March 7, 2001

1

Cost Capitalization Offset

Why was this account proposed?

Cost Capitalization Offset, was first proposed to help with the elimination problem between program

agencies and the administering agency for employer contribution to employee benefits. The program

agencies report their portion of the contribution in account 6400G and the administering agency records

the benefit revenue in account 5400 G. However, some agencies were capitalizing their portion of

employee benefit directly into Work-in-Process(WIP) or Construction-in-Progress (CIP) account. This

made it difficult to match program agencies’ 6400G with the administering agency’s 5400G. As a result,

the Issue Resolution Committee proposed account 6610 to provide agencies a mechanism to offset all

direct costs in the expense accounts when those costs were capitalized subsequently to an in-progress

product/job or to a completed product/job.

What is Direct Cost?

FASAB Statement of Federal Financial Accounting Standards #4, paragraph 90 defines direct cost to be

the following:

“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 an output include:

1) Salaries and other benefits for employees who work directly on the output

2) Materials and supplies used in the work

3) Various costs associated with office space, equipment, facilities, and utilities that are used exclusively

to produce the output, and

4) Costs of goods or services received from other segments or entities that are used to produce the

output.”

When should Cost Capitalization Offset Account be used?

All direct costs that are traditionally reported in the expense accounts and some direct material costs, that

did not meet capitalization threshold, should be first reported using the 6000 series USSGL accounts. This

will allow agencies to accumulate their cost information, establish audit trails, and allow a proper

elimination and consolidation at the government-wide level. Agencies will offset those amounts using

account 6610 when the cost is capitalized into Inventory Work-in-Process, Construction-in-Progress,

Internal-Use Software In Development, or to the finished product.
March 7, 2001

2

Cost Capitalization Offset

THE ENTRIES ILLUSTRATED BELOW SHOW A MANUFACTURING ACTIVITY

NOTE: Focus of these transactions is to illustrate the new proposed account 6610, Cost Capitalization

Offset and how this account is used. For complete Inventory scenario and the calculation of imputed cost

please refer to SGL case studies on Inventory and Liability - pension on the SGL web site. 

DESCRIPTION TRANSACTION Ref

1) To record appropriation,

apportionment and allotment.

proprietary

1010 FBWT 40,000

3100 Unexpended appropriation 40,000

budgetary

4119 Other appropriation realized 40,000

4450 Unapporitoned authority 40,000

4450 Unapporitoned authority 40,000

4510 Apportionments 40,000

4510 Apportionments 40,000

4610 Allotments - realized resources 40,000

A104

A118

A120 

2) To record raw material

purchased for its manufacturing

activity

proprietary

1525 Inventory - Raw Materials 5,000

2110 Accounts payable 5,000

3100 Unexpended appropriation 5,000

5700 Appropriation used 5,000

budgetary

4610 Allotments - realized resources 5,000

4901 Expended authority - unpaid 5,000

B302

B134

B204

B302

3) To record raw materials used to

produce product A

proprietary

1526 Inventory - Work in Process 4,000

1525 Inventory - Raw Materials 4,000

budgetary

None

D310
March 7, 2001

3

4a) To record incurrence of direct

labor (salary of production workers

- $10,000) during the production of

product A.

proprietary

6100 Operating expense 10,000

2210 Accr funded payroll and benefits 10,000

3100 Unexended appropriation 10,000

5700 Appropriation used 10,000

budgetary

4610 Allotments - realized resources 10,000

4901 Expended authority - unpd 10,000

B302

B134

B204

B302

4b) To capitalize payroll expense to

WIP. 

proprietary

1526 Inventory - WIP 10,000

6610 Cost Capitalization Offset 10,000

budgetary

None

D604?

5a) To record incurrence of

employee benefits such as

retirement, health, life and FECA

for workers during the production

of Product A.

For imputed cost calculation,

please refer to the pension case

study under Liability Standard on

the SGL website. Imputed cost

illustrated on this case study is not

calculated. It is an arbitrary

amount since our focus of this case

study was to illustrate how the

proposed new account 6610, Cost

Capitalization Offset is used.

proprietary

6400 Benefit expense 1,000

2213 Employer contrib & payroll taxes pay. 1,000

6730 Imputed costs 100

5780 Imputed financing source 100

3100 Unexpended appropriation 1,000

5700 Appropriation used 1,000

6850 Employer contrib not req CY budget 500

2225 Unfunded FECA liab 500

budgetary

4610 Allotments - realized resources 1,000

4901 Expended authority - unpd 1,000

D404

D602

B134

B326

D404
March 7, 2001

1

 The imputed cost was capitalized in order to comply with the “full cost” standard in FASAB

Standard #4, Managerial Cost Accounting. However, issues regarding charging for costs that were never

outlayed has been referred to the AAPC. 

