------+-------------+-------------+-------------+
| Steve       | NASA        | 2           | Job Order   | Currently   |
| Varholy     |             | 02-358-0978 |             |             |
|             |             |             |             | Evaluating  |
+-------------+-------------+-------------+-------------+-------------+

**Lessons Learned**

**Case Study of Agency Implementing Managerial Cost Accounting**

**General Services Administration**

**[Overview]{.underline}**

This report summarizes the U.S. General Services Administration's (GSA)
efforts to date to improve its managerial cost accounting capabilities
through the application of Activity-Based Costing (ABC) as well as cost
management concepts and techniques.

GSA initiated its cost management efforts in January 1996. Since that
time, GSA has completed an assessment of its short-term and long-term
training needs, designed, and delivered cost management training to
1,000 of its executives and managers nationwide, identified its
general-level cost information requirements, and initiated cost
management pilot projects for several of its major organizational
components. Additional cost management pilot projects are being planned
for start-up and completion during 1997.

GSA has accrued significant benefits from its cost management
initiatives. Cost training efforts have educated agency management about
the importance and relevance of managerial cost accounting. Several
managers have been transformed into cost management "champions" and have
become actively involved in cost management pilot projects. In addition,
the two initial cost management pilots yielded new kinds of relevant
cost information to aid program managers.

For the future, GSA plans to continuously improve and add to its cost
management capabilities and related financial and program management
systems. Particular emphasis will be placed on continuing to provide
immediate, short-term benefits for program managers while also
supporting ongoing, longer-term efforts within the Office of the Chief
Financial Officer (CFO) to upgrade and modernize GSA's automated
financial management systems.

**[Introduction]{.underline}**

GSA provides space, supplies, transportation, telecommunications, and
other products and services for nearly every department within the
federal government. GSA is headquartered in Washington, D.C., and is
located in 11 regions nationwide. GSA currently employs about 15,700
employees and has an annual budget of nearly \$13 billion.

However, only \$155 million of GSA's budget - less than 1.5% - is
provided by Congressional appropriations. More than 98% of GSA's budget
comes from reimbursable funding, with the federal agencies that use
GSA's products and services paying for these services directly. Because
of how GSA is financed, it is critical that GSA obtain adequate funds
from its customers to recoup all of its direct and indirect costs of
doing business and maintain a sufficient level of working capital to pay
for ongoing operations. More importantly, GSA needs to maintain customer
satisfaction in terms of its price and performance, or the customers
could conceivably seek alternative service providers. Emphasis on
customer satisfaction is likely to become more critical in the future,
given current trends toward increasing non-mandatory sourcing and
outsourcing/cross-servicing within the federal government.

GSA is continuing to change its culture and ways of doing business to be
more flexible and customer-focused, and has already become a leader in
cutting red tape and reducing operating costs. To continuously improve
and reengineer itself, GSA's strategic goals call for improving

1\) customer service; 2) operating efficiency; 3) governmentwide policy
and oversight; 4) cost- effectiveness of program activities; 5) security
of federal facilities; and 6) partnerships with its unions and
employees.

Another catalyst for change was provided by the National Performance
Review (NPR). This initiative prompted GSA to reassess all of its 16
major business activities by using a specially developed review
methodology, the Federal Operations Review Model (FORM). Each FORM
review compared each of GSA's distinct business lines with appropriate
private sector benchmarks to determine whether each business line should
be continued, privatized, eliminated, or spun-off to another agency.
These reviews required gathering considerable cost information.

As a by-product of FORM reviews and other cost reduction initiatives,
GSA's senior management quickly acknowledged the business need to
provide better and more relevant cost information for agency program
managers. GSA's CFO also acknowledged the need to leverage and
coordinate such efforts with other plans to upgrade and modernize GSA's
financial management information systems. These collective experiences
provided the impetus for GSA to initiate its cost management initiatives
in early FY 1996.

**[Cost Management Goals and Strategies]{.underline}**

GSA's primary cost management goals are to:

1\. provide GSA program managers with relevant cost information that can
be used to support GSA's strategic business goals;

2\. enhance GSA's capabilities to recover the full cost of doing
business, and use cost information to improve competitiveness, and
customer satisfaction;

3\. meet federal managerial cost accounting and related financial
reporting requirements; and

4\. identify business line cost information requirements and in so
doing, provide the various inputs that are essential for improving and
upgrading GSA's managerial cost accounting and financial management
systems.

These goals clearly reflect GSA's strong commitment toward upgrading its
managerial cost accounting and cost management capabilities. Moreover,
GSA's cost improvement approach reflects the need to meet both internal
and external cost information requirements by upgrading and more fully
integrating GSA's financial and program management systems. The Agency's
general strategy is to start identifying needed costing capabilities
(e.g., labor distribution, better overhead allocation methods, and
costing of services, etc.) while endeavoring to produce short-term
improvements, which in turn can be leveraged to provide for more fully
integrated and cost effective financial management systems for the
future.

**[Cost Initiatives]{.underline}**

To achieve these goals, GSA's CFO devised a set of strategies to place
additional emphasis on improving managerial cost accounting and cost
management within GSA. This approach called for several major cost
initiatives to be implemented in a phased and incremental manner.

Major initiatives included assessing cost management training needs,
providing cost management training, gathering internal and external
general-level cost information requirements, initiating ABC Management
(ABC/M) pilot projects, and leveraging the results of these pilots to
improve GSA's financial management systems relating to managerial cost
accounting and related financial reporting.

# *[Cost Accounting History]{.underline}*

**Assessed Cost Management Training Needs (1/96 - 3/96)**

To assess its needs for cost management training, GSA used contractor
expertise to identify its short-term and long-term training needs and
survey key GSA management officials to assess their cost training needs.
To facilitate this process, representatives from each major GSA
component and regional location were selected to provide essential input
and coordination for their respective organizations.

As a result of their collective efforts, a consensus was reached
regarding: whether to provide cost management training across the
agency; who should attend the training, what kinds of cost management
training should be provided, and when such training should be offered.
The results of this training needs assessment were documented and
clearly indicated that cost management training would benefit the agency
by:

1\. demonstrating to GSA employees that Agency management was serious
about its commitment to change and its willingness to transform GSA's
culture to a more customer-focused and cost-focused organization;

2.  providing GSA employees with a better appreciation of how cost
    information can be used to enhance program management and support
    GSA's strategic business goals;

3\. educating GSA employees about managerial cost accounting and its
relevance to program management planning, analysis, and decision-making;

4\. providing a needed forum for discussion about how the agency is
changing and solicit essential feedback and input from GSA personnel
regarding the current state of cost and performance information within
the agency; and

5\. obtaining needed input regarding GSA's internal cost information
requirements so that these requirements could be addressed through
subsequent financial management systems improvement efforts.

Accordingly, the decision was reached to provide cost management
training first for senior managers and then for mid-level managers,
senior program analysts, and other key program and financial staff. A
target audience of about 1,000 GSA employees nationwide was identified.

It was also determined that short-term training needs (i.e., training to
be provided over the next 6 months) should focus on promoting cost
awareness; explaining basic managerial cost accounting and cost
management concepts; educating GSA personnel about several planned
initiatives to improve GSA's cost information and related financial
management systems; emphasizing the importance and relevance of
identifying the full cost of doing business; and illustrating how the
latter information can improve operating efficiency and effectiveness,
customer satisfaction, and operating performance.

The training needs assessment also recommended that any long-term
training efforts (i.e., more than 6 months in the future) focus more
fully on using ABC/M principles to benchmark against the competition and
improve operating performance. However, the primary emphasis was placed
on implementing a short-term training initiative and then assessing its
results before proceeding to finalize any long-term training needs for
the agency.

**Provided Cost Management Training (5/96 - 8/96)**

After the training needs assessment report was completed and reviewed
within the Agency, management decided to offer two different short-term
training courses on cost management. A half-day course was designed
specifically to meet the training needs identified for GSA's senior
executives (i.e., members of the Senior Executive Service and a few
selected senior managers). This course focused primarily on explaining
GSA's short-term and long-term plans to enhance its cost information
capabilities and related financial management systems; presenting the
basic managerial cost accounting and cost management concepts;
illustrating the benefits of getting involved as a "champion" of ABC/M
within the agency; and how such "champions" could begin an ABC/M pilot
project within their organizations.

The second training course was designed to last 2 days and was tailored
to meet the needs of senior, mid-level, and first line GSA managers and
supervisors, as well as selected program and financial analysts. This
course focused primarily on the same subjects noted above, but also
included a special video presentation on ABC/M and a workshop where
training participants could actually construct a preliminary
step-by-step ABC model for their own organization(s). In addition,
training class participants were surveyed regarding their functional
requirements for cost information as they related to performance
measurement, quality, accountability, reporting, future training needs,
cost accumulation and allocation, and GSA's current and emerging
cultural/environmental climate.

Training results clearly exceeded expectations. About 1,000 GSA
personnel were trained. Over 92% of all training participants rated the
training as being effective or better. The success of this training was
also evident from the number of requests received to initiate cost
management pilot projects for various GSA business lines. These requests
were made by both headquarters and regional managers for GSA's various
business lines.

**Identified General-level Cost Information Requirements ( 5/96 -
12/96)**

As noted previously, cost management training provided a convenient
opportunity to solicit input from over 1,000 GSA officials regarding
their business requirements for more relevant cost information. A key
assumption incorporated into the cost training was that if GSA personnel
could be more knowledgeable about managerial cost accounting and cost
management concepts from the outset, they would be better able and more
willing to identify their general functional requirements for better
cost information. A related assumption was that if the training audience
was kept better informed and educated regarding managerial cost
accounting and cost management concepts and benefits, as well as GSA's
plans to enhance its financial systems in this regard, they would do a
better job in contributing various types of feedback required to support
systems planning and development efforts.

These assumptions proved to be valid. A significant amount of
information regarding cost requirements (e.g., work activities, desired
cost objects, reporting needs, etc.) was gathered as a by-product of the
cost management training efforts. This information was compiled as the
last training class activity and required about 2 to 3 hours per class
to gather, discuss and document. A separate report was prepared to
summarize these information requirements, and the product was shared
with several senior level GSA officials, including the CFO.

The internal cost requirements identified by training class participants
clearly indicate that GSA's program and financial managers require more
relevant cost information to help them manage their activities,
programs, and organizations. Such information is needed to improve the
pricing of goods and services provided to customers; enhance business
performance; and exceed customer-servicing expectations. More
specifically, particular types of cost information were deemed necessary
to collect and report for internal use within GSA. These included the
unit cost and profitability of business processes, products and
customers; benchmarking and trend analysis; cycle time to perform
business processes; value added analysis; responsibility accounting and
assigning costs based on responsibility for cost/benefits received;
providing additional "cuts" of cost information by desired cost object
(e.g., building, square footage, business activity, customer, type of
space utilized, etc.); strategic planning and price/rate setting; the
allocation of indirect or overhead costs; the distribution of labor
costs to specific activities and other cost objects (e.g.,
products/services, customers, etc.); and the identification of cost
drivers that cause costs to be incurred by various activities (i.e.,
resource drivers) or cost objects (i.e., activity drivers).

**Initiated Cost Management Pilot Projects (9/96 - Ongoing)**

The successful cost training effort led to numerous requests from GSA
managers or cost management "champions" to initiate cost management
pilot projects for their own business lines and organizations. Lacking
the resources to respond to all of these requests, it was determined
that such requests needed to be prioritized in accordance with GSA's
primary cost management goals, as stated previously. The primary
objectives in initiating these pilots were to:

1.  support GSA's strategic business interests while also addressing
    GSA's primary cost management goals;

2.  maintain the organizational momentum for change generated by the
    initial training efforts;

3.  demonstrate the applicability and practicality of cost management
    concepts to specific GSA business lines;

4.  gather additional information regarding specific GSA business line
    requirements for relevant cost information;

5.  determine the feasibility of using ABC software in conjunction with
    GSA's core accounting system;

6.  expose GSA program and accounting professionals to the value of
    implementing ABC and ABC/M as program and financial management tools
    in support of business objectives;

7.  support longer-term financial management system improvement efforts
    within GSA by identifying general-level cost information
    requirements while also serving as a catalyst to enhance GSA's
    current costing capabilities in the areas of labor distribution,
    overhead allocation, ABC/M, and performance measurement; and,

8.  demonstrate some short-term results for GSA's program managers and
    provide some immediate help to them in addressing their identified
    needs for more relevant cost information.

To facilitate the start-up of these cost management pilot projects,
several supporting actions were taken by GSA's CFO. One of these actions
was to develop a boilerplate task order that could be easily tailored by
any GSA business line to obtain needed contractor support. This support
was intended to provide the necessary expertise to do the up-front ABC/M
analysis of the business to identify all essential work activities,
desired cost objects, and cost drivers. This information was then used
to develop a working ABC model. Another important action taken by the
CFO was to select a singular, off-the-shelf ABC software product to
assist ABC model development throughout GSA. A third critical action
taken was to develop an overall strategy and formulate priorities for
each proposed cost management pilot project. In general, priorities were
assigned based on several considerations, including the perceived degree
of project importance to GSA and the business line, managerial support
and feasibility from a technical standpoint, and value from a strategic
and long-term viewpoint.

Another key in conducting the pilots was to form multi-disciplined
project teams comprised of team members from various affected
organizations. Typically, pilot teams included representatives from
contractor, program, financial, union, and Office of Inspector General
(OIG) to plan, coordinate and conduct all required project activities.
This organizing approach helped to provide the sponsoring business line
organization with a sense of project ownership and involvement. It also
ensured that all points of view were considered in planning and
constructing the ABC/M model for the affected GSA business line. Each
pilot team was generally comprised of 2 to 3 business line
representatives, 1 or 2 contractor personnel, 1 representative from the
Office of the CFO, 1 or 2 representatives from the OIG, union
representatives (as selected by each affected union), and additional
liaison personnel from each region included within the scope of the
pilot project.

Within GSA, the first two cost management pilots selected were for the
Public Building Service's (PBS) Office of Property Acquisition and
Realty Services (PARS) and its Office of Property Disposal. These
business lines were selected for the first pilots primarily because of
strategic business reasons, strong management support for doing cost
management pilots, and because the results that were expected to be
obtained from each pilot were expected to directly benefit both the
business line as well as ongoing efforts to enhance GSA's financial
management systems.

These two pilot projects were conducted in accordance with the following
methodology:

1.  assemble the team and prepare a project plan;

2.  orient all business line managers and staff regarding the project;

3.  identify all major work activities and tasks within the
    organization;

4.  identify all desired cost objects to be included in the ABC model;

5.  determine how labor time is to be captured and assigned to
    activities;

6.  construct a time survey or appropriate labor distribution
    capability;

7.  determine all resource costs to be included in the ABC model;

8.  determine all resource cost drivers (to drive resource costs to
    activities);

9.  determine all activity cost drivers (to drive activity costs to cost
    objects);

10. gather cost driver data and input this data into the ABC model;

11. use the ABC software to run the ABC model and evaluate results;

12. do value-added and cycle time analyses to identify improvement
    opportunities;

13. present the results to management and revise the model as needed;

14. ensure the model is sufficiently documented and plan for roll-out;
    and

15. identify additional opportunities for continuous improvement.

GSA's first pilot project teams were able to complete these steps within
4 months. The length of time required to complete a pilot generally
depends on its defined scope of activities and cost objects, how
precisely labor time information needs to be captured by activity and
cost object, and how readily cost driver information can be identified
and gathered for the ABC model. However, pilot project efforts can be
expedited by leveraging available contractor expertise, training
personnel on use of the ABC software prior to the start-up of the
project, and using a cross-functional team of dedicated resources.

**Results to Date and Future Plans (As of 1/97)**

As a result of the cost management pilot projects completed to date, GSA
has significantly improved the relevancy and quality of its cost
information for two business lines. Perhaps, more importantly, the
Office of the CFO has provided these business lines with critical
financial information that can be used to achieve its business
objectives and improve operating performance on an ongoing basis. This
latter benefit represents the essence of cost management; namely, to
first identify the true costs of doing business and then leverage this
new cost information to streamline costs, maintain competitiveness, and
improve customer performance. Cost management and ABC make all of these
things possible by presenting cost information in new ways that enable
managers to see their costs by work activities and other desired cost
objects for the first time. But ABC/M concepts go much further. Namely,
they integrate cost information with business process analysis and cycle
time analysis techniques so that managers can more meaningfully analyze
and improve their business processes and by so doing, increase customer
satisfaction. Therein lies the real value and challenge in implementing
ABC/M within both the public and private sectors.

Future cost management plans call for several more cost management
projects to be conducted within each major organizational component of
GSA. The primary goals of these efforts will be to more fully support
the cost information needs of GSA business lines in the short-term while
using this information to develop appropriate financial management
system capabilities for GSA in the future.

**For additional information regarding GSA's ongoing cost management
initiatives, please contact Howard Katz, U.S. General Services
Administration, Office of the Chief Financial Officer, at (202)
601-3348.**

Lessons Learned

**Case Study of Agency Implementing Managerial Cost Accounting**

U.S. Treasury's Customs Service

**[Introduction]{.underline}**

In recent years, several factors have motivated the U.S. Customs Service
towards developing and implementing a managerial cost accounting system.
Extensive statutory and legislative guidance has been established
mandating federal agencies to implement effective cost accounting
systems. The Customs and Trade Act of 1990, the Chief Financial
Officers\' (CFO) Act of 1990, the National Performance Review (NPR), the
Federal Accounting Standards Advisory Board (FASAB), and the Government
Performance and Results Act of 1990 (GPRA) all provide guidance and/or
mandate some form of cost accounting system within federal agencies. In
addition, prior reviews and audits cited material deficiencies with
regard to the lack of cost analyses and reporting of cost information on
the operations of the Customs Service. Unanswered Congressional
inquiries on user fees and tighter federal budgets also compelled the
Service to develop and implement a managerial cost accounting system.

Two initial attempts to develop a cost management information system
began in FY 1993, when the Service, assisted by contractors, developed a
cost and user fee model to comply with the provisions of the Customs
Trade Act of 1990, and to calculate the cost of certain inspectional
services. This model was intended to meet the requirements of the CFO
Act, resolve the cited material deficiencies, and provide cost
information in support of GPRA. This effort provided considerable
progress toward the development of cost accounting capabilities.
However, it was directed toward meeting specific and immediate needs.
There was no strategy or funding for coordinating and integrating
existing capabilities to create a single managerial cost accounting
system.

