OTHER COST ACCOUNTING CONCEPTS

FAR 31.201-1, Composition of Total Costs, states “(a) The total cost of a contract is the sum of the allowable direct and indirect costs allocable to the contract, incurred or to be incurred, less any allocable credits, plus any allocable cost of money pursuant to FAR 31.205-10. In ascertaining what constitutes a cost, any generally accepted method of determining or estimating costs that is equitable and is consistently applied may be used, including standard costs properly adjusted for applicable variances.”

There are two methods of recording costs in an accounting system: a job order system and a process cost system. Similarly, there are two bases for measuring cost: actual cost and standard cost. A job order cost system accumulates costs by job or task. In other words, this system assigns costs, such as direct labor, direct material, and overhead, to specific jobs within a contract. It may assign costs to individual production units or to a lot that consists of several units. The job order cost system is common in manufacturing contracts, where the production items are dissimilar in design, processing, or cost. It is also used in research and development contracts and service contracts. Costs in job order systems are recorded at actual cost.

A process cost system accumulates costs by a specific process or by a department that may represent several processes. This system assigns the various costs to the units introduced by the department during a specific time period. It is common in manufacturing of products where identical units of production are involved, such as chemical, petroleum, and computer chips.

In a process system, costs are assigned either at actual cost or at a standard cost. A standard cost accounting system, as defined in the FAR, uses costs that have been computed using preestablished measures (e.g., estimated or engineered standards). These measures pertain to both the quantity of services (e.g., labor hours, material units) and the value per quantity of resource. Standard cost accounting systems are acceptable as long as standard costs are properly adjusted for applicable variances. The recognition that standard cost accounting systems are capable of producing actual costs (i.e., standard plus or minus variances) is important because actual costs are the basis for determining allowable contract costs and in establishing costs for contract payments.

Government auditors often have difficulty reviewing process cost systems because they are unfamiliar with such systems. As a result, memorandum records might be necessary to present costs on a job cost basis. Government auditors also often have difficulty reviewing standard cost systems for the same reason. Similarly, memorandum records might be necessary to present standard costs on an actual cost basis.

CAS 407 provides criteria under which standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor, and provides guidance relating to the establishment of standards, accumulation of standard costs, and accumulation and disposition of variances.

When a contract is not subject to the CAS, only the FAR cost principles and GAAP will apply. For the most part, the FAR cost principles are not as specific as the CAS; however, many of the same cost accounting concepts are included in both. In fact, some of the CAS are incorporated by reference or by restatement in the FAR cost principles.