COST MEASUREMENT AND ANALYSIS

Introduction

Costs are bad things endured or good things lost. Government action -- spending, taxing, borrowing, regulating, changing property rights or liability rules, whatever -- typically creates both "goods" and "bads." As Kip Viscusi (1996) explains: "The ultimate issue is whether on balance we are made better off," that is, whether public actions produce more good than bad, more benefits than costs.

Economists and accountants mean two different but related things by the term cost. Economists define cost in terms of the opportunities that are sacrificed when a choice is made. Hence, under the economist's definition, costs are simply benefits lost (and, in some cases, benefits are merely costs avoided). That is, costs are prospective and subjective. They are seen from the perspective of a decision maker not a detached observer (Buchanan, 1969: 38-39). Moreover, to an economist, cost is a stock concept -- a precisely dimensioned reality at an identifiable point in time. That is, costs are incurred when decisions are made.

Accountants define cost in terms of resources consumed. Hence, from the accountant's standpoint, costs are retrospective and objective -- they are seen from the perspective of a detached observer. Accountants usually define costs as flows: costs reflect changes in stocks (reductions in good things, increases in bad things) over a fixed temporal interval.

To distinguish between these two cost concepts, I will refer to what economists do as cost estimation and what accountants do as cost measurement. This chapter will emphasize cost measurement.

Of course, both concepts have a lot in common. In the first place, accountants and economists would agree that, for want of a better yardstick, costs should be measured in dollars (money). Second, both would agree that it is meaningless to talk about cost without identifying a cost object (or cost objective as the Cost Accounting Standards Board (CASB) calls it). Although there are as many different costs as there are cost objects, cost necessarily means cost to do something. Third, both would agree that standing matters. Cost necessarily means cost to somebody -- preferably real people, because ultimately all costs (and benefits) are borne by individuals, although for some purposes a legal entity (organization) will suffice.

Fourth, given perfect markets and information (including perfect foresight) and holding for what and to whom constant, the two concepts may be made to collapse to a single identity. This can be accomplished by measuring costs in units of present value: i.e., the change in present value or owner's equity caused by some specified action (where for purposes of measurement the attendant increase in wealth is excluded from the computation of equity). This is, of course, Armen Alchian's present worth or capital value concept of cost (Alchian, 1959: 23). In practice, where market prices adequately reflect willingness and ability to pay, the capital value concept of cost is a good proxy for opportunity cost. If someone were willing to pay more for the goods consumed than market prices, they would have done so. In that case, "objectively observed cost and revenue streams accurately represent the dimensionally different and subjectively evaluated alternatives among which choices are actually made by individuals" (Buchanan, 1969: 39).

There are two instances, however, in which market prices fail to measure opportunity costs satisfactorily:

(1) where markets are incomplete (do not clear) or are missing altogether; and

(2) where willingness to pay violates norms of fairness or equality under the law.

Both of these cases are critical to an evaluation of government action. Indeed, if markets were complete and fairness irrelevant, there would be little for government to do aside from protecting property rights, establishing liability rules, and providing a reliable money supply.

Unfortunately for cost analysts, many consequences of government action are not traded in markets. To measure willingness to pay for these things, economists rely on indirect, inferential techniques, such as hedonic pricing or contingent valuation (Vining and Weimer, forthcoming). They measure the benefits from workplace safety by looking at the wage premiums paid in less safe workplaces and they estimate the value of endangered species by asking people how much they would pay to preserve them (Cropper, 1992). Montgomery, Brown and Adams (1994), for example, conclude that it would cost $21 billion (discounted present values in 1990 dollars) to increase the likelihood of the survival of the Northern spotted owl from zero to 88 percent, $12 billion more to increase it to 91 percent, and an additional $13 billion to increase it to 95 percent. To choose between those options, some economists would ask people how much they would be willing to pay to preserve spotted owls (e.g., Portney, 1994; Hanemann, 1994; see, however, Diamond and Hausman, 1994).

Moreover, the consequences of government action are seldom proportionally allocated among individuals. If government does not or cannot make losers whole, one can never really be sure the costs of its actions have been properly assessed. As a practical matter, government analysts tend to deal with this issue by putting most of the things that can be satisfactorily measured using market prices on the cost side and every thing else -- like the value of spotted owls -- on the benefit side of their ledgers. This, of course, provides a highly skewed perspective on government action. If cost minimization were the only objective of cost analysis, we could best achieve it by having no government whatsoever (see Viscusi, 1996).