In FY 1995, Congress approved increases for initial improvements to
financial management accountability and control, and directed the
Service to provide a report on its financial improvement plans with the
FY 1996 budget submission. Congress approved the FY 1996 budget
submission making it possible for the Service to embark on the long-term
project of designing a comprehensive approach to developing and
implementing a full managerial cost accounting system. This system would
be designed to capture full cost, which would provide managers at all
levels with the decision-support information needed to optimize
performance and meet all externally imposed requirements for tracking
costs and performance data.

Also in FY 1995, the Service underwent a major reorganization, which
steered away from management by organization to management by process.
The Service wanted to select a costing methodology that would fit the
newly formed process management and considerably expand the cost model
developed in FY 1993. In addition to fitting well with process
management, research showed that the Activity-Based Costing (ABC)
methodology provides quantitative decision support information for
resource use, full costing for managers throughout the organization,
assistance in evaluating program results, compliance with legislative
acts, and accurate cost information for external parties (i.e.
Congress). This methodology also supplies baseline cost information for
ascertaining user fees and preparing the annual budgets. Having decided
on the ABC methodology, the Service selected the PC-based off-the-shelf
software package HyperABC as its managerial cost accounting system
software.

# *[Constructing a Cost Management Information System - What\'s Been Done]{.underline}*

The Cost Management Group (CMG) at the Customs Service has been given
the responsibility of developing the Cost Management Information System
(CMIS). The construction of this system has been based on three phases
of implementation: (1) defining the requirements, (2) establishing a
pilot or test program, and (3) expanding the pilot to a full cost
management system.

## Phase I - Requirements Definition

The CMIS will not succeed if its benefits are not identified and
accepted by the primary users of its output. Therefore, it was critical
that those users be involved in defining the requirements of the system.
Information gathering sessions were conducted through interviews and
group discussions with personnel in the field and headquarters areas.
These sessions provided the opportunity to determine the expectations of
the system users while also developing the functional and technical
requirements needed for its design.

## Phase 11 - Building a Pilot Program

During the information gathering sessions described above, an
implementation approach was developed that identified the particular
area for piloting the system. That area was the Commercial Air Passenger
Process, part of the Core Passenger Process at Customs. This process was
chosen for numerous reasons, which included its high-level of
visibility, level of process definition, ability to provide immediate
results, and support, by both management and the union. Upon selecting
the particular area to pilot, a board of directors was established to
provide guidance and oversight for the project. This board is made up of
management officials from all levels of the process and convenes
approximately every ten to twelve weeks to discuss the issues involved
in development of the CMIS.

Designing the cost model for the pilot required the identification and
definition of the sub-processes and activities performed in the
Commercial Air Passenger Process. This was accomplished through
discussions with managers and employees involved in the process. First
the Passenger Process Owner identified the sub-processes, then an
information gathering session was held with Chief Inspectors and Process
Owners from twelve airport locations across the country to list and
define the activities under those sub-processes. This session was
critical not just for gathering information for the model, but for
educating the potential users of the possible benefits to be derived
from the CMIS.

Using the list of activities defined earlier, a survey was developed to
gather data on time spent by inspectors performing those activities on
the job. This manual means of capturing labor data was chosen for the
short-term needs of the pilot. During FY 1997, the CMG began collecting
this information using a statistical sampling method in which quarterly
surveys were sent to a random group of employees for all locations where
Passenger Processing activities are performed. To simplify this process,
other methods of capturing labor data electronically through existing
scheduling and time card systems are being researched.

The survey (page I-15) listed the activities and provided space for each
employee to allocate their time by hours. All time in a regular
eighty-hour work period had to be accounted for with another survey
filled in for overtime. Surveying for overtime hours allowed us to
identify those dollars paid to employees that regularly worked in
another process, but worked overtime in the Passenger Process. Upon
approval of the board to utilize the survey, it was then administered to
inspectors during site visits to three airport locations chosen as the
initial test sites for the pilot. Responses to the survey were entered
into a spreadsheet, analyzed for reasonableness and completeness, then
downloaded to a database for input to the model.

Allocating the costs of other types of resources (i.e., equipment, rent,
data processing, etc.) required the identification of other types of
drivers and a means of acquiring that information. Due to time
constraints in establishing the pilot, many of these resources were
allocated based on FTE levels within the organizations involved. The
goal is to develop more accurate methods of spreading those costs back
to the activities that use them, such as allocating rent based on square
footage or charging ADP costs by usage. Research is being conducted to
determine the best drivers for assigning these costs and from what
systems this information will be acquired.

In addition to information on time usage and resource drivers, the
HyperABC model required numerous other types of data to generate its
output. This included information on organizational structures within
the Service, revenue and expense data, and workload statistics for
spreading activity costs to the Customs Service's outputs or products.
All of this required downloading data files from various operational and
historical databases owned and operated by different organizations
within the Service. Coordination with those organizations is crucial to
the success of the pilot and the expansion of the CMIS.

Revenue treatment was another important factor in developing the CMIS
pilot. Some of the revenue generated by the Passenger Process was of a
reimbursable nature and, therefore, was used to offset the related
expenses. The remaining revenues will be identified with the processes
that produce them, enabling the comparison of the costs of those
activities with the revenues they generate.

The final step in constructing the pilot CMIS concerned the choice of a
reporting tool. Pilot Lightship was chosen to fill this need. It is
compatible with HyperABC and is already in use by other systems within
the Service that would be linking to the CMIS. Although HyperABC
contains very useful reporting features (pages I-16 -- I-18), it was
determined that they were not adequate to meet all the needs of the
managers. It should be understood that the users of the CMIS would have
access to the reporting tool only for drawing down cost information.
Only members of the CMG will be permitted to access the cost model
within HyperABC, therefore, controlling who can effect changes to the
model and its components. Several screens have been designed in
Lightship to be used for viewing cost data in various formats and at
many organizational and process levels. Great care has been taken to
make querying for cost data in the CMIS a user-friendly experience. The
screens have been designed with click and go buttons and easy to read
charts, graphs, and spreadsheet type reports that can be downloaded to
other applications for additional analysis and printing. Pages I-19 --
I-21 provide a glimpse of what the CMIS reporting tool looks like for
the pilot program.

## Phase III - CMIS Implementation

During Phase III of the CMIS Project, the ABC model constructed for the
pilot will be expanded to incorporate the remaining Core Processes
(i.e.: Trade and Outbound) and all other aspects of the Service. The
goal is to formulate a system that encompasses all costs that the
Service incurs. This will be accomplished in much the same manner as
that for the pilot. Facilitated information gathering sessions will be
held with representatives of the other processes and their supporting
offices to identify their activities and outputs. Resources will then be
mapped to these activities within the model using surveys and other
methods to be defined later. The costs of performing all activities
within the Service will be directly allocated to the three Core
Processes to the fullest extent possible.

From a technical standpoint, Phase III will entail the development of
new Lightship screens, development of automatic procedures for updating
and testing the system, utilization of an ORACLE database for systems
data storage, and integration with other systems being developed at the
Service. In addition, appropriate user training will be provided.

### Important Development Issues

There remain many issues yet to be dealt with during the CMIS
development, some of which have already been discussed above, such as
deciding upon the best method for collecting labor data and determining
more accurate resource drivers to allocate the costs of resources to the
activities under each process. Following is a brief listing of some of
those issues.

-   Many processes, strategies, and mission support functions lack a
    clear definition of their relationships\--a problem that must be
    solved by management.

-   All activities do not fit within the sub-processes identified; in
    some cases, there is overlap. In addition, many sub-processes and
    activities have not been fully defined for all remaining offices.

-   Certain functions performed by the Service do not relate to the Core
    Processes at all. Functions of the Office of Investigations and the
    Office of International Affairs fall into this category.

-   In the short-term, all costs will be captured and reported at the
    subprocess level, but a decision will have to be made as to when to
    begin collecting and reporting costs at a lower level. Inevitably,
    this means that CMIS will be required to capture information at a
    level that will meet the needs of all users. For example: Port
    Directors may wish to have activity-level data to track related
    overtime costs, Customs Management Center (CMC) Directors may want
    sub-process level data to analyze their costs, Process Owners at
    Customs\' Headquarters could require sub-process and/or
    process-level costs to do comparative analysis, and the CFO's Office
    may need any one of these levels of data for reporting costs and
    preparing annual budget requests.

-   Output/performance measurements need to be clearly defined and
    integrated into the cost model.

-   The exact direction to take regarding how to expand the system from
    the pilot stage will need to be determined. Should we expand through
    each Core Process as a whole or take on smaller parts of the
    organization that include operations in all three of the Core
    Processes and some mission support functions as well?

-   The method(s) of allocating certain intra-agency and overhead costs
    needs to be determined in order to capture full cost information
    (i.e., Department of the Treasury costs spread over each of its
    Bureaus, etc.)

**[Summary]{.underline}**

Successful completion of this project will require an action plan that
takes into account the priority needs of the Customs Service for cost
information. There are a number of factors which will have to be
considered in making these decisions, including deadlines that must be
met, relevance of the data for management purposes, requirements for
Activity-Based Budgeting, performance measurement objectives, etc. This
will involve virtually all aspects of the Service and require working
with numerous sites Servicewide. This is further complicated by
high-level issues that must be resolved and by attempts to address
multiple needs for cost information, both internal and external. It may
not be possible to satisfy all requirements for cost information at the
same time, and it may not even be practical to address all priority
needs concurrently, but there is a common ground for everyone and, with
proper development, this system will find it.

If you would like more information about the Custom Service's Management
Information System, contact Ms. Jo Cohen-Langlois at (202) 927-0310.

Lessons Learned

**Reporting Case Study**

**U.S. Treasury's Bureau of Printing and Engraving**

## Synopsis

Management reporting at the Bureau of Engraving and Printing has been a
central aspect of the management planning, implementation, and control
process for over twenty-five years. Managerial cost accounting reports
are a critical component of the Bureau\'s budgeting, pricing, and
performance measurement systems, in addition to their providing relevant
and timely information to program managers. These reports, therefore,
fulfill multiple purposes in meeting the needs of a diverse group of
Bureau managers and technical staffs.

The Bureau\'s actual managerial cost accounting reports have undergone
significant changes over the past twenty-five years to respond to new
conditions and the increasingly different needs for information from
Bureau managers and technical staffs. The requirement to continually
update management reports will not change in the future, but will likely
intensify to meet the challenges of a government that works better and
costs less.

## Background

The Bureau of Engraving and Printing is the component of the Department
of the Treasury responsible for the production of government securities.
It manufactures all United States paper currency, about 50% of U. S.
Postage Stamps, and various other secure documents such as
identification cards for the military, and naturalization and
citizenship cards for the Department of Justice. Currency manufacturing
operations, which began in 1862 and stamp operations which began in 1894
account for over 99% of the Bureau\'s workload.

The Bureau operates under authority of Public Law 81-656, which
established the current revolving fund. This law, in addition to Public
Law 95-81, directed the Bureau to be self-sustaining by charging
customer agencies the total direct and indirect costs to produce their
products, including administrative costs and amounts necessary to fund
the acquisition of new equipment and technology. As a result, the Bureau
does not receive an annual appropriation from Congress. In FY 1996,
sales to customer agencies exceeded \$450 million.

The Bureau of Engraving and Printing has prepared managerial cost
accounting reports for use by internal managers for over twenty-five
years. These reports are used to track actual cost performance to ensure
that costs are in line with prices as well as to identify and prioritize
situations that require prompt management attention. Managerial cost
accounting reports are also used in budget formulation, pricing
development, and performance measurement systems. To meet these and
other needs that have arisen, the Bureau\'s reports have undergone a
profound evolution over the past twenty-five years.

**Late 60s to mid 1970**

In the 1960s and early 1970s, the Bureau produced monthly actual cost
reports for each responsibility segment in the production of currency,
postage, and special products. These reports showed a six month
comparison of total cost for each segment broken down by direct and
indirect labor, benefits, direct and indirect materials, contract
services, travel, training, rent, equipment depreciation, and allocated
costs for utilities and services provided by other Bureau components.
The major drawbacks in the usefulness of these reports were the
inability to identify the effect of volume changes on segment costs, the
exclusion of non-financial performance measures, the lack of identifying
variances and their causes, and the lack of timeliness caused by
reliance on the Bureau\'s largely manual accounting system.

### Mid 70s to mid 1980

During the mid 1970s, the Bureau enlisted the aid of a major accounting
and consulting firm to assist in designing, developing, and implementing
an improved system of managerial cost accounting reports. The major
outcome of this effort was the development of unit cost standards and a
reporting system that compared actual unit cost to the standard unit
cost. The following report is an example of the type of reporting
provided by this system:

+-----------------------------------------------------------------------+
| #### Figure 6                                                         |
|                                                                       |
| MONTHLY COST OF PRODUCING CURRENCY                                    |
|                                                                       |
| MONTH OF JUNE 1979                                                    |
|                                                                       |
| \-\-- COST/1000 \-\-- - FAVORABLE (UNFAVORABLE) VARIANCE -            |
|                                                                       |
| [OPERATION]{.underline} [STAND.]{.underline} [ACTUAL]{.underline}     |
| [TOTAL]{.underline} [EFFIC.]{.underline} [RATE]{.underline}           |
| [VOLUME]{.underline} [SPEND]{.underline}                              |
|                                                                       |
| PAPER \$3.37 \$3.35 \$0.02 \$0.00 \$0.02 \$0.00 \$0.00                |
|                                                                       |
| BACK INK 1.02 0.95 0.07 0.05 0.02 0.00 0.00                           |
|                                                                       |
| FACE INK 0.73 0.69 0.04 0.03 0.01 0.00 0.00                           |
|                                                                       |
| PRINT BACK 0.98 0.94 0.04 (0.01) (0.01) 0.07 (0.01)                   |
|                                                                       |
| PRINT FACE [1.00]{.underline} [0.97]{.underline} [0.03]{.underline}   |
| [(0.02)]{.underline} [(0.01)]{.underline} [0.07]{.underline}          |
| [(0.01)]{.underline}                                                  |
|                                                                       |
| [\$7.10]{.underline} [\$6.90]{.underline} [\$0.20]{.underline}        |
| [\$0.05]{.underline} [\$0.03]{.underline} [\$0.14]{.underline}        |
| [\$(0.02)]{.underline}                                                |
|                                                                       |
| EXAMINE 1.40 1.38 0.02 0.02 (0.01) 0.01 0.00                          |
|                                                                       |
| OVERPRT 1.96 1.75 0.21 0.06 0.00 0.08 0.07                            |
|                                                                       |
| VAULT [0.22]{.underline} [0.21]{.underline} [0.01]{.underline}        |
| [0.00]{.underline} [0.00]{.underline} [0.00]{.underline}              |
| [0.01]{.underline}                                                    |
|                                                                       |
| [\$3.58]{.underline} [\$3.34]{.underline} [\$0.24]{.underline}        |
| [\$0.08]{.underline} [\$(0.01)]{.underline} [\$0.09]{.underline}      |
| [\$0.08]{.underline}                                                  |
|                                                                       |
| SPOILAGE 0.70 0.60 0.10 0.07 0.03 0.00 0.00                           |
|                                                                       |
| TOTAL \$11.38 \$10.84 \$0.54 \$0.20 \$0.05 \$0.23 \$0.06              |
+-----------------------------------------------------------------------+

As shown above, these reports provided variance analysis for the
following variances: efficiency, material usage, rate/price, volume, and
spending. Additionally, the implementation of this reporting system
resulted in the institutionalization of monthly cost and production
reporting meetings with the Bureau\'s senior staff, program managers,
and resource managers. These meetings were held to discuss and evaluate
actual cost results, and identify areas in which corrective actions were
needed.

While this system was an improvement over the previous reporting system,
it became apparent over time that there were still shortcomings to the
system. The reliance of the system on detailed variance analysis, the
exclusion of non-financial performance measures, and a continuing lack
of timeliness were major shortcomings. Program managers found variance
analysis difficult to understand, and even more difficult to use in
identifying how to improve operating results. However, they determined
that volume had a significant impact on total unit cost due to the high
capital costs and indirect support costs of the Bureau. Thus, they were
able to maximize individual performance results by concentrating on
increasing the units of production, most often by working overtime.
While this would reduce the reported unit cost of production, it also
resulted in creating large inventories of in process and finished goods.
Due to the intrinsic value of the Bureau\'s products, the large
inventories resulted in high inventory carrying costs, including
constructing and staffing additional vaults, adding additional
accountability staffs, and costs of obsolescence. Thus, the reports
reinforced dysfunctional behavior.

### Mid 80s to mid 1990s

In order to address the above concerns, in the mid 1980s the Bureau
departed from detailed variance analysis and began reporting on
performance events that caused the major unit cost variances. Reports
became more focused on non-financial performance measures, such as
machine productivity, utilization of machine capacity, and production
yield. Reports continued to provide a comparison of unit costs, but
their major purpose was to provide a cost perspective to interpret
performance results.

While the reports were an improvement over those provided in the early
80s, they did not provide trend information. Consequently, in 1995, the
Bureau\'s cost reports were supplemented with charts and graphs
depicting performance-related information. An example of the type of
information reported is presented on the following pages.

The Bureau has found that the current reporting system, which combines
financial and non-financial information, is much more useful for
planning, controlling, and improving operations. Attention is focused
primarily on the aspects of production that managers and first-line
supervisors can address, and are meaningful to them. And, by focusing on
these, the Bureau is better able to direct attention and resources to
areas that need improvement.

Lastly, the Bureau has also learned that the real value of managerial
cost accounting reporting is not just related to what is reported and
how, but also to the timeliness of the information. A report showing
costs that are 100% accurate, but is released 3 weeks after the fact is
much less useful than a report showing a 95% accuracy level, but is
released less than one week after the fact. Thus, being directionally
correct, as well as relevant and timely, is viewed as much more
important to managerial cost accounting reports than absolute accuracy.
While this view does not apply to external, financial accounting
reports, it is often one of the key culture changes to successful
internal reporting of managerial cost accounting information.

**[Conclusion]{.underline}**

Above all, effective managerial cost accounting reporting cannot be
implemented with the objective that it will remain constant over time.
Reports must be flexible if they are going to meet the ongoing needs of
government managers. Thus, it can be said that at the Bureau of
Engraving and Printing, managerial cost accounting reporting is a
continually evolving part of the management process and will enable the
Bureau to meet the changing needs of its executive staff, program
managers, and technical staffs.