2

 “Overhead is applied to products because of management’s desire for a close approximation

of costs of different products. If such product costs are to help management for product pricing,

income determination, and inventory valuation, they must be timely as well as accurate. If the purpose

were to apply all actual overhead to actual production for the year, the most accurate application of

overhead could be made only at the end of the year, after actual results were determined. However,

this timing would be too late. Managers want product cost information throughout the year. Therefore

overhead application rates are usually computed in advance of production.” (Charles T Horngren,

George Foster, Cost Accounting A Managerial Emphasis, 6th edition pg 98). 

4

5b) To capitalize employee benefit

cost1 to, WIP. There are other

direct costs that are not identified

in this illustration.

proprietary

1526 Inventory - WIP 1,600

6610 Cost Capitalization Offset 1,600

budgetary

None

D604

6) To record incurrence of other

factory overhead ($2,000) such as

factory rent, factory utilities, and

indirect labor ($3,000) utilized to

produce product A.

proprietary

6100 Op expense/Prog costs (overhead) 5,000

2110 Accounts payable 2,000

2210 Accrued funded payroll and benefits 3,000

3100 Unexpended appropriation 5,000

5700 Appropriation used 5,000

budgetary

4610 Allotments - realized resources 5,000

4901 Expended authority - unpaid 5,000

B302

B134

B204

B302

7) To record overhead applied2, the

budget rate is determined to be

$5.00/per direct labor hour. The

direct labor hour was determined to

be 900 hours. 900 hours * $5.00 =

$4,500. 

proprietary

1526 Inventory - Work in Process 4,500

6600 Applied overhead 4,500

budgetary

None

D604
March 7, 2001

5

8) To pay salary to the employees proprietary

2210 Accrued payroll and benefits 13,000

1010 Fund balance 13,000

budgetary

4901 Expended authority - unpaid 13,000

4902 Expended authority - pd 13,000

B110?

9) To reclassify fully completed

goods which are ready to be sold

proprietary

1527 Inventory - Finished Goods 14,500

1526 Inventory - Work in Process 14,500

budgetary

None

D312

10) To liquidate liabilities for the

purchase of raw materials and

other overhead costs

proprietary

2110 Accounts payable 7,000

1010 Fund balance 7,000

budgetary

4901 Expended authority - unpd 7,000

4902 Expended authority - pd 7,000

B110

11) To close underapplied

overhead, which is deemed

immaterial

proprietary

6600 Applied overhead 4,500

6500 Cost of goods sold 500

6100 Op exp/Prog costs (OH) 5,000

[If overhead is overapplied (applied overhead is budgeted

more than the actual), the adjustment will be credited to

CGS]

budgetary

None

D500
March 7, 2001

6

Pre-closing Trial balance - Proprietary Pre-closing Trial balance - Budgetary

1010 FBWT 20,000

1525 Inventory - Raw Materials 1,000

1526 Inventory - WIP 5,600

1527 Inventory - Finished Goods 14,500

2213 Employee contrib & payroll taxes pay. 1,000

2225 Unfunded FECA liab 500

3100 Unexended appropriation 19,000

5700 Appropriation used 21,000

5780 Imputed financing source 100

6100 Operating expense 10,000

6400 Benefit expense 1,000

6500 Cost of Goods Sold 500

6610 Cost Capitalization Offset 11,600

6730 Imputed costs 100

6850 Emp contrib not req CY budget 500 

53,200 53,200

4119 Other appropriation realized 40,000

4610 Allotments - realized resources 19,000

4901 Expended authority - unpaid 1,000

4902 Expended authority - pd 20,000

STATEMENT OF NET COST

6100 Operating expense 10,000

6400 Benefit expense 1,000

6500 Cost of Goods sold 500

6610 Cost Capitalization Offset (11,600)

6730 Imputed costs 100

6850 Emp contrib not req CY budget 500

Net Cost 500

CLOSING ENTRIES

proprietary

3310 Cumulative results 12,100

6100 Operating expense 10,000

6400 Benefit expense 1,000

6500 CGS 500

6730 Imputed costs 100

6850 Emp contrib not req CY budget 500 

6610 Cost Capitalization Offset 11,600

5700 Appropriation used 21,000

5780 Imputed financing source 100

3310 Cumulative results 32,700

budgetary

4610 Allotments - realized resources 19,000

4450 Unapportioned auth 19,000

4902 Expended authority - pd 20,000

4201 Total actual resources 20,000

4119 Other appropriation realized 40,000
March 7, 2001

7

STATEMENT OF FINANCING

1A. Obligations incurred (4901+4902) 21,000

1D. Financing imputed for cost subsidies 100

2C. Costs capitalized in the B/S 

(1525,1526,1527) (21,100)

4. Financing sources yet to be provided

(6850) 500

Net Cost 500

BALANCE SHEET

Assets

1010 FBWT 20,000

1525 Inventory - Raw Materials 1,000

1526 Inventory - WIP 5,600

1527 Inventory - Finished Goods 14,500

Total Assets 41,100

Liabilities and Net position

2213 Employee contrib & payroll taxes pay. 1,000

2225 Unfunded FECA liab 500

3100 Unexended appropriation 19,000

3310 Cumulative results 20,600

Total liabilities and Net Position 41,400