Nevertheless, this chapter will focus on the consumption of things that are satisfactorily measured using market prices.

Why Measure Costs?

The usual distinction made in the literature is between decision facilitating and decision influencing (Demski and Feltham, 1976). Because time only runs one way, both uses of cost information are problematic. In the first instance, a cost description (measurement or estimate) is provided to decision makers before a decision is made. Unfortunately, costs can only be measured after the fact. This means that cost analysts must estimate the costs of the alternatives under consideration. In some cases, measured cost is a reliable predictor of future costs; in other cases it is not. Regardless of its reliability, however, it is all we have or can have. In the second instance, cost is measured after decisions have been made and implemented. Only the measurement method and its consequences are conveyed prior to the decision. In this second case, measured costs are used to evaluate managerial performance, with the purpose of influencing management choices. Consequently, managers must be informed as to how their performance will be measured and how measured performance will affect outcomes they care about -- promotion, pay, esteem, etc.

I will next outline the basic approaches to cost measurement and then show how cost measures can be used to facilitate and to influence decisions.

Approaches to Cost Measurement

Cost measurement is fundamentally a simple process. In most cases, cost analysts begin by measuring resources consumed (cost items). Next, they match (assign) cost items to cost objects. Finally, they account for the prices paid (historical cost) to acquire cost items and adjust those prices to reflect economic reality.

Nearly, anything of interest to a decision maker can be a cost object. Insofar as organizations exist to benefit customers or clients by means of their products or services, however, organizational decision makers should be (and generally are) especially interested in product costs. Sometimes, a final product/service consists of several intermediate services, each of which is produced in one or more organizational units, which implies several layers of cost objects.

Matching Cost Items to Cost Objects

There are four ways a cost item can be matched (assigned) to a cost object: (1) direct matching, (2) averaging (apportioning), (3) allocating, and (4) allocating and then apportioning. Cost items that benefit a single cost object -- a department, an activity, a process, a product, or a service -- may be directly matched to the cost object in question. Cost items that are exhausted to produce a single cost object are always direct costs. Cost items that benefit one cost object at a time, but are not used up producing a single cost object, must be apportioned. Cost items that are exhausted to benefit two or more cost objects must be allocated to each on some basis, so that each bears its fair share of the cost of the item. Cost items that benefit two or more cost objects at a time, but are not used up as a result, must be both allocated and apportioned.

These distinctions can be illustrated by the production of mutton and wool. To produce mutton and wool, one must acquire sheep, grazing land, and grain, and hire shepherds. Each leaf of grass or gram of oats will be consumed by one and only one sheep. In theory, then, we could treat each sheep as a cost object and directly match it to the items it consumed (although, if this were not a 4H project, the measurement costs of doing so would be prohibitively high, since it would be necessary to fence in the sheep and monitor its consumption). There is a difference, however, between grass and grain. Grain is purchased by the kilo, grass by the hectare. The cost of grain can be matched directly to the cost object; the cost of the land used must be averaged or apportioned by calculating the rent per hectare for the period in question and then, if the cost object in question were kept in pen 1/10 of a hectare in size, by dividing the rent by ten. If the cost objects were kept in a herd, the cost analyst could average the land rent in much the same way, simply by dividing the rent by the number of sheep or the total weight gain of the herd, in which case the rent could then be allocated back to each animal, if the analyst had a reason for doing so (this approach is called process costing). The cost of the shepherd could be handled in much the same way. Alternatively, the time the shepherd devoted to an individual sheep -- getting it off a rock or out of a tree, say -- could be assigned the sheep in question (job order costing) and the rest of his time could be averaged over the whole herd.

Things get a bit trickier if the cost analyst wants to know the cost of mutton. This is because the cost items used for sheep production jointly benefit the production of both mutton and wool. The analyst must allocate the cost of bringing the herd to market to its constituent products, perhaps on the basis of the total revenue obtained for each. In which case a cost per kilo of mutton produced could be measured by apportioning the allocated cost by the total kilos of mutton sold. These distinctions are summarized in Figure 1.1

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Of course, the distinction between exhaustible items and non-exhaustible items is roughly equivalent to the accountant's distinction between current (short term) and fixed (long term) assets. Indeed, from the standpoint of preparing general purpose financial statements they are essentially identical. The difference is that cost analysts are concerned with many things that are not included in general purpose financial statements. Financial statements focus on things that all entities (of a given class) have in common -- assets, liabilities, capital, income, expenses, cash flows, etc. Cost analysts are primarily concerned with things that are specific to a particular entity. Besides, if the time horizon of the cost object (or objects) in question is long enough, all cost items save only capital and land are exhaustible. As a practical matter, under a positive discount rate, even land and capital are treated as if they were exhaustible.