Managerial cost accounting reporting is also differentiated from
external financial reporting due to fundamental differences in the needs
of the targeted audience and the requirement for absolute accuracy.
While external users of financial information are mostly concerned with
accuracy, comparability and consistency, internal users are mostly
concerned with timeliness, relevance, and directionally correct
information.

Following are examples of several types of reports currently being used
by the Bureau.

**FINANCIAL REPORT FOR MONTHLY PRODUCTION AND COST MEETING**

**MONTH OF SEPTEMBER 1996**

+------------------+----------+--------+--------+----------+----------+
|                  | FY 1996  | SEP 96 | SEP 95 | YEAR TO  |          |
|                  |          |        |        | DATE     |          |
|                  |          |        |        | COST     |          |
+------------------+----------+--------+--------+----------+----------+
|                  | STANDARD | ACTUAL | ACTUAL | FY 1996  | FY 1995  |
+------------------+----------+--------+--------+----------+----------+
| **DC:**          | \$16.00  | \      | \      | \$15.37  | \$15.27  |
|                  |          | $15.16 | $15.07 |          |          |
| **\$1.00 NOTES** |          |        |        |          |          |
+------------------+----------+--------+--------+----------+----------+
| **HIGH DENOM.**  | \$19.25  | \      | \      | \$19.68  | \$20.91  |
|                  |          | $18.97 | $22.10 |          |          |
+------------------+----------+--------+--------+----------+----------+
| **\$100.00       | \$37.61  | \      | N/A    | \$36.00  | N/A      |
| NOTES**          |          | $37.84 |        |          |          |
+------------------+----------+--------+--------+----------+----------+
| **WCF:**         | \$16.39  | \      | \      | \$16.44  | \$15.87  |
|                  | ytd      | $16.77 | $16.28 |          |          |
| **\$1.00 NOTES** |          |        |        |          |          |
|                  | \$16.97  |        |        |          |          |
|                  | \*       |        |        |          |          |
+------------------+----------+--------+--------+----------+----------+
| **HIGH DENOM.**  | \$19.67  | \      | \      | \$19.69  | \$20.89  |
|                  | ytd      | $20.28 | $21.59 |          |          |
|                  |          |        |        |          |          |
|                  | \$20.05  |        |        |          |          |
|                  | \*       |        |        |          |          |
+------------------+----------+--------+--------+----------+----------+

**PROGRAM HIGHLIGHTS**

+------------+-----------------------------------------------+---------+
| **ITEM**   | **COMMENTS**                                  | **PAGE  |
|            |                                               | \#**    |
+------------+-----------------------------------------------+---------+
| **         |                                               |         |
| CURRENCY** |                                               |         |
+------------+-----------------------------------------------+---------+
| Spoilage   | WCF - High Denomination Notes: Spoilage       | 5       |
|            | increased 1% to highest level for the year,   |         |
|            | (and above standards).                        |         |
|            |                                               |         |
|            | DC - High Denomination Notes: Spoilage        |         |
|            | decreased over 1% to                          |         |
|            |                                               |         |
|            | within standard, and close to lowest level    |         |
|            | for FYT 1996.                                 |         |
|            |                                               |         |
|            | DC - \$100 Notes: Spoilage increased by about |         |
|            | 7% due to start up                            |         |
|            |                                               |         |
|            | associated with resumption of production for  |         |
|            | first time since June                         |         |
|            |                                               |         |
|            | 1996\.                                        |         |
+------------+-----------------------------------------------+---------+
| Ink        | Green ink mileage continued to increase for   | 6       |
| Mileage    | DC, to the highest level for the year.        |         |
+------------+-----------------------------------------------+---------+
| Pr         | All DC operations experienced a decline in    | 7-8     |
| oductivity | September due to change over to \$100 notes.  |         |
| per        | WCF operations productivity increased.        |         |
|            |                                               |         |
| Machine    |                                               |         |
| Shift      |                                               |         |
+------------+-----------------------------------------------+---------+
| Inventory  | DC: In process inventory levels decreased to  | 11      |
|            | target ranges, meeting 1 to 3 day goal        |         |
|            | between operations.                           | 12      |
|            |                                               |         |
|            | WCF: In process inventories continued to      |         |
|            | decrease, although                            |         |
|            |                                               |         |
|            | slightly above target levels.                 |         |
+------------+-----------------------------------------------+---------+
| Pr         | Positive 3% BEP-wide, with gains in Currency  | 24-26   |
| oductivity | production                                    |         |
+------------+-----------------------------------------------+---------+
| FTE Usage  | FTE usage continues downward trend            | 27      |
+------------+-----------------------------------------------+---------+

Lessons Learned

**Reporting Case Study**

**U.S. Treasury's Financial Management Service**

## Introduction

The Financial Management Service (FMS) is a bureau of the Department of
the Treasury. FMS' main businesses consist of making a majority of the
federal government's payments, performing the federal government's
central accounting, developing financial management policy and guidance
for the federal government, and collecting debt owed to the federal
government. In short, FMS is the federal government's financial manager.

FMS began implementing a bureau-wide Activity-Based Costing (ABC) model
in May 1995. The initial model was completed in October 1995 and FMS is
currently in the process of refining the activity dictionary, resource
drivers, and the data capturing systems. The activity dictionary,
resource drivers, and data capturing systems make up the
"infrastructure" of the ABC system. We feel that it is essential to have
a solid infrastructure in order to report timely, reliable, and
consistent cost data to management.

At this time, most of the reporting capability is in the planning phase,
because we have concentrated on the ABC system infrastructure. However,
we have developed some standard reports that have been distributed
throughout the organization. The following two reports provide some
insight into the types of cost reports that FMS developed with the
initial ABC model, and FMS' plans to report the cost data throughout the
organization.

**[FMS' ABC System]{.underline}**

FMS conducted two ABC/Business Process Analysis (BPA) pilot projects
prior to the FMS-wide ABC project. One of the major benefits was that
FMS gained the valuable knowledge and skills necessary to complete an
ABC project. After the pilot projects were completed, FMS began the
bureau-wide ABC project. FMS put an ABC Project Team together. The key
is not that FMS used a team approach, but that the team was a
cross-functional team made up of members from all of FMS' program areas,
the Comptroller's Office, and contractors.

The ABC model was completed in the following phases: (1) develop
activity dictionary; (2) rationalize and confirm activity dictionary;
(3) labor costing of activities; (4) resource costing to activities; and
(5) product costing. All of the data gathered during each phase was
loaded into the HyperABC software package that FMS selected for the ABC
system. HyperABC is the "engine" that provides all of the calculations
necessary to allocate and reallocate resources based on the driver
information loaded into the software. HyperABC's strong points are in
the "engine" capacity. In addition to the HyperABC "engine" FMS also
uses HyperLink, which provides the capability to download any data from
HyperABC to lotus spreadsheets for customized reporting capabilities.

## FMS' ABC Reports

FMS developed two reports using HyperLink with the initial ABC model.
Those reports are the Core Business Process Report (page J-9) and the
Organizational Cost Report (page J-10). These reports were distributed
throughout the organization as each area was briefed on the results of
the initial ABC model. The remainder of this section will describe both
of the above reports.

# *Core Business Process Report*

The Core Business Process Report provides the costs of each core
business process in a hierarchical manner. The Core Business Process is
the highest level in FMS' ABC system. Each core business process is
broken down into a group of processes and each process is broken down
into a group of activities. The activities are the lowest and most
detailed level of cost data. FMS gathers all cost data at the
activity-level. An Example of FMS' Core Business Process hierarchy is:

**CORE BUSINESS PROCESS - CENTRAL ACCOUNTING**

Process - Perform Central Accounting

Activity - Verify Agency Data

Activity - Review Bank Data

Activity - Post Adjustments

Activity - Prepare Reports

Activity - Validate Opening/Closing Balances

Activity - Account Administration

Process - Process Appropriations

Activity - Review Appropriation Legislation

Activity - Appropriation Control

The first page of the Core Business Process Report (page J-9) shows the
full cost of the core business process and the full cost of each of the
respective processes that make up the core business process. Along with
the full cost of each process, the report provides the respective
percentage of the core process costs for each process. The report also
provides the total FTE for the core process and each process along with
FTE percentages. The successive pages provide the same cost and FTE data
for each process and the respective activities for each process.

# *Organization Cost Report*

The Organizational Cost Report (page J-10) provides a comparison of
costs for each organizational entity. For each entity, the left side
provides expenses by each object classification. The left side also
provides expense data that would not show up on reports provided by the
administrative accounting system, but nonetheless are expenses of
operating the organization. Some examples of these reallocated expenses
are rent, utilities, and central account expenses. In these cases, the
expenses are recorded at a central account level and thus do not show up
on each branch's expense report. These costs are a cost of doing
business so they have been reallocated down to the branch levels.

The right side of the report provides the activity costs and associated
FTEs for each activity performed by the organization. The total amount
is the same on either side of the report, but the left side provides
traditional data available to each manager while the right side shows
the cost of each activity performed by the branch.

**[HyperABC System]{.underline}**

As mentioned earlier, HyperABC is especially strong in its capability to
perform calculations. The software itself is user-friendly. We have
provided the HyperABC software on FMS' LAN so managers may view the ABC
data without the restrictions of our initial hardcopy reports. The
system allows the user to view any organizational costs (down to the
branch-level) as they relate to any activity, process, or core business
process. In general it allows more flexibility to the user in viewing
the ABC data. The user can also print a quick report from the HyperABC
system, but the reports are lacking in style and modification
capabilities.

**[FMS' Planned ABC Reporting Capabilities]{.underline}**

FMS plans to provide a standard set of reports via our LAN system to all
FMS employees. These standard reports will be developed in conjunction
with the program managers so that we provide cost data that will be
useful and relevant. Although we haven't yet discussed what data the
standard reports will provide, our current reports will most likely be
the basis of the standard set with some flexibility modifications. When
we decide on the set of standard reports, the HyperABC software itself
will only be accessible to the system administrator. However, the system
administrator will provide customized reports at the request of
management. This will provide consistent and reliable cost data to the
organization without jeopardizing the cost system and data integrity.
This will also make the same cost data accessible to everyone in the
organization. Consistency and reliability are the two most important
components of managerial data.

Glossary of Cost Accounting Terminology

(This glossary is intended to serve as a reference for accounting,
finance, and budget terminology that is pertinent to managerial cost
accounting in the federal environment. All terminology is FASAB and
JFMIP compliant.)

**ABSORPTION COSTING** - Method in which all manufacturing costs,
variable and fixed, are treated as product costs, while
non-manufacturing costs (e.g., selling and administrative expenses) are
treated as period costs. Absorption costing for inventory valuation is
required for external reporting.

**ACCESSORIAL CHARGES** - Costs incurred for packing, crating, and
handling related to sales or shipments of property.

**ACCOUNTING CYCLE** - A time period for the sequence of financial
record-keeping; beginning with the recording of financial transactions
as they occur and culminating in the preparation of financial
statements.

**ACCOUNTING PERIOD** - The period of time which an organization
designates for reporting purposes in which general ledger transactions
are closed for posting of additional transactions, and results of
operations are determined for the designated period of time for
management review. The accounting period can be one month, six months,
twelve months, or any time frame designated by the organization.

**ACCRUAL METHOD** - The accrual method of accounting recognizes the
significant aspects of financial transactions as they occur. Under the
accrual method, income and assets are recorded in the period in which
earned or acquired, and expenses and liabilities are recorded in the
period in which incurred. Accrual accounting emphasizes matching
revenues and expenses. Generally, accrual accounting can contribute to
effective financial control over resources and cost of operations and is
essential to developing adequate cost information.

**ACCRUED EXPENDITURE - PAID** - The budgetary account that matches the
proprietary account \"funds disbursed.\" It represents the dollar value
of goods and services received for which payment has been made.

**ACCRUED EXPENDITURE - UNPAID** - The budgetary account, which matches
the proprietary account \"accounts payable.\" It represents the dollar
value of goods and services received for which payment has not been
made.

**ACCRUED EXPENDITURES** - The term used for the credits entered into
the budgetary accounts to recognize liabilities incurred for (1)
services performed by employees, contractors, other Government
accounting entities, vendors, carriers, grantees, lessors, etc.; (2)
goods and other tangible property received; and (3) items such as
annuities or insurance claims for which no current service is required.
Accrued expenditures are categorized as either paid or unpaid.

**ACCRUED EXPENSES** - Expenses incurred during a reporting period for
which payment is not made until a subsequent period. Although the
expense is not paid for during the reporting period, it should be
recognized in the period in which it occurred.

**ACQUISITION COST** - Consists of the amount, net of both trade and
cash discounts, paid for property, including transportation costs.

**ACTIVITY** - The actual task or step performed in producing and
delivering products and services. An aggregation of actions performed
within an organization that is useful for purposes of activity-based
costing.

**ACTIVITY ANALYSIS** - The identification and description of activities
in an organization. Activity analysis involves determining what
activities are done within a department, how many people perform the
activities, how much time is spent performing the activities, what
resources are required to perform the activities, what operational data
best reflect the performance of the activities, and what customer value
the activity has for the organization. Activity analysis is accomplished
with interviews, questionnaires, observation, and review of physical
records of work. It is the foundation for agency process value analysis,
which is key to overall review of program delivery.

**ACTIVITY ATTRIBUTES** - Characteristics of individual activities.
Attributes include cost drivers, cycle time, capacity, and performance
measures. For example, a measure of the elapsed time required to
complete an activity is an attribute.

**ACTIVITY BASE** - Application to the production activity used to
relate overhead to production (e.g., units produced, direct labor hours,
direct labor cost, machine hours).

**ACTIVITY-BASED COSTING** - A cost accounting method that measures the
cost and performance of process related activities and cost objects. It
assigns costs to cost objects, such as products or customers, based on
their use of activities. It recognizes the casual relationship of cost
drivers to activities.

**ACTIVITY CAPACITY** - The demonstrated or expected capacity of an
activity under normal operating conditions, assuming a specified set of
resources over a long period of time. An example of this would be a rate
of output for an activity expressed as 500 cycles per hour.

**ACTIVITY COST ASSIGNMENT** - The process in which the cost of
activities is attached to cost objects using activity drivers.

**ACTIVITY COST POOL** - A grouping of all cost elements associated with
an activity.

**ACTIVITY DRIVER** - A measure of the frequency and intensity of the
demands placed on activities by cost objects. An activity driver is used
to assign costs to cost objects. It represents a line item on the bill
of activities for a product or customer. An example is the number of
part numbers, which is used to measure the consumption of
material-related activities by each product, material type, or
component. The number of customer orders measure the consumption of
order-entry activities by each customer. Sometimes an activity driver is
used as an indicator of the output of an activity, such as the number of
purchase orders prepared by the purchasing activity.

**ACTIVITY DRIVER ANALYSIS** - The identification and evaluation of the
activity drivers used to trace the cost of activities to cost objects.
Activity driver analysis may also involve selecting activity drivers
with a potential for cost reduction.

**ACTIVITY LEVEL** - A description of how an activity is used by a cost
object or other activity. Some activity levels describe the cost object
that uses the activity and the nature of the use. These levels include
activities that are traceable to the product (i.e., unit-level,
batch-level, and product-level costs), to the customer (customer-level
costs), to a market (market-level costs), to a distribution channel
(channel-level costs), and to a project such as a research and
development project (project-level costs).

**ACTIVITY-BASED COST SYSTEM** - A system that maintains and processes
financial and operating data on a firm\'s resources, activities, cost
objects, cost drivers, and activity performance measures. It also
assigns costs to activities and cost objects.

**ACTIVITY-BASED COSTING** - A cost accounting method that measures the
cost and performance of process- related activities and cost objects. It
assigns direct and indirect costs to cost objects, such as products or
customers, based on their use of activities. It recognizes the causal
relationship of cost drivers to activities.

**ACTIVITY-BASED MANAGEMENT** - A discipline that focuses on the
management of activities as the route to improving the value received by
the customer and the profit achieved by providing this value. This
discipline includes cost driver analysis, activity analysis, and
performance measurement. Activity-based management draws on
activity-based costing as its major source of information.

**ACTUAL COST** - An amount determined on the basis of costs incurred,
including standard costs properly adjusted for applicable variance.

**ACTUARIAL COST METHODS** - A recognized actuarial technique used for
establishing the amount and the incidence of employer contributions or
accounting charges for pension costs under a pension plan.

**AGENCYWIDE** - A reporting entity, which is generally assumed to be an
Agency. If a large governmental department has organizational components
that are themselves reporting entities, then the reporting components
and their organizational equivalents would be the agency-wide level.

**ALLOCATIONS** - The amount of obligational authority transferred from
one agency, bureau, or account that is set aside in a transfer
appropriation account to carry out the purpose of the parent
appropriation or fund.

**ALLOTMENT AND SUBALLOTMENT** - An authorization by an official in
charge of an agency, or designee, to the head of any organizational unit
to incur obligations within a specified amount; a formal distribution of
an allocation or sub-allocation containing at least the same legal and
other limitations applicable to the allocation or sub-allocation. A
distribution of budget authority to an installation -level accounting
entity.

**ALLOWANCE** - Acceptable reduction in quantity or quality such as
normal spoilage in an operation.

**ALTERNATIVE COST** - 1. Cost that would pertain if an alternative set
of conditions or assumptions were to prevail (as compared to a cost
assumed or experienced under current conditions). 2. Choosing the next
best or highest valued alternative, compared to the chosen alternative,
will result in benefits forfeited, and thus an alternative cost.

**AMORTIZATION** - The gradual extinguishing of any amount over a period
of time through a systematic allocation of the amount over a number of
consecutive accounting periods such as the retirement of a debt by
serial payments to a sinking fund.

**ANALYSIS OF VARIANCE** - Seeking causes for variances between standard
costs and actual costs; also called variance analysis. A variance is
considered favorable if actual costs are less than standard costs; it is
unfavorable if actual costs exceed standard costs. Unfavorable variances
need further investigation.

**ANTI-DEFICIENCY ACT** - Legislation enacted by Congress to prevent the
incurring of obligations or the making of expenditures (outlays) in
excess of amounts available in appropriations or funds; to fix
responsibility within an agency for the creation of any obligation or
the making of any expenditure in excess of apportionment or
reapportionment or in excess of other subdivisions established pursuant
to sections 1341 and 1517 of 31 U.S.C.; and to assist in bringing about
the most effective and economical use of appropriations and funds.

**APPLIED COST** - One that has been assigned to a product, department,
or activity. An applied cost does not have to be based on actual costs
incurred. Overhead applied to a product is an example of an applied
cost. To apply overhead, a predetermined overhead rate is developed; it
is based on budgeted overhead and budgeted volume of activity.

**APPRAISAL COSTS** - A category of quality costs incurred to determine
whether products and services are conforming to customer requirements,
such as inspection and field testing costs.

**APPROPRIATE COST** - Those costs that are relevant to the particular
situation.

**APPROPRIATED FUNDS** - Appropriated funds are monies made available to
a federal entity by Congress. There are generally two types of
appropriations: annual and multiyear. The appropriation acts approved by
Congress specify the purpose for which the APFs can be used.

**APPROPRIATION** - In most cases, appropriations are a form of budget
authority provided by law that permits federal agencies to incur
obligations and make payments out of the Treasury for specified
purposes. An appropriation usually follows enactment of authorizing
legislation. An appropriation act is the most common means of providing
budget authority, but in some cases the authorizing legislation itself
provides the budget authority.

**ATTRIBUTES** - Characteristics of activities, such as cost drivers and
performance measures.

**ATTRIBUTION** - The process of assigning pension benefits or costs to
periods of employee service.

**AVOIDABLE VARIABLE COST** - The direct and cause-and-effect indirect
costs of resources that could be eliminated or put to other uses if the
stated function or process is discontinued within the specified
organizational unit.

**BACKFLUSH COSTING** - 1. A costing method that applies costs based on
the output of a process. The process uses a bill of material or a bill
of activities explosion to draw quantities from inventory, through
work-in-process, to finished goods; at any intermediate stage, using the
output quantity as the basis. These quantities are generally costed
using standard costs. The process assumes that the bill of material (or
bill of activities) and the standard costs at the time of backflushing
represent the actual quantities and resources used in the manufacture of
the product. This is important, since no shop orders are usually
maintained to collect costs. 2. A costing method generally associated
with repetitive processes.

**BASIC FINANCIAL STATEMENTS** - The basic financial statements are
those on which an auditor would normally be engaged to express an
opinion. The term \"basic\" does not necessarily mean that other
financial information not covered by the auditor\'s opinion is less
important to users than that contained in the basic statements; it
merely connotes the expected nature of the auditor\'s review of, and
association with, the information. The basic financial statements in
financial reports prepared pursuant to the Chief Financial Officers Act,
as amended, are called the \"principal financial statements.\" The Form
and Content of these statements are determined by OMB.

**BEST PRACTICES** - A methodology that identifies an activity as the
benchmark by which a similar activity will be judged. This methodology
is used to assist in identifying a process or technique that can
increase the effectiveness or efficiency of an activity. The source may
be internal (e.g., taken from another part of the company) or external
(e.g., taken from a competitor).

**BILL OF ACTIVITIES** - A listing of the activities required (and,
optionally, the associated costs of the resources consumed) by a product
or other cost object.

**BOOK VALUE** - The net amount at which an asset or liability is
carried on the books of account (also referred to as carrying value or
amount). It equals the gross or nominal amount of any asset or liability
minus any allowance or valuation amount.

**BREAK-EVEN ANALYSIS** - Branch of cost-volume profit (cvp) analysis
that determines the break-even point, which is the level of sales where
total costs equal total revenue. Thus, zero profit results.

**BREAK-EVEN EQUATION** - Equation that helps determine break-even
sales. For example:

px=vx+FC where p = unit selling price

v = unit variable cost

FC = total fixed cost

x = sales in units

**BREAK-EVEN POINT** - The unique sales-level at which neither a profit
nor a loss occurs. It is the sales volume, in units or in dollars, where
total sales revenue equals total costs.

**BUDGET** - 1. A projected amount of cost or revenue for an activity or
organizational unit covering a specific period of time. 2. Any plan for
the coordination and control of resources and expenditures.

**BUDGET AUTHORITY** - The authority provided by federal law to incur
financial obligations that will result in immediate or future outlays.

**BUDGET VARIANCE ANALYSIS** - A comparison of budget to actual results
and a review of favorable and unfavorable variances.

**BUDGETARY ACCOUNTING** - Budgetary accounting is the system that
measures and controls the use of resources according to the purposes for
which budget authority was enacted; and that records receipts and other
collections by source. It tracks the use of each appropriation for
specified purposes in separate budget accounts through the various
stages of budget execution from appropriation to apportionment and
allotment to obligation and eventual outlay. This system is used by the
Congress and the Executive Branch to set priorities, to allocate
resources among alternative uses, to finance these resources, and to
assess the economic implications of federal financial activity at an
aggregate level. Budgetary accounting is used to comply with the
Constitutional requirement that "No Money shall be drawn from the
Treasury, but in Consequence of Appropriations Made by Law; and a
regular Statement and Account of the Receipts and Expenditures of all
public Money shall be published from time to time."

**BUSINESS TYPE ACTIVITY** - Significantly self-sustaining activity
which finances its continuing cycle of operations through collection of
exchange revenue.

**BY-PRODUCT** - Item emerging from a single production process that has
a relatively low sales value in comparison with the firm's main or joint
products. Examples of by-products are sawdust or wood chips in lumber
mill operations.

**CAPACITY** - Ability to produce during a given time period, with an
upper limit imposed by the availability of space, machinery, labor,
materials, or capital. Capacity may be expressed in units, weights,
size, dollars, man-hours, labor cost, etc. Typically, there are five
different concepts of capacity:

\(1\) IDEAL CAPACITY - Volume of activity that could be attained under
ideal operating conditions, with minimum allowance for inefficiency. It
is the largest volume of output possible. Also called theoretical
capacity*,* engineered capacity*,* or maximum capacity*.*

\(2\) PRACTICAL CAPACITY - Highest activity level at which the facility
can operate with an acceptable degree of efficiency, taking into
consideration unavoidable losses of productive time (i.e., vacations,
holidays, repairs to equipment). Also called maximum practical
capacity*.*

\(3\) NORMAL CAPACITY - Average level of operating activity that is
sufficient to fill the demand for the company's products or services for
a span of several years, taking into consideration seasonal and cyclical
demands and increasing or decreasing trends in demand.

\(4\) PLANNED CAPACITY - Similar to normal capacity except it is
projected for a particular single year. Also called expected actual
capacity*.*

\(5\) OPERATING CAPACITY - Similar to planned capacity except the time
period is within a small portion of a single year (i.e., daily, monthly,
quarterly).

**CAPACITY COSTS** - Fixed costs incurred to provide facilities that
increase a firm's ability to produce such as those relating to space,
equipment, and buildings. They include rents, depreciation, property
taxes, and insurance.

**CAPITAL ASSET** - Asset purchased for use in production over long
periods of time rather than for resale. It includes (a) land, buildings,
plant and equipment, mineral deposits, and timber reserves; (b) patents,
goodwill, trademarks, and leaseholds; and (c) investments in affiliated
companies.

**CAPITAL LEASES** - Leases that transfer substantially all the benefits
and risks of ownership to the lessee.

**CAPITALIZE** - To record and carry forward into one or more future
periods any expenditure the benefits or process from which will then be
realized.

**CASH BASIS OF ACCOUNTING** - The cash basis of accounting emphasizes
the receipt and payment of cash. That is, revenue is recognized only
when cash is received from a customer or client, and expenses are
recognized only when cash is actually paid for an item or service
received.

**CASH DISCOUNT** - A reduction in the amount due on a payable if paid
within a stated period.

**CHART OF ACCOUNTS** - The list of general account numbers that
subdivide basic accounting equations, with associated titles and
definitions, used by an entity for posting to its general ledger.

**CHIEF FINANCIAL OFFICERS ACT (CFO) OF 1990 (PUBLIC LAW 101-576)** -
Legislation to reform financial management in the federal government.

**CLASSIFICATION STRUCTURE** - The data elements defined to support a
specific portion of an information architecture.

**CLEANUP COSTS** - The costs of removing, containing, and/or disposing
of (1) hazardous waste from property or (2) material and/or property
that consists of hazardous waste.

**COMMON COST** - The cost of resources employed jointly in the
production of two or more outputs where the cost cannot be directly
traced to any one of those outputs.

**COMMON DATA SOURCE** - all of the financial and programmatic
information available for the budgetary, cost, and financial accounting
processes. It includes all financial and much non-financial data, such
as environmental data, that are necessary for budgeting and financial
reporting as well as evaluation and decision information developed as a
result of prior reporting and feedback.

**COMPOSITE BREAK-EVEN POINT** - Term used to designate break-even sales
when more than one product or service is provided. A break-even point
for all the products or services combined can be determined, based on
the expected SALES MIX and the composite or weighted average unit
contribution margin.

**CONSTANT DOLLAR** - A dollar value adjusted for changes in the average
price level. A constant dollar is derived by dividing a current dollar
amount by a price index. The resulting constant dollar value is that
which would exist if prices had remained at the same average level as in
the base period. Any changes in such constant dollar values would
therefore reflect only changes in the real volume of goods and services,
not changes in the price level. Constant dollar figures are commonly
used to compute the real value of the gross domestic product and its
components and to estimate the real level of federal receipts and
outlays.

**CONSTRUCTION-IN-PROGRESS** - Inventory method whereas the inventory
account reflects construction costs incurred using the completed
contract method and the percentage of completion method.

**CONSUMED COST** - Measure of expired benefits. Examples include cost
of goods sold and periodic depreciation expense of a fixed asset. Income
statement expenses are consumed costs in the generation of revenue.

**CONSUMPTION METHOD -** A method of accounting for goods, such as
materials and supplies, where the goods are recognized as assets upon
acquisition and are expensed as they are consumed.

**CONTRIBUTION (MARGIN) INCOME STATEMENT** - Income statement that
organizes costs by behavior. It shows the relationship of variable costs
and fixed costs, regardless of the functions a given cost item is
associated with. A contribution income statement highlights the concept
of contribution margin (cm). This format provides data that are useful
for internal management.

**CONTRIBUTION MARGIN** - Difference between sales and the variable
costs of the product or service, also called *marginal income*. It is
the amount of money available to cover fixed costs and generate profits.
For example, if sales are \$15,000 and variable costs are \$6100,
contribution margin is \$8900 (\$15,000 less \$6100).

**CONTRIBUTION MARGIN RATIO** - Computation showing contribution margin
as a percentage of sales.

**CONTRIBUTION MARGIN VARIANCE** - A measure of deviation from budget
for the contribution margin. Specifically, it is the difference between
the actual contribution margin and the planned contribution margin.

**CONTRIBUTION MARGIN METHOD** - Variation of the equation method. It is
used in cost-volume-profit (cvp) analysis or break-even analysis. The
approach centers on the idea that each unit sold provides a certain
amount of contribution margin that goes toward the covering of fixed
costs.

**CONTRIBUTION MARGIN PER UNIT** - The amount that the sale of one unit
contributes toward recovering fixed costs and profit.

**CONTRIBUTION RATE** - The contribution margin per unit expressed as a
percentage of the product's selling price.

**CONTROLLABLE COST** - A cost that can be influenced by the action of
the responsible manager. The term always refers to a specified manager
since all costs are controllable by someone.

**CONVENTIONAL COST SYSTEM** - A cost system that uses only unit- (or
volume-) based cost drivers to apply overhead costs to products and
services.

**CONVERSION COST** - Sum of the costs of direct labor and overhead.

**COST** - The monetary value of resources used or sacrificed or
liabilities incurred to achieve an objective, such as to acquire or
produce a good or to perform an activity or service. Depending on the
nature of the transaction, cost may be charged to operations
immediately, i.e., recognized as an expense of the period, or to an
asset account for recognition as an expense of subsequent periods.

**COST ABSORPTION** - Application of the costs to the physical units or
other measures of output that pass through the process. First, costs
must be accumulated by processing departments before applying the
department costs to the units. An application of overhead costs to
processing departments (or jobs), using a predetermined overhead rate,
is an example of cost absorption.

**COST ACCOUNTING** - Method of accumulating, classifying, summarizing,
reporting, and interpreting information for the purposes of operational
planning and control, special decisions, and product costing.

**COST ACCOUNTING PRACTICE** - Any disclosed or established accounting
method or technique which is used for measurement of cost, assignment of
cost to accounting periods, and assignment of costs to cost objects.

**COST ACCOUNTING STANDARDS** - A set of rules issued by any of several
authorized organizations or agencies, such as the Federal Accounting
Standards Advisory Board (FASAB), Governmental Accounting Standards
Board (GASB), Cost Accounting Standards Board (CASB), American Institute
of Certified Public Accountants (AICPA) or the Association of Chartered
Accountants (ACA), dealing with the determination of costs to be
allocated, inventoried, or expensed.

**COST ACCOUNTING SYSTEM** - A system of accounting for operations that
uses perpetual inventory records.

**COST ACCUMULATION** - Collection of costs in an organized fashion by
means of a cost accounting system. There are two primary approaches to
cost accumulation: job order and process costing. Under a job order
system, the three basic elements of costs, direct materials, direct
labor, and overhead, are accumulated according to assigned job numbers.
Under a process cost system, costs are accumulated according to
processing department or cost center.

**COST ALLOCATION** - A method of assigning costs to activities,
outputs, or other cost objects. The allocation base used to assign a
cost to objects is not necessarily the cause of the cost. For example,
assigning the cost of power to machine activities by machine hours is an
allocation because machine hours are an indirect measure of power
consumption.

**COST ASSIGNMENT** - A process that identifies costs with activities,
outputs, or other cost objects. In a broad sense, costs can be assigned
to processes, activities, organizational divisions, products, and
services. There are three methods of cost assignment: (a) directly
tracing costs wherever economically feasible, (b) cause-and-effect, and
(c) allocating costs on a reasonable and consistent basis.

**COST BEHAVIOR ANALYSIS** - Separating mixed costs into their variable
and fixed elements. Mixed costs are common to a wide range of firms.
Examples of mixed costs include sales compensation, repairs and
maintenance, and overhead in general. Mixed costs must be separated into
the variable and fixed elements in order to be included in a variety of
business planning analyses such as cost-volume-profit (cvp) analysis.
There are several methods available for this purpose including the
least-squared method.

**COST BEHAVIOR PATTERN** - Manner in which a cost will react to changes
in the level of activity. Costs may be viewed as variable, fixed, or
mixed (semi-variable). A mixed cost is one that contains both variable
and fixed elements. For planning, control, and decision purposes, mixed
costs need to be separated into their variable and fixed components,
using such methods as the high-low method and the least-squared method.
An application of the variable-fixed breakdown is a break-even and
cost-volume profit (cvp) analysis.

**COST BENEFIT ANALYSIS** - Manner of determining whether the favorable
results of an alternative are sufficient to justify the cost of taking
that alternative. This analysis is widely used in connection with
capital expenditure projects. An example of cost-benefit analysis is
where the cost incurred to uncover the reasons for a variance outweigh
the benefit derived.

**COST CENTER** - A logical or physical grouping of one or more similar
services for the purpose of identifying obligations or developing the
cost identification for the services. Services are grouped into cost
centers in order to (1) normalize between services that use similar
resources with different capabilities, (2) apply surcharges and
discounts to services, (3) identify costs for different classes of the
same service, or (4) identify obligations. This is the lowest level
(that is, unit) or activity that is used to identify obligations or
expend resources to produce a unit of work, and the lowest level of
activity to segregate costs for management in order to assess
efficiency, usage, examine trends, etc.

**COST CONTROL** - Steps taken by management to assure that the cost
objectives set down in the planning stage are attained and to assure
that all segments of the organization function in a manner consistent
with its policies. For effective cost control, most organizations use
standard cost systems, in which the actual costs are compared against
standard costs for performance evaluation and the deviations are
investigated for remedial actions. Cost control is also concerned with
feedback that might change any or all of the future plans, the
production method, or both.

**COST DISTRIBUTION** - Assignment of cost to activities, or other cost
objects by either assignment based on cause and effect or the allocation
of costs on a reasonable basis, consistent with SFFAS No. 4. The
collective term for these two methods of cost assignment is used since,
from a systems point of view, both require the development and use of
specific distribution rules.

**COST DRIVER** - Any factor that causes a change in the cost of an
activity or output. For example, the quality of parts received by an
activity, or the degree of complexity of tax returns reviewed by the
IRS.

**COST DRIVER ANALYSIS** - The examination, quantification, and
explanation of the effects of cost drivers. Management often uses the
results of cost driver analyses in continuous improvement programs to
help reduce throughput time, improve quality, and reduce cost.

**COST EFFECTIVE** - Among decision alternatives, the one whose cost is
lower than its benefit. The most cost-effective program would be the one
with the lowest cost-benefit-ratio among various programs competing for
a given amount of funds.

**COST ELEMENT** - An amount paid for a resource consumed by an activity
and included in an activity cost pool. For example, power cost,
engineering cost, and depreciation may be cost elements in the activity
cost pool for a machine activity.

**COST ESTIMATION** - Measurement of past costs for the purpose of
predicting future costs or decision-making purposes. For example, a cost
volume formula (such as *y =* \$300 = \$5*x*) can be used to estimate a
cost item *y* for any given value of volume *x*.

**COST FINDING** - Cost finding techniques produce cost data by
analytical or sampling methods. Cost finding techniques are appropriate
for certain kinds of costs, such as indirect costs, items with costs
below set thresholds within programs, or for some programs in their
entirety. Cost-finding techniques support the overall managerial cost
accounting process and can represent non-recurring analysis of specific
costs.

**COST OBJECT** - An activity, output, or item whose cost is to be
measured. In a broad sense, a cost object can be an organizational
division, a function, task, product, service, customer, or cost
objective.

**COST OBJECTIVE** - An activity, operation, or completion of a unit of
work to complete a specific job for which management decides to
identify, measure, and accumulate costs. The cost objective must be
discrete enough and described in writing to such a level of detail as to
form a basis to establish cost centers and output products.

**COST OF GOODS MANUFACTURED** - The cost of producing goods during the
accounting period. The cost of goods manufactured is an element of the
income statement. It consists of the cost of producing goods: direct
material, direct labor, and overhead. Also considered is the change in
the work-in-process inventory.

**COST OF GOODS SOLD** - See COST OF SALES.

**COST OF PREDICTION ERROR** - Cost of a failure to predict a certain
variable accurately.

**COST OF PRODUCTION REPORT** - Summary of the total cost of an item. It
involves charges to a processing department and the allocation of the
total cost between the ending work-in-process inventory and the units
completed and transferred to the next department or finished goods
inventory.

**COST OF QUALITY** - All the resources expended for appraisal costs,
prevention costs, and internal and external failure costs of activities
and cost objects.

**COST OF SALES** - Price of buying or making an item that is sold; also
called *cost of goods sold.* The difference between sales and cost of
sales is gross profit. For a retail business, the cost of sale is the
purchase price of the item. For a manufactured good, the cost of sale
includes direct material, direct labor, and overhead associated with
producing it.

**COST POOL** - Grouping of individual costs. Subsequent allocations are
made of cost pools rather than of individual costs. Costs are often
pooled by departments, by jobs, or by behavior pattern. For example,
overhead costs are accumulated by service departments in a factory and
then allocated to production departments before multiple departmental
overhead rates are developed for product costing purposes.

**COST PREDICTION** - Forecast of costs for managerial decision-making
purposes. The terms *cost estimation* and *cost prediction* are used
interchangeably. To predict future costs, a cost function is often
specified and estimated statistically. The cost function may be either
linear (i.e., *y = a + bx)* or nonlinear. The estimated cost function
must pass statistical tests, such as having a high r-squared and a high
t-value, to provide sound cost prediction.

**COST-VOLUME FORMULA** - Cost accounting formula used for cost
prediction and flexible budgeting purposes. It is a cost function in the
form of:

*y = a+bx*

Where *y* = the semi-variable (or mixed) costs to be broken up

*x* = any given measure of activity such as volume and labor-hours

*a* = the fixed cost component

*b* = the variable rate per unit of *x*

For example, the cost-volume formula for overhead is *y =* \$200 +
\$10*x* where *y* = estimated overhead and *x* = direct labor-hours,
(i.e., the overhead is estimated to be \$200 fixed, plus \$10 per hour
of direct labor).

**COST-VOLUME-PROFIT (CVP) ANALYSIS** - Analysis that deals with how
profits and costs change with a change in volume. More specifically, it
looks at the effects on profits of changes in such factors as variable
costs, fixed costs, selling prices, volume, and mix of products sold.

**CROSS-SUBSIDY** - The improper assignment of costs among cost objects
such that certain cost objects are overcosted while others are
undercosted relative to the activity costs assigned. For example,
traditional cost accounting systems tend to overcost high-volume
products and undercost low-volume products.

**CUSTOMER ORDER** - An order received and accepted by the performing
activity from a customer. It is written evidence that certain goods and
services will be provided to the tenderer of the order for a specified
amount. The order must contain an original signature or equivalent of
both the ordering activity and the receiving activity.

**DEPARTMENTAL CONTRIBUTION TO OVERHEAD** - The amount by which a
department's revenues exceed its direct costs and expenses.

**DEPLETION** - An accounting technique that allocates the cost of
natural resources as an operating expense during the period of life
which is normally considered reasonable for the natural resources to be
consumed.

**DEPRECIATION ACCOUNTING** - The systematic and rational allocation of
the acquisition cost of an asset, less its estimated salvage or residual
value, over its estimated useful life.

**DEVOLUTION -** Management's decision to spin-off or discontinue some
or all of the operations of an organizational component.

**DIFFERENTIAL COST** - The cost difference expected if one course of
action is adopted over of another.

**DIRECT ALLOCATION METHOD** - Method of allocating the costs of each
service department directly to production departments; also called
*direct method.* Under this method, no consideration is given to
services performed by one service department for another.

**DIRECT COST** - The cost of resources directly consumed by an
activity. Direct costs are assigned to activities by direct tracing of
units of resources consumed by individual activities. A cost that is
specifically identified with a single cost object.

**DIRECT LABOR** - Work directly involved in making a product or in
providing a service. Examples of direct labor costs are the wages of
assembly workers on an assembly line and the wages of a machine tool
operator in a machine shop. Direct labor is an inventoriable cost.

**DIRECT MATERIALS** - Materials that physically become part of a
product or service and therefore are clearly identified with specific
outputs or services.

**DISCLOSURE** - Reporting information in notes or narrative regarded as
an integral part of the basic financial statements.

**DISCOUNT** - The difference between the estimated worth of a future
benefit and its present value; a compensation for waiting or an
allowance for returns from using the present value of these returns in
other ways.

**DISCOUNT RATE** - An interest rate that is used in present value
calculations to equate amounts that will be received or paid in the
future, to their present value.

**DISCOUNTED CASH FLOW** - A technique used to evaluate the future cash
flows generated by a capital investment to determine their present
value.

**DISCRETIONARY COST** - Cost changed by management decision such as
advertising, repairs and maintenance, and research and development.

**DONATED CAPITAL** - The amount of non-reciprocal transfers of assets
or services from state, local, and foreign governments; individuals; or
others not considered parties related to the Government.

**DRAWBACKS** - Refunds of all or part of duties on imported goods that
are subsequently exported or destroyed. Typically these arise when
imported materials are used to manufacture a product that is later
exported. In such cases, most of the duties originally paid are
refundable when the finished product is exported.

**ECONOMIC LIFE** - The period during which a fixed asset is capable of
yielding services of value to its owner.

**EFFICIENCY VARIANCE** - A measure of how effectively an organization
utilized inputs in the production of goods and services. Inputs can be
in the form of materials, labor, or variable overhead. It is the
difference between the quantity of inputs that were actually used and
the standard quantity planned for that level of production, multiplied
by the standard price per unit of input.

**END USER** - Any component of a reporting entity that obtains goods or
services for direct use in its normal operations. The component may also
be a contractor.

**ENTITLEMENT PERIOD** - The period (such as monthly) at which benefits
become due.

**ENTITLEMENT PROGRAM** - A program in which the federal government
becomes automatically obligated to provide benefits to members of a
specific group who meet the requirements established by law.

**ENTITY** **-** A unit within the federal government, such as a
department, agency, bureau, or program, for which a set of financial
statements would be prepared. Entity also encompasses a group of related
or unrelated commercial functions, revolving funds, trust funds, and/or
other accounts for which financial statements will be prepared in
accordance with OMB annual guidance on Form and Content of Financial
Statements.

**EQUIVALENT UNITS** - Number of partially completed units considered to
be equivalent to a number of fully completed units. For example, if 1000
units are in work-in-process at the end of the period and are considered
80% complete, the equivalent production is 800 units. The equivalent
unit cost of an item equals the total cost divided by the equivalent
units. If the total cost of the item was \$2400, the unit cost would be
\$3 (\$2400/800). Equivalent units are determined separately for direct
material and conversion cost. If 3000 units in ending work-in-process
are 70% complete as to direct material and 90% complete as to
conversion, the equivalent units are 2100 for direct material and 2700
for conversion.

**ESTIMATED ACTUAL CHARGES** - A systematic and documented estimate of
actual cost. The procedure is used in the absence of an established cost
accounting system, and the procedure is sometimes referred to as a cost
finding technique.

**ESTIMATED COST** - The process of projecting a future result in terms
of cost, based on information available at the time. Estimated costs,
rather than actual costs, are sometimes the basis for credits to
work-in-process accounts and debits to finished goods inventory.

**EVENT** - A happening of consequence to an entity. It may be an
internal event that occurs within an entity, such as the transforming of
raw materials into a product. It may be an external event that involves
interaction between an entity and its environment, such as a transaction
with another entity, an act of nature, theft, vandalism, a tort caused
by negligence, or an accident.

**EXCHANGE REVENUE** - Inflows of resources to a governmental entity
that the entity has earned. They arise from exchange transactions, which
occur when each party to the transaction sacrifices value and receives
value in return.

**EXCHANGE TRANSACTION** - A transaction that arises when each party to
the transaction sacrifices value and receives value in return.

**EXECUTORY COST** - Those costs such as insurance, maintenance, and
taxes incurred for leased property, whether paid by the lessor or
lessee.

**EXPENDITURE** - A term that has the same definition as outlay, with
respect to provisions of the Antideficiency Act (31 U.S.C. 1513-1514)
and the Congressional Budget and Impoundment Control Act of 1974 (2
U.S.C. 622(i)).

**EXPENSE** - Outflows or other depletion of resources or incurring
liabilities (or a combination of both), the benefits from which apply to
an entity's operations for the current accounting period, but do not
extend to future periods.

**FACILITIES** - Industrial property (other than material, special
tooling, special test equipment, and military property) for production,
maintenance, research, development, or testing, including real property
(other than land) and rights therein, buildings, structures,
improvements, and plant equipment (including capital leases).

**FEDERAL MISSION PROPERTY, PLANT, & EQUIPMENT (PP&E)** - Items used to
meet a federal government mission in which the specific PP&E used is an
integral part of the output of the mission.

**FINANCIAL ACCOUNTING** - 1. The accounting for assets, liabilities,
equities, revenues, and expenses as a basis for reports to external
parties. 2. A methodology that focuses on reporting financial
information primarily for use by owners, external organizations, and
financial institutions. This methodology is constrained by rule-making
bodies such as the Financial Accounting Standards Board (FASB), the
Securities Exchange Commission (SEC), and the American Institute of
Certified Public Accountants (AICPA).

**FINANCIAL EVENT** - Any occurrence that requires the generation of a
transaction having financial consequences necessitating a posting to the
proprietary and/or budgetary general ledger accounts related to the
receipt of appropriations or other financial resource; acquisition of
goods or services; payments or collections; recognition of guarantees,
benefits to be provided, or other potential liabilities; or other
reportable financial activities.

**FINANCIAL MANAGEMENT** - That aspect of management that provides
direction, guidance, and control of financial operations for achieving
program objectives through the application of planning, budgeting,
accounting, and reporting; management of resources, contracts and
investments; auditing, analysis and evaluation. Financial management
includes the process of acquiring, allocating, and controlling the use
of resources, especially fiscal, and generally those impacting manpower,
methods, and materiel.

**FINANCIAL MANAGEMENT PROCESS** - The financial management process
begins upon the creation of a business transaction which results in the
recording of a financial event at the transaction level, and includes
transaction details recorded in mixed systems, such as inventory and
property systems, which are aggregated for posting to general ledger
control accounts. The financial management process ends with the
preparation of the financial statements.

**FINANCIAL MANAGEMENT SYSTEMS** - The financial systems and the
financial portions of mixed systems necessary to support financial
management.

**FINANCIAL SYSTEM** - An information system comprised of one or more
functions that is used in accounting, finance, or budget execution for
any of the following: collecting, processing, maintaining, transmitting,
and reporting data about financial events; supporting financial planning
or budgeting activities; accumulating and reporting cost information; or
supporting the preparation of financial statements. A financial system
encompasses automated and manual processes, procedures, controls, data,
hardware, software, and support personnel dedicated to the operation and
maintenance of financial system functions. A financial system also
provides budget execution capability when it records the funding and
related budget execution documents, establishes and tracks the use of
funds against limitations assigned, tracks the use of these funds
through operating or financial plans, maintains current information on
commitments and obligations according to the classification structure on
a fund by fund basis, and/or provides for certification of funds
availability prior to the issuance of a commitment, obligation, or
expenditure.

**FINANCING INTEREST** - Interest charged as a cost of extending credit
as opposed to interest charged because of delinquency.

**FINISHED GOODS INVENTORY** - Products that have completed the process
and are ready to be sold by the manufacturer.

**FIRST-IN, FIRST-OUT (FIFO**) - A cost flow assumption; the first goods
purchased or produced are assumed to be the first goods sold.

**FIXED ASSETS** - A category of property consisting of those items used
in the production of other assets or services and have a useful life of
two years or more.

**FIXED COST** - A cost that does not vary in the short term with the
volume of activity. Fixed cost information is useful for cost savings by
adjusting existing capacity, or by eliminating idle facilities. Also
called a Non-Variable Cost or Constant Cost.

**FIXED OVERHEAD** - Portion of total overhead that remains constant
over a given time period without regard to changes in the volume of
activity. Examples of fixed overhead are depreciation, rent, property
taxes, insurance, and salaries of supervisors.

**FIXED OVERHEAD SPENDING (BUDGET) VARIANCE** - That portion of the
fixed overhead variance that results from the difference between the
actual fixed overhead incurred and the budgeted amount of fixed
overhead.

**FIXED OVERHEAD VARIANCE** - Difference between actual fixed overhead
incurred and fixed overhead applied to production. The total fixed
overhead variance is divided into two specific variances: volume
variance and fixed overhead spending (budget) variance.

**FIXED OVERHEAD VOLUME (DENOMINATOR) VARIANCE** - A measure of the
impact of operating at a higher or lower level of capacity than planned.
The component of the fixed overhead variance that measures the
difference between budgeted fixed overhead and applied fixed overhead
based on the standard hours. More specifically, it is the difference
between the actual activity level and the budgeted activity level,
multiplied by the standard fixed overhead rate.

**FIXED PRICE** - Price that serves as a standard for the valuation of
certain inventory accounts (i.e., raw material, work-in-process, and
finished goods) in standard costing.

**FLEXIBLE (VARIABLE) BUDGET** - One based on different levels of
activity. It is an extremely useful tool for comparing the actual cost
incurred to the cost allowable for the activity level achieved. It is
dynamic in nature rather that static. By using the cost-volume formula
(or flexible budget formula), a series of budgets can be developed
easily for various levels of activity. A static (fixed) budget is geared
for only one level of activity and has problems in cost control.
Flexible budgeting distinguishes between fixed and variable costs, thus
allowing for a budget that can be automatically adjusted (via changes in
variable cost totals) to the particular level of activity *actually*
attained. Thus variances between actual costs and budgeted costs are
adjusted for volume ups and downs before differences due to price and
quantity factors are computed. The primary use of the flexible budget is
for accurate measure of performance by comparing actual costs for a
given output with the budgeted costs for the *same level of output*.

**FOREIGN CURRENCY FLUCTUATIONS** - The difference between estimated
rates approved for execution and actual foreign currency exchange rates
in effect at time of payment that cause changes in obligations or
contractual liabilities. Obligations are recorded using the estimated
rate, and payments are made using the current foreign currency exchange
rate.

**FULL ABSORPTION COSTING** - A method of costing that assigns (absorbs)
all labor, material, and service/facilities and support costs to
products or other cost objects. The costs assigned include those that do
and do not vary with the level of activity performed.

**FULL COST** - The sum of all costs required by a cost object including
the costs of activities performed by other entities regardless of
funding sources. More specifically, the full cost of an output produced
by a responsibility segment is the sum of (1) the costs of resources
consumed by the responsibility 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 and by other reporting entities.

**FULL-COST-PLUS PRICING** - Method in which the cost base is the full
cost per unit. Selling and administrative costs are provided for through
the markup that is added to this base.

**FUNCTION COST** - Classification showing the nature of the output for
which costs are incurred, such as product packaging, sales promotion, or
other such specific activities.

**FUNCTIONAL CLASSIFICATION - (In a Cost Accounting Sense)** - System
under which costs are classified according to the function they perform
within the business; for example, selling, general and administrative,
or financial costs. The traditional approach to the income statement,
which is required for external reporting, uses this classification of
costs. There are different ways of classifying costs. For example, costs
are classified by behavior as variable or fixed, according to their
response to changes in levels of activity.

**GENERAL AND ADMINISTRATIVE COSTS (G&A)** - Labor and non-labor costs
that cannot be reasonably associated with any single output or group of
outputs and are, therefore, allocated over all outputs.

**GENERAL LEDGER** - The core of an accounting system which is a
chronological record of accounting transactions. It shows the names of
accounts, the amounts that are to be debited and credited to each
account, and descriptions of the transactions. Also see U.S. Standard
General Ledger (U.S.S.G.L.).

**GENERAL PURPOSE FINANCIAL REPORTS** - Reports intended to meet the
common needs of diverse users who typically do not have the ability to
specify the basis, form, and content of the reports they receive.

**GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)** - Guidelines that
accountants follow in observing and communicating financial data.
Authoritative sources of GAAP are: Financial Accounting Standards Board
(FASB) Statements of Financial Accounting Standards and Interpretations;
Accounting Principles Board (APB) Opinions; and American Institute of
Certified Public Accountants (AICPA) Accounting Research Bulletins.
Other sources include: FASB Technical Bulletins; AICPA Industry Audit
and Accounting Guides; and AICPA Statements of Position. The phrase
\"generally accepted accounting principles\" (GAAP) is a technical
accounting term which encompasses the conventions, rules, and procedures
necessary to define accepted accounting practices at a particular time.
It includes not only broad guidelines of general application, but also
detailed practices and procedures. Those conventions, rules, and
procedures provide a standard by which financial presentations are
measured.

**GOOD** - A tangible product produced for a customer.

**GOODS IN PROCESS INVENTORY** - Products that are in the process of
being manufactured, but that are not yet complete.

**GOVERNMENT‑FURNISHED EQUIPMENT (GFE)** - Property provided to a
contractor by the federal government to use in producing an end product.
It is not consumed, but is returned in the same form at the end of the
contract.

**GOVERNMENT‑FURNISHED MATERIAL (GFM)** - Property provided to a
contractor by the federal government which may be incorporated into an
end item (a change in form) or may be consumed in the performance of a
contract.

**GOVERNMENT‑FURNISHED PROPERTY (GFP)** - Property acquired directly by
the government and made available to a contractor.

**GOVERNMENT-ACKNOWLEDGED EVENTS** - Events that are not a liability in
themselves, but are \"of financial consequence\" to the federal
government because it chooses to respond to the event.

**GOVERNMENT MANAGEMENT REFORM ACT OF 1994 (GMRA) (PUBLIC LAW
103-356)** - Legislation, which expands the CFO Act's requirement for
audited financial statements to all 24 CFO agencies. Also, requires
strategic plans and vision statements for each agency.

**GOVERNMENT PERFORMANCE AND RESULTS ACT OF 1993 (GPRA)** **(PUBLIC LAW
103-62)** - Legislation which provides for the establishment of
strategic planning and performance measurement in the federal
government.

**GOVERNMENT-RELATED EVENTS** - Non-transaction-based events that
involve interaction between federal entities and their environment.

**GOVERNMENTWIDE -** The entire federal government, inclusive of all
costs incurred in the government and reported in the consolidated
financial statements of the federal government.

**GRANTS** - Monetary assistance awarded by the government for which no
substantial involvement is anticipated between the government and the
recipient during performance of the contemplated activity. Grants are
not expected to be repaid by the grantee.

**HISTORICAL COST** - Initially, the amount of cash (or its equivalent)
paid to acquire an asset.

**HOLDING COST** - A financial technique that calculates the cost of
retaining an asset (e.g., finished goods inventory or a building).
Generally, the calculation includes a cost of capital in addition to
other costs such as insurance, taxes, and space.

**HOMOGENEOUS COST POOL** - A group of overhead costs associated with
activities that can use the same cost driver.

**HUMAN CAPITAL** - Expenses incurred for education and training
programs financed by the federal government for the benefit of the
public and designed to increase or maintain national economic productive
capacity.

**IDLE CAPACITY** - Unused capacity.

**IDLE TIME** - Cost of direct labor for employees unable to perform
their assigned tasks because of machine breakdowns, shortage of
materials, power failure, production scheduling, and the like. The cost
of idle time is treated as part of overhead \-- that is, as part of
indirect costs that should be spread over all the production of a
period.

**IMPUTED COST** - Cost that is implied, but not reflected in the
financial reports of the firm; also called *implicit cost.* Imputed
costs consist of the opportunity costs of time and capital that the
manager has invested in producing the given quantity of production, and
the opportunity costs of making a particular choice among the
alternatives being considered.

**INCOME** - 1. Money earned during an accounting period that results in
an increase in total assets. 2. Items such as rents, interest, gifts,
and commissions. 3. Revenues arising from sales of goods and services.
4. Excess of revenues over expenses and losses for an accounting period
(i.e., net income). See also gross income; income realization; net
income; revenue.

**INCREMENTAL ANALYSIS** - Decision-making method that utilizes the
concept of relevant costs; also known as relevant cost approach or
differential analysis*.*

**INCREMENTAL COST** - The increase or decrease in total costs that
would result from a decision to increase or decrease output level, to
add a service or task, or to change any portion of operations. This
information helps in making decisions such as to contract work out,
undertake a project, or increase, decrease, modify, or eliminate an
activity or product.

**INDIRECT COST** - A cost that cannot be identified specifically with
or traced to a given cost object in an economically feasible way.

**INDIRECT EXPENSES** - Expenses that are not easily associated with a
specific department; they are incurred for the benefit of more than one
department.

**INDIRECT LABOR** - Labor *not* directly involved in production but
essential to the process, such as supervisory personnel.

**INDIRECT MATERIALS** - Materials that are used in support of the
production process but that do not become a part of the product or
service and are not directly traceable to the output.

**INFORMATION SYSTEM** - The organized collection, processing,
transmission, and dissemination of information in accordance with
defined procedures, whether automated or manual.

**INTENSITY** - The cost consumed by each unit of the activity driver.
It is assumed that the intensity of each unit of the activity driver for
a single activity is equal. Unequal intensity means that the activity
should be broken into smaller activities, or that a different activity
driver should be chosen.

**INTEGRATION** - The use of common processes and standardized data to
effectively and efficiently manage and report on the use of financial
resources, and track the financial implications of activities of the
federal government.

**INTER-ENTITY** - A term meaning between or among different federal
reporting entities. It commonly refers to activities or costs between
two or more agencies, departments, or bureaus.

**INTER-AGENCY ALLOCATIONS** - Distributions of an agency\'s budgetary
resources to another agency, separately identified in the accounts to
ensure that the receiving agency is responsive to the allocating agency.
Such allocations may be non‑expenditure transfers, which establish
transfer appropriation accounts, or subdivisions of an agency.

**INTEREST** - The service charge for the use of money or capital, paid
at agreed intervals by the user, commonly expressed as an annual
percentage of outstanding principal.

**INTEREST METHOD** - Under the interest method of amortization, an
amount of interest equal to the carrying amount of the investment times
the effective interest rate is calculated for each accounting period.
This calculated interest is the effective interest of the investment
(referred to as \"effective yield\" in some literature). The effective
interest is compared with the stated interest of the investment. (The
stated interest is the interest that is payable to the investor
according to the stated interest rate.) The difference between the
effective interest and the stated interest is the amount by which the
discount or the premium should be amortized (i.e., reduced) for the
accounting period.

**INTEREST PENALTY** - A payment of money by the government to a
contractor when a payment for goods or services is not made by the
payment due date.

**INTEREST RATE** - The price charged per unit of money borrowed per
year, or other unit of time, usually expressed as a percentage.

**INTERNATIONAL BUDGET COSTS** - Costs which are normally accepted into
the budgets of the international organizations.

**INTRA-ENTITY COSTS** - Costs from organizational components within the
reporting entity that provide support for the responsibility segment's
programs, projects, or activities. These costs include the direct and
indirect costs of other organizational components of the reporting
entity.

**INVENTORY** - Inventory is a category of property consisting of those
items held for sale or issue.

**INVESTMENT** - As a budget term, investment refers to equipment
financed with procurement appropriation accounts. As an accounting term,
investment is an asset that meets prescribed capitalization criteria
established by the Comptroller General.

**JOB (ORDER) COST SHEET** - Subsidiary record for work-in-process
inventory under a job order cost accounting system. A separate cost
sheet is kept for each identifiable job, accumulating the direct
materials, direct labor, and overhead assigned to that job as it moves
through production. The form varies according to the needs of the
company.

**JOB** - A unique product or service that is produced to meet the
demands of a particular customer.

**JOB LOT** - A group of unique products or services that is produced
for a particular customer.

**JOB ORDER COST ACCOUNTING SYSTEM** - A cost accounting system that is
designed to determine the cost of producing each job or job lot, and
that accumulates costs by job.

**JOB ORDER COSTING** - A method of cost accounting that accumulates
costs for individual jobs or lots. A job may be a service or
manufactured item, such as the repair of equipment or the treatment of a
patient in a hospital.

**JOB ORDER MANUFACTURING** - A type of manufacturing that produces
unique products (or services) for each customer.

**JOINT COST** - A single cost incurred in producing or purchasing two
or more essentially different products.

**JOINT PRODUCTS** - Items that have a relatively significant sales
value when two or more types are produced simultaneously from the same
input by a joint process. For example, gasoline, fuel oil, kerosene, and
paraffin are the joint products produced from crude oil.

**JUST-IN-TIME (JIT)** - An approach to managing inventories and
production operations such that units of materials and products are
obtained and provided only as they are needed.

**LABOR EFFICIENCY VARIANCE** - A measure that captures the cost impact
between the amount of labor time that was actually used and the planned
amount for a given level of output. More specifically, it is the
difference between the actual amount of labor time and the standard
labor time allowed, multiplied by the standard labor rate.

**LABOR RATE (PRICE) VARIANCE** - A measure that captures the cost
impact between the actual and standard rate paid to employees. More
precisely, it is the difference between the actual labor rate paid to
workers and the standard labor rate, multiplied by the actual hours
used.

**LABOR VARIANCE** - A measure of the difference between the actual
costs of labor and the standard costs for labor. This represents the
total of labor rate (price) variance and labor efficiency variance.

**LAST-IN, FIRST-OUT (LIFO)** - A cost flow assumption; the last goods
purchased are assumed to be the first goods sold.

**LATEST ACQUISITION COST (LAC) METHOD** - A method that provides that
all like units held be valued at the invoice price of the most recent
like item purchased, less any discounts, plus any additional costs
incurred to bring the item to a form and location suitable for its
intended use.

**LIFE-CYCLE COSTING** - An acquisition or procurement technique which
considers operating, maintenance, and other costs in addition to the
acquisition cost of assets.

**LOSS** - Any expense or irrecoverable cost, often referred to as a
form of non-recurring charge, an expenditure from which no present or
future benefit may be expected.

**LOWER OF COST OR MARKET** - A valuation rule that recognizes
impairment of asset values but avoids anticipated gains. The rule is
typically applied to individual items or groups of like items, such as
inventory or marketable securities. In this rule, \"cost\" refers to
historical cost and \"market\" refers to the current replacement cost by
purchase or production.

**MACHINE-HOUR ALLOCATION BASE** - Cost allocation base that provides a
systematic and contemporaneous method of applying overhead costs to
work-in-process inventory. An overhead rate of cost per hour of work
expended by a machine is applied to the work-in-process.

**MAINTENANCE** - The act of keeping fixed assets in useable condition.
It includes preventive maintenance, normal repairs, replacement of parts
and structural components, and other activities needed to preserve the
asset so that it continues to provide acceptable services and achieves
its expected life. Maintenance excludes activities aimed at expanding
the capacity of an asset or otherwise upgrading it to serve needs
different from, or significantly greater than, those originally
intended.

**MANAGERIAL (MANAGEMENT) ACCOUNTING** - Process of identification,
measurement, accumulation, analysis, preparation, interpretation, and
communication of financial information that is used by management to
plan, evaluate, and control within an organization. It is the accounting
method/process used for the planning, control, and decision-making
activities of an organization. Managerial accounting is concerned with
providing information to internal managers who are charged with
directing, planning, and controlling operations and making a variety of
management decisions. Managerial accounting can be contrasted with
financial accounting, which is concerned with providing information, via
financial statements, to stockholders, creditors, and others *outside*
the organization.

**MANAGERIAL COST ACCOUNTING SYSTEM** - An information system that
supports the appropriate collection, measurement, accumulation,
analysis, interpretation, and communication of cost information. This
information should be provided in such a way that it helps the user
determine the cost of providing specific programs and activities and the
composition of, and changes in, these costs. The organization and
procedures, whether automated or not, and whether part of the general
ledger or stand-alone, that accumulates and reports consistent and
reliable cost information and performance data from various agency
feeder systems. The accumulated and reported data enable management and
other interested parties to measure and make decisions about the
agency\'s/segment\'s ability to improve operations, safeguard assets,
control its resources, and determine if mission objectives are being
met.

**MANUFACTURING COSTS** - Expenses associated with manufacturing
activities. They consist of three categories: direct materials, direct
labor, and overhead.

**MARGIN OF SAFETY** - The excess of expected sales over the sales at
the break-even point.

**MARGINAL COST** - Calculation showing the change in total cost as a
result of a change in volume. For example, if one more unit of output
causes an increase in total cost of \$40, the \$40 is the marginal cost.

**MARGINAL REVENUE** - Change of the total revenue of a business
resulting when an extra unit is sold.

**MARKET VALUE** - 1. The estimated amount that can be realized by
disposing of an item through arm\'s length transactions in the
marketplace; the price (usually representative) at which bona fide sales
have been consummated for products of like kind, quality, and quantity
in a particular market at any given time. 2. For investments in
marketable securities, the term refers to the value of such securities
determined by prices quoted on securities exchange markets multiplied by
the number of bonds or shares held in an investment portfolio.

**MATERIALS PRICE VARIANCE** - A measure of the difference between the
actual price paid for materials and the standard price, multiplied by
the actual quantity of material purchased. Materials price variance is
the component of materials variance, which captures the dollar impact of
deviations in actual prices for material from the predetermined standard
prices.

**MATERIALS QUANTITY (USAGE) VARIANCE** - A measure of the difference
between the actual amount of raw material and the standard amount of raw
material allowed, multiplied by the standard price. Materials quantity
variance is the component of materials variance, which captures the
dollar impact of deviations in actual quantities of raw materials, used
in production from the predetermined standard quantities.

**MATERIALS REQUISITION** - A source document used to request materials
and used to assign materials cost to specific jobs or to overhead.

**MATERIALS VARIANCE** - A measure of the difference between the actual
cost and the standard cost of materials. This represents the total of
materials price variance and materials quantity variance.

**MEASURABLE** - Can be determined with reasonable certainty or is
reasonably estimable.

**MINIMUM LEASE PAYMENTS** - The payments that the lessee is obligated
to make or may be required to make in connection with leased property.

**MIXED COST** - A cost that can be separated into fixed and variable
components.

**MOVING AVERAGE** - An inventory costing method used in conjunction
with a perpetual inventory system. A weighted average cost per unit is
recomputed after every purchase. Goods sold are costed at the most
recent moving average cost.

**MULTIPLE OVERHEAD RATES** - Manner of measuring product costs. A
different predetermined overhead rate is set for each department of an
organization, rather than having a single predetermined rate. When
products are heterogeneous, receiving uneven attention and effort as
they move through various departments, departmental rates are necessary
to achieve more accurate and equitable product costs.

**NET PRESENT VALUE** - A method that evaluates the difference between
the present value of all cash inflows and outflows of an investment
using a given rate of discount. If the discounted cash inflow exceeds
the discounted outflow, the investment is considered economically
feasible.

**NET REALIZABLE VALUE** - The estimated amount that can be recovered
from selling, or any other method of disposing of an item less estimated
costs of completion, holding and disposal.

**NOMINAL DOLLAR** - The dollar value assigned to a good or service in
terms of prices current at the time the good or service is required.
This contrasts with the value assigned to a good or service measured in
constant dollars.

**NON-VALUE-ADDED ACTIVITY** - An activity that is considered not to
contribute to customer value or to the organization\'s needs. The
designation \"non-value-added\" reflects a belief that the activity can
be redesigned, reduced, or eliminated without reducing the quantity,
responsiveness, or quality of the output required by the customer or the
organization.

**NONCONTROLLABLE COST** - Cost not subject to influence at a given
level of managerial supervision. For instance, a manager's salary is not
within the control of the manager himself. Rent of the building is
another example. See also controllable cost.

**NONEXCHANGE REVENUE** - Inflows of resources to the Government that
the Government demands or that it receives by donations. The inflows
that it demands include taxes, duties, fines, and penalties.

**NONEXCHANGE TRANSACTION** - A transaction that arises when one party
to a transaction receives value without giving or promising value in
return, or when one party to a transaction gives or promises value
without receiving value in return.

**NONFEDERAL PHYSICAL PROPERTY** - Physical properties financed by
grants from the federal government, but owned by state and local
governments.

**NON-PRODUCTION COST** - Costs incurred and recognized that are linked
to events other than the production of goods and services. Examples
include other post employment benefits (OPEB) costs recognized as
expenses when an OPEB event occurs, certain property acquisition costs
that are recognized as expenses at the time of acquisition,
reorganization costs, and non-recurring cleanup costs resulting from
facility abandonments that are not accrued. Since these costs are
recognized for a period in which a particular event occurs, assigning
these costs to goods and service produced in that period would distort
the production costs. In special purpose cost studies, management may
have reasons to determine historical output costs by distributing some
of these costs to outputs over a number of past periods.

**OBLIGATED BALANCES** - The net amount of obligations in a given
account for which payment has not yet been made.

**OBLIGATIONAL AUTHORITY** - The sum of a) budget authority provided for
a given fiscal year; b) balances of amounts brought forward from prior
years that remain available for obligation; and c) amounts authorized to
be credited to a specific fund or account during that year, including
transfers between funds or accounts. (See \"Budget Authority.\") For
FMS, represents total authority received through use of the DD Form
2060, or use of the Service automated funds distribution systems.
Includes column 11 authority to incur commitments and obligations
directly against the Trust Fund and column 10 reimbursable orders.

**OBLIGATIONS** - Amounts of orders placed, contracts awarded, services
received, and other transactions occurring during a given period that
would require payments during the same or a future period.

**OBSOLESCENCE** - A product or service that has lost its value to the
customer due to changes in need or technology.

**OPERATING LEASE** - An agreement conveying the right to use property
for a limited time in exchange for periodic rental payments.

**OPPORTUNITY COST** - The value of the alternatives foregone by
adopting a particular strategy or employing resources in a specific
manner. Also called Alternative Cost or Economic Cost.

**OTHER FINANCING SOURCES** - Inflows of resources that increase net
position of a reporting entity but that are not revenues or gains.
Borrowing is not included as other financing sources, since it does not
increase the net resources of the reporting entities.

**OTHER POSTEMPLOYMENT BENEFITS (OPEB)** - Forms of benefits provided to
former or inactive employees, their beneficiaries, and covered
dependents outside pension or Other Retirement Benefits (ORB) plans.

**OTHER RETIREMENT BENEFITS (ORB)** - Forms of benefits, other than
retirement income, provided by an employer to retirees. Those benefits
may be defined in terms of specified benefits, such as health care,
tuition assistance, or legal services, which are provided to retirees as
the need for those benefits arises, such as certain health care
benefits. Or they may be defined in terms of monetary amounts that
become payable on the occurrence of a specified event, such as life
insurance benefits.

**OUTCOME** - The results of a program activity compared to its intended
purposes. Program results may be evaluated in terms of service or
product quantity and quality, customer satisfaction, and effectiveness.

**OUTLAY** - The issuance of checks, disbursement of cash, or electronic
transfer of funds made to liquidate a federal obligation. Outlays also
occur when interest on the Treasury debt held by the public accrues and
when the Government issues bonds, notes, debentures, monetary credits,
or other cash-equivalent instruments in order to liquidate obligations.
Also, under credit reform, the credit subsidy cost is recorded as an
outlay when a direct or guaranteed loan is disbursed.

**OUTPUTS** - Any product or service generated from the consumption of
resources. It can include information or paper work generated by the
completion of the tasks of an activity.

**OVERAPPLIED OVERHEAD** - The amount by which the overhead applied to
jobs during a period with the predetermined overhead application rate
exceeds the overhead incurred during the period.

**OVERHEAD** - Costs that are incurred but are not clearly associated
with specific units of a product or service; includes all costs other
than direct material and direct labor. In addition to indirect materials
and indirect labor, it includes such items as depreciation, fringe
benefits, payroll taxes, and insurance.

**OVERHEAD BUDGET** - Schedule of all expected costs except for direct
material and direct labor. Overhead items include indirect material,
indirect labor, rent, and insurance. Overhead may be variable, fixed, or
a combination of both.

**OVERHEAD RATE** - The rate determined by performing organizations to
allocate operating costs not directly identifiable to the work order.
Includes supervisory and general and administrative expenses as well as
miscellaneous material and supplies.

**PACKING, CRATING, AND HANDLING (PCH) COSTS** - A subset of accessorial
costs that are incurred for sales, or shipments of property. (See
\"accessorial charges.\")

**PAYROLL COSTS** - Employer cost incurred for employees' services.
Payroll costs consist of the actual cash paid to the employees and the
withheld amounts (liabilities) for employee's federal income taxes,
FICA, and various voluntary health and benefit plans. Employer's payroll
costs also consist of its matching share of employee's FICA taxes and
contributions to the state and federal unemployment insurance programs.

**PERFORMANCE MEASUREMENT** - A means of evaluating efficiency,
effectiveness, and results. A balanced performance measurement scorecard
includes financial and non-financial measures focusing on quality, cycle
time, and cost. Performance measurement should include program
accomplishments in terms of outputs (quantity of products or services
provided, e.g., the number of items efficiently produced) and outcomes
(results of providing outputs, e.g., whether outputs are effectively
meeting intended agency mission objectives).

**PERFORMANCE MEASURES** - Indicators of the work performed and the
results achieved in an activity, process, or organizational unit.
Performance measures may be financial or non-financial. An example of a
performance measure of an activity is the number of defective parts per
million. An example of a performance measure of an organizational unit
is return on sales.

**PERIOD COSTS** - Costs that are charged to expense because their
benefits appear to expire as the costs are incurred.

**PLANTWIDE OVERHEAD RATE** - Single predetermined overhead rate used in
all departments of an organization, rather than having a separate rate
for each department. If the company's departments are homogeneous, the
use of a single plant-wide rate may be adequate as a means of allocating
overhead costs to production jobs.

**POOL RATE** - The overhead costs for a homogenous cost pool divided by
the appropriate cost driver associated with the pool.

**PORT LOADING AND UNLOADING COSTS** - A subset of accessorial costs.
The costs incurred for loading, unloading, and handling at the ports of
embarkation and debarkation.

**PREDETERMINED OVERHEAD APPLICATION RATE** - The rate established prior
to the beginning of a period that relates estimated overhead to another
variable such as estimated direct labor, that is used to assign overhead
costs to jobs.

**PREMIUM DEFICIENCY** - A condition under which a liability for future
policy benefits using current conditions exceeds the liability for
future policy benefits using contract conditions. In such cases, the
difference should be recognized as a charge to operations in the current
period.

**PRESENT VALUE (PV)** - The value of future cash flows discounted to
the present at a certain interest rate (such as the reporting entity\'s
cost of capital), assuming compound interest.

**PREVENTIVE COSTS** - A category of quality costs incurred to prevent
defects of products and services, such as quality training programs and
quality circles.

**PRICE VARIANCE** - A measure of the difference between actual and
standard prices multiplied by the actual quantity. This is a component
of total variance.

**PRIME COST** - Consists of direct material and direct labor.

**PRO RATA** - Basis for allocating an amount proportionately to the
items involved.

**PROCESS** - The organized method of converting inputs (people,
equipment, methods, materials, and environment) to outputs (products and
services). The natural aggregation of work activities and tasks
performed for program delivery.

**PROCESS COSTING** - A method of cost accounting that first collects
costs by processes and then allocates the total costs of each process
equally to each unit of output flowing through it during an accounting
period.

**PROCESS VALUE ANALYSIS** - Tools and techniques for studying processes
through customer value analysis. Its objective is to identify
opportunities for lasting improvement in the performance of an
organization. It provides an in-depth review of work activities and
tasks, through activity analysis, which aggregate to form processes for
agency program delivery. In addition to activity-based costing, quality
and cycle time factors are studied for a complete analysis of
performance measurement. Each activity within the process is analyzed,
including whether or not the activity adds value for the customer.

**PRODUCT** - Any discrete, traceable, or measurable good or service
provided to a customer. Often goods are referred to as tangible
products, and services are referred to as intangible products. A good or
service is the product of a process resulting from the consumption of
resources.

**PRODUCT COSTS** - Costs that are capitalized as inventory because they
produce benefits that are expected to have value in the future.

**PRODUCT LINE/FAMILY** - A group of products or services that have a
defined relationship because of physical and production similarities.

**PRODUCT LIFE CYCLE** - The period that starts with the initial product
specification and ends with the withdrawal of the product from the
marketplace. A product life cycle is characterized by certain defined
stages, including research, development, introduction, maturity,
decline, and abandonment.

**PRODUCTION BUDGET (FORECAST)** - Schedule for expected units to be
produced. It sets forth the units expected to be manufactured to satisfy
budgeted sales and inventory requirements. Expected production volume is
determined by adding desired ending inventory to planned sales and then
subtracting beginning inventory.

**PRODUCTION COST** - The sum of all costs required to produce an
output, including direct and indirect costs from within the entity and
costs of resources provided by other entities.

**PRODUCTION DEPARTMENT** - An organizational unit that has the
responsibility for partially producing a product or service.

**PRODUCTION MIX VARIANCE** - A measure of the cost impact of
differences between the actual production mix and the standard or
budgeted mix. This situation typically occurs when an organization has
multiple products or inputs. The mix variance explains the portion of
the quantity variance caused by using inputs in ratios different from
standard proportions.

**PRODUCTION YIELD VARIANCE** - A measure of the difference between the
actual yield and the standard or budgeted yield.

**PROGRAM -** A mission program, whose products or services the Agency
delivers as part of its strategic plan.

**PROGRESS BILLINGS** - Interim billings for construction work or
government contract work.

**PROJECT** - A planned undertaking, usually related to a specific
activity, such as the research and development of a new product or the
redesign of the layout of a plant.

**PROJECT COSTING** - A method that collects information on activities
and costs associated with a specific activity, project, or program.

**PROPERTY** - Anything that is owned by the government. As used in the
military establishment, the term is usually confined to tangible
property, including real estate and material. Property consists of two
major categories: fixed assets and inventory. Fixed assets are those
items purchased for use at the established dollar threshold for
capitalization of assets and with a useful life of more than two years.
Inventory are those items held for sale or issue.

**PROPRIETARY ACCOUNTING** - Also known as financial accounting, a
process that supports accrual accounting and financial reporting that
attempts to show actual financial position and results of operations by
accounting for assets, liabilities, net position, revenues, and
expenses.

**PRORATION** - Allocating or assigning an amount in proportion to some
base to an activity, department, or product. Service costs are
frequently allocated to user departments based on the base allocation
formula/procedure (e.g., number of employees, machine hours spent). See
also allocation.

**PURCHASES METHOD** - A method of accounting for goods, such as
materials and supplies, in which the acquisition cost is recognized as
an expense upon purchase of the goods rather than upon their use.

**RAW MATERIALS** - Materials that are purchased for use in making
products; most are used as direct materials but some are used as
indirect materials.

**REAL PROPERTY** - Fixed assets that are comprised of land and the
rights to land; buildings, to include capitalized additions,
alterations, improvements, and rehabilitations; and other structures and
facilities.

**RECIPROCAL ALLOCATION METHOD** - Process of allocating service
department costs to production department, where reciprocal services are
allowed between service departments; also known as the reciprocal
method, the matrix method, the double-distribution method, the
cross-allocation method, and simultaneous equation method. The method
sets up simultaneous equations to determine the allocable cost of each
service department.

**RECOGNITION (OR RECOGNIZE)** - Recognition is the process of formally
recording or incorporating an item into the financial statements of an
entity as an asset, liability, revenue, expense, or the like.

**RECORD** - To give expression to a transaction on (or in) the books of
account; to enter.

**REDISTRIBUTED COST** - Reassignment of a cost. For example, rent of
the computer department is first assigned to it. Then the total service
cost of the computer department is redistributed on some rational basis
(such as space occupied) to other service departments and to production
departments. See also probation.

**REESTIMATE** - Refers to estimates of the subsidy costs performed
subsequent to their initial estimates made at the time of a loan\'s
disbursement.

**REIMBURSEMENTS** - Sums received as payment or advance payment for
goods or services furnished either to the public or to another federal
government account. If authorized by law, these sums are credited
directly to specific appropriation and fund accounts. These amounts are
deducted from the total obligations incurred (and outlays) in
determining net obligations (and outlays) for such accounts.
Reimbursements are offsetting collections. (See offsetting collections.)

**RELEVANT COSTS** -- Those cost elements that are necessary for
particular management analyses and/or decision-making purposes when full
cost is not appropriate. Relevant costs may include expected or
potential costs that differ among alternative courses of action.

**RELATIVE SALES VALUE METHOD** - Manner of allocating joint costs in
proportion to relative sales values of joint products. For example,
joint products X and Y have joint costs of \$1200 and X sells for \$70
while Y sells for \$50. Then X would be allocated \$1200 X (\$70/\$120)
= \$700 of the joint costs while Y would be allocated \$1200 X
(\$50/\$120) = \$500 of the joint costs.

**RELEVANT RANGE OF OPERATIONS** - A business's normal operating range;
excludes extremely high and low volumes that are not likely to be
encountered.

**REPAIRABLE** - An inventory item that is expected to be repaired when
broken or worn out.

**REPETITIVE MANUFACTURING** - The manufacture of identical products (or
a family of products) in a continuous flow.

**REPLACEMENT COST** - The cost to be incurred at a future time to
procure equipment or material in place of items, which have been sold or
transferred. In lower cost or market computations, the term \"market\"
means replacement cost, subject to ceiling and floor limitations.

**REPLACEMENT COST ACCOUNTING** - Valuing assets and liabilities at
their cost to replace. It is a departure from historical cost
accounting. The effect of inflationary changes on items bought and sold
is considered. Holding gains and losses arises from a change between the
historical cost and the replacement cost.

**REQUIRED SUPPLEMENTARY STEWARDSHIP INFORMATION (RSSI)** - The category
defined by the Board for reporting information required by the
stewardship standards. Stewardship information may be presented as RSSI,
in the financial statements, or in the notes to them. Stewardship
information will be necessary for a fair presentation of financial
position and results of operations.

**RESALE INVENTORY** - The aggregate of those items of tangible
government property which a) are held as a stock of goods for sale in
the ordinary course of business; b) are in process of production for
such sale; or c) are to be currently consumed, combined, or transferred
in the production of goods or services sale.

**RESEARCH AND DEVELOPMENT** - Federal investment in research and
development refers to those expenses incurred in support of the search
for new or refined knowledge and ideas and for the application or use of
such knowledge and ideas for the development of new or improved products
and processes with the expectation of maintaining or increasing national
economic productive capacity or yielding other future benefits. Research
and development is composed of basic research, applied research, and
development.

**RESERVATION** - An administrative reservation of funds based on
procurement directives, requests, or equivalent instruments that
authorize preliminary negotiations, but require that funds be certified
by the official responsible for the administrative control of funds
before incurring obligations. Initiations are entered into memorandum
accounts to help keep pre-commitment actions, such as approved
procurement programs and procurement directives, within the available
subdivision of funds.

**RESERVES** - Portions of budgetary resources set aside by OMB to (1)
provide for contingencies or (2) effect savings made possible by or
through changes in requirements or greater efficiency of operations.

**RESIDUAL VALUE** - Residual value is the estimated value remaining at
the end of a capital asset\'s useful life or the amount that can be
expected to be recovered from the asset\'s disposal when it is removed
from service.

**RESOURCE** - An economic element that is applied or used in the
performance of activities. Salaries and materials, for example, are
resources used in the performance of activities.

**RESOURCE COST ASSIGNMENT** - The process by which cost is attached to
activities. This process requires the assignment of cost from general
ledger accounts to activities using resource drivers.

**RESOURCE DRIVER** - A measure of the quantity of resources consumed by
an activity. An example of a resource driver is the percentage of total
square feet of space occupied by an activity. This factor is used to
allocate a portion of the cost of operating the facilities to the
activity.

**RESPONSIBILITY ACCOUNTING** - Collection, summarization, and reporting
of financial information about various decision centers (*responsibility
centers)* throughout an organization; also called *activity accounting*
or *profitability accounting.* It traces costs, revenues, or profits to
the individual managers primarily responsible for making decisions about
the costs, revenues, or profits in question and taking appropriate
actions. Responsibility accounting is appropriate where top management
has delegated authority to make decisions. The idea being that each
manager's performance should be judged by how well he or she manages
those items under his or her control*.*

**RESPONSIBILITY CENTER** - An organizational unit headed by a manager
or a group of managers who are responsible for its activities.
Responsibility centers can be measured as revenue centers (accountable
for revenue/sales only), cost centers (accountable for costs/expenses
only), profit centers (accountable for revenues and costs), or
investment centers (accountable for investments, revenues, and costs).

**RESPONSIBILITY SEGMENT** - A significant organizational, operational,
functional, or process component which has the following
characteristics: (a) its manager reports to the entity\'s top
management; (b) it is responsible for carrying out a mission, performing
a line of activities or services, or producing one or more products; and
(c) for financial reporting and cost management purposes, its resources
and results of operations can be clearly distinguished, physically and
operationally, from those of other segments of the entity.

**REVENUE** - Increase in the assets of an organization or the decrease
in liabilities during an accounting period, primarily from the
organization's operating activities. This may include sales of products
(sales), rendering of services (revenues), and earnings from interest,
dividends, lease income, and royalties.

**REVENUE ADJUSTMENT** - A contra revenue account that is used to report
reduction in revenue when realization is not probable (less likely than
not). It includes returns, allowances, and price re-determinations, but
not credit losses (due to the inability of the debtor to pay the
established or negotiated price).

**REVENUE CENTER** - Unit within an organization responsible for
generating revenues. It is a profit center since for all practical
purposes there is no revenue center that does not incur some costs
during the course of generating revenues. A favorable variance occurs
when actual revenue exceeds expected revenue.

**REVOLVING FUND** - A fund consisting of permanent appropriation and
expenditures of collections, from both the public and other Governmental
agencies and accounts, that is earmarked to finance a continuing cycle
of business-type operations.

**RISK** - The subjective assessment of the possible positive or
negative consequences of a current or future action. In a business
sense, risk is the premium requested or paid for engaging in an
investment or venture. Often, risk is incorporated into business
decisions through such factors as hurdle rates or the interest premium
paid over a prevailing base interest rate.

**SALES MIX** - The ratio of the volumes of the various products sold by
a company.

**SEIZING AGENCY** - An agency that seizes property as a part of its law
enforcement activities.

**SELLING EXPENSE (COST)** - Expenses incurred in selling or marketing;
e.g., salaries, commissions, and promotion expenses.

**SEMIVARIABLE COST** - One that varies with changes in volume, but
unlike a variable cost, does not vary in direct proportion; also called
*mixed cost.* In other words, this cost contains both variable and fixed
components.

**SERVICE** - An intangible product or task rendered directly to a
customer.

**SERVICE CHARGE** - An amount of money automatically added to a
customer\'s bill for products sold or services rendered.

**SERVICE DEPARTMENT** - An organizational unit of a facility that has
the responsibility for providing support for the work of the production
departments. Examples are purchasing, building and ground personnel, and
power departments. All of these activities are necessary parts of the
production process and primarily supportive of production departments.
Service department costs must be allocated to production departments
before *overhead rates* are determined.

**SERVICE DEPARTMENT COSTS** - Costs incurred in rendering service to
production departments and to other service departments. Service
department costs are overhead costs. Since the production departments
are directly benefited by service departments, the costs of a service
department should be allocated to the appropriate production departments
(as part of overhead costs).

**SETUP COST** - Expenses incurred each time a batch is produced. It
consists of the engineering cost of setting up the production runs or
machines, the paperwork cost of processing the work order, and ordering
cost to provide raw materials for the batch.

**STANDARD COST** - Production or operating cost that is carefully
predetermined. A standard cost is a target cost that *should* be
attained. The standard cost is compared with the actual cost in order to
measure the performance of a given costing department or operation.
*Variances*, which are the differences between actual costs and standard
costs, may indicate inefficiencies that have to be investigated.
Corrective action may have to be taken.

**STANDARD COSTING** - A costing method that attaches costs to cost
objects based on reasonable estimates or cost studies and by means of
budgeted rates rather than according to actual costs incurred. The
anticipated cost of producing a unit of output. A predetermined cost to
be assigned to products produced. Standard cost implies a norm, or what
costs should be. Standard costing may be based on either absorption or
direct costing principles, and may apply to all or some cost elements.

**STANDARD HOURS ALLOWED** - Time that should have been used to
manufacture actual units of output during a period. It is obtained by
multiplying actual units of production by the standard labor time.

**STANDARD LABOR RATE** - Direct labor rate that should be paid for each
hour of labor time. It includes not only base wages earned but also an
allowance for fringe benefits and other labor-related costs.

**STANDARD MATERIAL PRICE** - Per unit price for direct materials that
should be paid for a single unit of materials. It reflects the final,
delivered cost of the materials, net of any discounts taken.

**STANDARD PRICE** - The unit price of an item, as it is recorded in the
Standard Catalog for use in financial and accountable records of the
holding Service or Agency. An item not included in the appropriate
Service or Agency pricing catalog, shall be priced at original cost, if
available, or if it is not known, at fair market value.

**STANDARD QUANTITY** - Amount of materials that should have been used
to manufacture units of output during a period. It is obtained by
multiplying actual units of production by the standard material quantity
per unit.

**STEP COSTS** - Costs that are approximately fixed over a small volume
range, but are variable over a large volume range. For example,
supervision costs are fixed for a given range of production volume, but
increased production often requires additional work shifts leading to
added supervisory costs in a lump sum fashion.

**STEP-VARIABLE COST** - A cost that remains constant over limited
ranges of volumes, but increases by a lump sum when volume increases
beyond maximum amounts.

**SUBSIDIARY LEDGERS** - Records that provide detailed information about
amounts recorded in the general ledger accounts.

**SUNK COST** - Costs incurred in the past whose total will not be
affected by any decision made now or in the future. Such costs are
usually past or historical costs. For example, if a machine acquired for
\$50,000 three years ago has a book value of \$20,000, the \$20,000 book
value is a sunk cost that does not affect a future decision involving
its replacement.

**SUPPORT COSTS** - Costs of activities not directly associated with
production. Typical examples are the costs of automation support,
communications, postage, process engineering, and purchasing.

**SURCHARGE** - A supplemental fee charged to a customer in addition to
the normal price assessed for goods or services.

**SURROGATE ACTIVITY DRIVER** - An activity driver that is not
descriptive of an activity, but is closely correlated to the performance
of the activity. The use of a surrogate activity driver should reduce
measurement costs. The number of production runs, for example, is not
descriptive of the material disbursing activity, but the number of
production runs may be used as an activity driver if material
disbursements coincide with production runs.

**SUSTAINING ACTIVITY** - An activity that benefits an organization at
some level (e.g., the company as a whole or a division, plant, or
department), but not any specific cost object. Examples of such
activities are preparation of financial statements, plant management,
and the support of community programs.

**TANGIBLE ASSETS** - Depreciable property, plant, equipment, and
software developed, manufactured, transferred, or acquired at a specific
point in time for a determinable cost; are used over some period (useful
life), the length of which is estimated to be 2 years or greater; and
generally, become economically worthless (except for residual value) at
the end of their estimated useful lives.

**TARGET COST** - A cost calculated by subtracting a desired profit
margin from an estimated (or a market-based) price to arrive at a
desired production, engineering, or marketing cost. The target cost may
not be the initial production cost, but instead the cost that is
expected to be achieved during the mature production stage.

**TARGET COSTING** - A method used in the analysis of product and
process design that involves estimating a target cost and designing the
product to meet that cost.

**TAX EXPENDITURE** - A revenue foregone attributable to a provision of
the federal tax laws that allows a special exclusion, exemption, or
deduction from gross income or provides a special credit, preferential
tax rate, or deferral of tax liability.

**TAX GAP** - An estimate of taxes (including duties) unpaid because of
non-compliance with existing laws and regulations.

**TECHNOLOGY COSTS** - A category of cost associated with the
development, acquisition, implementation, and maintenance of technology
assets. It can include costs such as the depreciation of research
equipment, tooling amortization, maintenance, and software development.

**THROUGHPUT** - The rate of production of a defined process over a
stated period of time. Rates may be expressed in terms of units of
products, batches produced, dollars turned over, or other meaningful
measurements.

**TOTAL COST** - Sum of the various costs incurred. For example, total
costs are the sum of direct materials, direct labor, and overhead. By
management function, total costs are the sum of costs and selling and
administrative expenses. By behavior in relation to fluctuations in
activity, total costs are the sum of variable costs and fixed costs.

**TOTAL COST METHOD** - An accounting method that includes the actual
acquisition cost of each item held plus the costs of any additions,
improvements, alterations, rehabilitations, or replacements that extend
the useful life of an asset.

**TRACEABILITY** - The ability to assign a cost directly to a specific
activity or cost object by identifying or observing specific resources
consumed by the activity or cost object.

**TRACEABLE COST** - One directly assigned to a given item or function.

**TRACING** - The assignment of cost to an activity or a cost object
using an observable measure of the consumption of resources by the
activity or cost object. Tracing is generally preferred to allocation if
the data exist or can be obtained at a reasonable cost.

**TRADE DISCOUNT** - A reduction in price, usually varying in percentage
with volume of transactions, and made by vendors to those engaged in
certain businesses and allowable regardless of when the account is paid.

**TRANSACTION** - A particular kind of external event involving the
transfer of something of value concerning two or more entities. The
transfer may be a two way or one way flow of resources or of promises to
provide resources.

**TRANSFERRED-IN COSTS** - Costs of processing a product or performing a
service from a prior department to the current department. The costs
usually occur under a process costing system.

**TRANSPORTATION COSTS** - The costs incurred for shipment of materials,
personnel, or goods.

**TRIAL BALANCE** - A financial report showing the accumulated balances
in the general ledger accounts of an entity at a certain point in time.
The account balances may include balances in the assets, liabilities,
equity, revenue, cost, budget and statistical accounts.

**UNAVOIDABLE COSTS** - Costs to be incurred regardless of the decision
to make or buy a certain part or keep or drop a certain product line;
these costs cannot be recovered or saved. Much or all of fixed costs in
those cases are unavoidable costs, e.g., property taxes and rent.

**UNCONTROLLABLE COST** - The cost over which a responsible manager has
no influence.

**UNDELIVERED ORDER**(**S)** - Contracts or orders issued by the
ordering entity for goods and services which have not yet been received
and accepted, and for which the liability has not yet been accrued.

**UNDERAPPLIED OVERHEAD** - The amount by which overhead incurred during
a period exceeds the overhead applied to jobs with the predetermined
overhead application rate.

**UNDISTRIBUTED COST** - A cost or disbursement to a budget authority
which has not been allocated to a specific case.

**UNEARNED REVENUE** - Revenue from customers collected in advance of
earnings and prior to delivery of goods or services.

**UNFAVORABLE VARIANCE** - Excess of actual costs over standard costs.
Unfavorable variances typically require further investigation for
possible causes.

**UNFILLED CUSTOMER ORDERS** - The amount of orders accepted from
ordering entities within the U. S. Government for goods and services to
be furnished on a reimbursable basis; or, in the case of transactions
with the public, amounts collected in advance for which the entity has
not yet performed as requested.

**UNFUNDED COST** - Costs not financed by the performing activity\'s
current appropriations or fund accounts. Applicable types of costs
include depreciation, interest on investment, and civilian retirement
amounts funded by Office of Personnel Management.

**UNIT COST** - The cost of a selected unit of a good or service.
Examples include dollar cost per ton, machine hour, labor hour, or
department hour.

**UNITED STATES GOVERNMENT STANDARD GENERAL LEDGER (U.S.G.S.G.L.)** - A
uniform chart of accounts and pro forma transactions used to standardize
federal agency accounting and to support the preparation of standard
external reports required by central agencies. OMB and Treasury
Financial Management Service regulations require agencies to use the SGL
to accumulate and report standard financial data. The SGL chart of
accounts identifies and defines budgetary, proprietary, and memorandum
accounts to be used in agencies' accounting systems. The SGL is generic
for the federal government, and is not intended to reflect any single
federal agency's accounting system. The Federal Financial Management
Improvement Act of 1996 requires agency financial management systems to
comply with the SGL at the transaction level.

**UNOBLIGATED BALANCES -** Balances of budgetary resources that have not
yet been obligated. Unobligated balances expire (cease to be available
for obligation) 1) at the end of the fiscal year for year accounts; at
the end of the period specified for multiple year accounts and for no
year accounts only when they are rescinded by law, 2) when their purpose
is accomplished, or (3) when disbursements against the appropriation
have not been made for 2 full consecutive years.

**USEFUL LIFE** - The normal operating life in terms of utility to the
owner.

**VALUATION ACCOUNT (ALLOWANCE)** - An account that partly or wholly
offsets one or more other accounts; for example, accumulated
depreciation is a valuation account related to specific depreciable
assets and allowance for bad debts is a valuation account related to
accounts receivable. If a valuation account is deducted from the related
asset or liability it is sometimes referred to as a contra-asset or
contra-liability account.

**VALUE ANALYSIS** - A cost reduction and process improvement tool that
utilizes information collected about business processes and examines
various attributes of the processes (e.g., diversity, capacity, and
complexity) to identify candidates for improvement efforts.

**VALUE-ADDED ACTIVITY** - An activity that is judged to contribute to
customer value or satisfy an organizational need. The attribute
\"value-added\" reflects a belief that the activity cannot be eliminated
without reducing the quantity, responsiveness, or quality of output
required by a customer or organization. Value-added activities should
physically change the product or service in a manner that meets customer
expectations.

**VARIABLE OVERHEAD** - Portion of total overhead that varies directly
with changes in volume. Examples of variable overhead are indirect
materials, supplies, indirect labor, fuel, and power.

**VARIABLE COST** - A cost that varies with changes in the level of an
activity, when other factors are held constant. The cost of material
handling to an activity, for example, varies according to the number of
material deliveries and pickups to and from that activity.

**VARIABLE OVERHEAD EFFICIENCY VARIANCE** - A measure of the difference
between standard hours allowed and actual hours incurred multiplied by
the standard variable overhead rate. Variable overhead efficiency
variance is the component of the variable overhead variance that is
caused by differences in operating efficiency.

**VARIABLE OVERHEAD SPENDING VARIANCE** - A measure of the difference
between the actual variable overhead rate and the standard variable
overhead rate multiplied by the actual hours of the activity base used.
Variable overhead spending variance is the component of the variable
overhead variance that is caused by differences in the variable overhead
rate.

**VARIABLE OVERHEAD VARIANCE** - A measure of the difference between
actual variable overhead incurred and the variable overhead applied.
This represents the total of variable overhead spending variance and
variable overhead efficiency variance.

**VARIANCE** - (1) The amount, rate, extent, or degree of change, or the
divergence from a desired characteristic or state, (2) the difference
for a year or less between the elements (direct material, direct labor,
factory overhead) of standard cost and actual cost. The term applies to
(a) money difference or (b) changes in the character or purpose of
amounts expended.

**WAREHOUSING COSTS** - Costs normally incurred for labor, materiel, or
services in packing item(s) that are removed from storage, to prepare
item(s) for shipment; and processing related materiel release documents.

**WASTE** - Resources consumed by unessential or inefficient activities.

**WEIGHTED AVERAGE COSTING** - Procedure for computing the unit cost of
a process. Beginning work-in-process inventory costs are added to the
costs of the current period, then a weighted average is obtained by
dividing the combined costs by equivalent units. Thus there is only one
average cost for goods completed.

**WEIGHTED-AVERAGE** - A periodic inventory costing method where ending
inventory and cost of goods sold are priced at the weighted-average cost
of all items available for sale.

**WORK CELL** - A physical or logical grouping of resources that
performs a defined job or task. The work cell may contain more than one
activity. For example, all the tasks associated with the final assembly
of a product may be grouped in a work cell.

**WORK CENTER** - It consists of one or more resources where a
particular product or process is accomplished.

**WORK IN PROCESS** - Costs of the materials, labor, and indirect costs
used in producing an end item (real property or personal property) or
service, whether fabricated by a governmental business operation fund,
or by a non-governmental organization under contract.

**WORK TICKET** - Form used to charge jobs for direct labor used.

**WRITE-OFF** - An action to remove an amount from an entity\'s assets
or financial resources.

**Reference Materials Used in This Section:**

Tierney, Cornelius E., *Handbook of Federal Accounting Practices*,
Reading Massachusetts: Addison-Wesley, 1982:122.

Draft Glossary, *DoD Financial Management Regulation*, DoD FMR 7000.1-R

Cooper W. Ijiri, *Kohler's Dictionary for Accountants*, 6th ed.,
Englewood Cliffs, NJ: Prentice-Hall, 1983.

*The CAM-I Glossary of Activity-Based Management*, Edited by Norm
Raffish and Peter B. B. Turney, (Arlington: CAM-I, 1991).

Joel G. Siegel, Ph.D., CPA; Jae K. Shim, Ph.D., [Dictionary of
Accounting Terms]{.underline}, Second Edition, Hauppauge, NY: Barron's
Educational Series, Inc.

Draft Consolidated Glossary - a compilation of terms in the Statement of
Federal Financial Accounting Standards.

Larson, Kermit D. & Miller, Paul W., *Fundamental Accounting
Principles*, 13th edition.

**Acknowledgments for the Hard Work and Dedication in Producing this
Guide.**

**Board of Directors**

Frank Sullivan, Chair, Dept. of Veterans Affairs

Ron Longo, Dept. of the Treasury

Ken Winter, National Aeronautics & Space Administration

Irwin David, Dept. of Agriculture

Doris Chew, Joint Financial Management Improvement Program

Kevin Kuesters, Dept. of Commerce

Stuart Graff, Dept. of Education

**Editors and Facilitation Staff**

*Department of Veterans Affairs*

Dennis Kordyak Lorraine Grant

Ron Dobranski Rotimi Omotosho

Bill Gilfillan Jim Bradley

Monica Congleton Steve Arisumi

Joe Henle Maria Nelson

*Office of Management and Budget Department of Agriculture*

Robyn Seaton Pat Smith

Woody Jackson

**Integration of Cost Accounting, Budget, and GPRA Subgroup**

*Members*

Dave Zavada, Chair, Office of Management and Budget Carol Smith, Dept.
of Labor

Carole Hutchinson, General Services Administration Jay Tyler, Dept. of
the Treasury

Dean Klein, General Services Administration Jim Bradley, Dept. of
Veterans Affairs

Michelle Hanson, Office of Management and Budget Mark Russell, Dept. of
Veterans Affairs

Phil Smith, National Aeronautics & Space Administration Gwen Kerrick,
Dept. of Veterans Affairs

*Other Contributors*

Ron Longo, Dept. of the Treasury

Justine Rodriguez, Office of Management and Budget

Gary Reisner, Office of Management and Budget

Mike Curro, General Accounting Office

**Accounting for Full Costs Subgroup**

*Members*

Schuyler Lesher, Chair, Dept. of the Interior Bill Webber, Dept. of the
Interior

Greg Boutin, Bureau Engraving & Printing Bill King, Dept. of Agriculture

Michael Virga, Office of Personnel Management Steve Barth, Dept. of the
Army

Carol Watson, Dept. of Veterans Affairs Blair Staley, Dept. of the
Interior

Kenneth E. Bode, Internal Revenue Service Sharon L. Fratis, Dept. of
Defense

Jim Turdici, Nuclear Regulatory Commission Ted Heintz, Dept. of the
Interior

Stephen Varholy, Nat\'l Aeronautics & Space Admin. Bob Lee, Dept. of the
Treasury

Diane Eggert, Immigration & Naturalization Service Richard Mayo, FASAB

Sheila Conley, Office of Management and Budget Steve Smith, Dept. of
Transportation

Bill Faustman, Environmental Protection Agency Jim Campbell, Dept. of
Energy

Gary Collins, U.S. Geological Survey James Reid, Dept. of Energy

Ken Harris, Office of Personnel Mgmt. David Light, Dept of Labor

Carol Israel, Treasury, Financial Mgmt. Service Bob Musser, Private
Sector Council

Nancy Perkins, Environmental Protection Agency Pat Wensel, Farm Credit
Admin.

**Implementation of a Managerial Cost Accounting Process Subgroup**

*Members*

William Gilfillan, Co-Chair, Dept. of Veterans Affairs Linda Dornisch,
Customs Service

Monica Congleton, Co-Chair, Dept. of Veterans Affairs Richard Mayo,
FASAB

Bart Waggy, Dept. of Housing & Urban Development Anita Byrd, Dept. of
Labor

Barbara Freggens, Environmental Protection Agency Vivian Lu, Dept. of
Agriculture

Roger Elmore, Bureau of Land Management

*Unofficial Advisor Special Contributor*

Clif Williams, Coopers and Lybrand David Rebich, Dept. of the Treasury,
Financial Management Service

**Reporting of Managerial Cost Information Subgroup**

*Members*

De Ritchie, Chair, Dept. of Defense David Rebich, Dept. of the Treasury

Sonya Smith, Dept. of Veterans Affairs Robert Lee, Dept. of the Treasury

Stephen Smith, Federal Aviation Administration Sharon Fratis, Dept. of
Defense

Norm Caulder, Environmental Protection Agency Bill deBardelaben, Dept.
of Defense

Nancy Perkins, Environmental Protection Agency Ken Bode, Internal
Revenue Service

Robert Manuse, General Services Administration Blair Staley, Department
of Labor

Carol Israel, Dept. of the Treasury James Short, Dept. of Army

Howard Katz, General Services Administration John Glover, Dept. of
Defense

Greg Boutin, Bureau of Engraving & Printing Jo Cohen-Langlois, Customs
Service

Ed Cox, General Services Administration Linda Dornisch, Customs Service

Raymond Kidd, Dept. of Defense (OIG) Jerry Ross, Customs Service

Barbara Sauls, Dept. of Defense (OIG)

*Unofficial Advisors:*

Carrie Hug, Grant Thorton (formerly of DOT) Joe Donlon, Grant Thorton

[^1]: "From Red Tape to Results: Creating a Government That Works Better
    and Costs Less," *Report of the National* *Performance Review*
    (September 1993).

[^2]: GAO Report, *GAO/T-AFMD-90.*

[^3]: Statement of Federal Financial Accounting Standards No. 4,
    *Managerial Cost Accounting Concepts and Standards for the Federal
    Government*, par. 4.

[^4]: Ibid., pars. 43-44*.*

[^5]: Ibid., pars. 46-48; Statement of Federal Financial Accounting
    Concepts No. 1, *Objectives of Federal Financial* *Reporting*, par.
    168.

[^6]: Statement of Federal Financial Accounting Concepts No. 1,
    *Objectives of Federal Financial Reporting,* par. 122.

[^7]: Statement of Federal Accounting Standards No. 4, *Managerial Cost
    Accounting Concepts and Standards for the Federal Government*, par.
    42.

[^8]: See SFFAS No. 7, *Accounting for Revenue and Other Financing
    Sources*; FASAB's Implementation Guide to SFFAS No. 7; and OMB
    Bulletin 97-01, *Form and Content of Agency Financial Statements*,
    for more information on the proper treatment of revenues and other
    financing sources.

[^9]: OMB Bulletin 97-01, *Form and Content of Agency Financial
    Statements*, p. 27.

[^10]: SFFAS No. 4, *Managerial Cost Accounting Concepts and Standards
    for the Federal Government*, par. 99.

[^11]: Ibid., par. 90.

[^12]: Ibid., pars. 90 and 126.

[^13]: Ibid., par. 128.

[^14]: SFFAS No. 5, *Accounting for Liabilities of the Federal
    Government*, par 74.

[^15]: Statement of Federal Financial Accounting Standards No. 4,
    *Managerial Cost Accounting Concepts and Standards* *for the Federal
    Government*, par. 91.

[^16]: Ibid., par 104.

[^17]: OMB Bulletin 97-01, *Form and Content of Agency Financial
    Statements*, p. 28.

[^18]: SFFAS No. 4, *Managerial Cost Accounting Concepts and Standards
    for the Federal Government*, p. 36.

[^19]: Ibid., par. 71.

[^20]: OMB Bulletin 97-01, *Form and Content of Agency Financial
    Statements*, pgs. 25-29.

[^21]: SFFAS No. 4, *Managerial Cost Accounting Concepts and Standards
    for the Federal Government*, par. 89.

[^22]: SFFAS No. 3, *Accounting for Inventory and Related Property*;
    SFFAS No. 6*, Accounting for Property, Plant, and Equipment*.

[^23]: OMB Bulletin 97-01, *Form and Content of Agency Financial
    Statements*, p. 26.

[^24]: SFFAS No. 4*, Managerial Cost Accounting Concepts and Standards
    for the Federal Government*, par. 110.

[^25]: JFMIP, *Framework for Federal Financial Management Systems*, pgs.
    17-18.

[^26]: Ibid., p. 19.

[^27]: Charles T. Horngren, *Cost Accounting, A Managerial Emphasis*, p.
    369.

[^28]: GAO report GAO/AIMD-95-179, *Budget Account Structure -- A
    Descriptive Overview*. p. 7.

[^29]: Statement of Federal Financial Accounting Standards (SFFAS) No.
    4, *Managerial Cost Accounting Concepts and Standards for the
    Federal Government,* par. 53.

[^30]: Statement of Federal Financial Accounting Concepts No. 1,
    *Objectives of Federal Financial Reporting*, par. 23.

[^31]: Ibid., par. 192.

[^32]: For additional information, see Joseph A. Ness and Thomas G.
    Cuccuzz, "Tapping the Full Potential of ABC," *Harvard Business
    Review* (July-August 1995), pp. 130-138.

[^33]: ,Charles T. Horngren, *Cost Accounting, A Managerial Emphasis*,
    p. 572.