My categories are somewhat heterodox, to be sure. Most accountants merely distinguish between direct and indirect costs: direct costs can be traced to a single cost object; indirect costs arise where resource consumption benefits several cost objects. The CASB, for example, says that costs are assigned to accounting periods. They are then allocated to cost objects within the accounting period. They may be either directly or indirectly allocated. However, this classification leaves the distinction between apportionment and allocation hopelessly confused -- as I explain below, this distinction is a lot more important now than it once was.

Adjusting the Prices Paid to Acquire Cost Items to Reflect Economic Reality

Where a cost item is supplied by an efficient market and immediately exhausted (kilowatts of electricity, for example), the price paid to acquire the item satisfactorily measures cost. Some cost items are not instantaneously exhausted, however. Materials and supplies, work in progress or in transit, and finished goods awaiting delivery are held in inventory; plant and equipment are consumed very slowly. Land and capital are used rather than consumed.

Non-exhaustible items play a significant role in the delivery of services by government. For example, the federal government's investment in property, plant, and equipment exceeds $1 trillion. Consequently, the Federal Accounting Standards Advisory Board (FASAB) Statement No. 6, "Accounting for Property, Plant, and Equipment," directs that:

"General PP&E shall be reported in the basic financial statements: the balance sheet, and the statement of net cost. The acquisition cost of general PP&E shall be recognized as an asset. Subsequently, except for land which is a non-depreciable asset, that acquisition cost shall be charged to expense through depreciation. The depreciation expense shall be accumulated in a contra asset account -- accumulated depreciation."

FASAB further directs that depreciation expense should reflect the estimated useful life of the asset in question, less its estimated salvage/residual value, taking into account factors such as physical wear and tear and technological change (e.g., obsolescence), and that any changes in estimated useful life or salvage/residual value shall be treated in the period of the change and future periods. In other words, FASAB Statement No. 6 moves the federal government toward commercial accounting practices, which probably represents a considerable advance over the status quo. Proper accounting for the use of non-exhaustible items by federal agencies should go beyond commercial practice, however.

This conclusion is amply demonstrated by the experience of state regulatory commissions. These commissions set/approve rates for investor owned public utilities time in a highly adversarial, public context involving huge stakes. Every issue is represented by the best legal, economic, and accounting expertise money can buy. To guarantee a fair return on owners' investment, the regulators must measure a utility's non-exhaustible items and their consumption accurately. The measures they use developed over decades. They have been tested in thousands of administrative hearings and hundreds of court cases, not to mention myriad financial markets. As a result a tested, workable body of accounting practice meeting the needs of the public, the regulated entities, and financial markets has evolved.

The approach to the measurement of non-exhaustible item stocks and consumption flows used in regulatory accounting (Carlton and Perloff, 1990: 56-7) differs significantly from that proposed in FASAB Statement No. 6 in three critical respects: the use of replacement cost (current market price) rather than historical cost (outlays for the item), expensing the use of real property, and the measurement of all relevant service providing non-exhaustible items. The reason public utility commissions use replacement cost rather than historical cost is that replacement cost is usually the best available measure of opportunity cost. Its use better conforms to economic logic than does historical cost. When an entity uses historical cost to value non-exhaustible items, rather than replacement cost, it sacrifices valuable, perhaps, critical information and actually distorts the incentives facing operating managers. The discrepancy between historical cost and replacement cost is usually greatest where intangible fixed capital -- human and intellectual capital -- is concerned and least where working capital is concerned. At the limit, an entity's cash balances are presumed to be absolutely liquid and perfectly redeployable. Tangible fixed capital in the form of plant or equipment is usually an intermediate case.

Public utility commissions understand that many non-exhaustible items (land and land rights for example) do not depreciate. However, their use does involve a significant opportunity cost. Financial theory tells us that the appropriate price to charge for the use of a non-exhaustible item is its rental value in its best (highest valued) alternative use. Consequently, where a non-exhaustible item has alternative uses, the entity holding it should recognize a charge for its use -- the higher of its rental value or its measured consumption (see below). Of course, some non-exhaustible items have no alternative uses. This is true of many of the non-exhaustible items used by government (e.g., a missile silo or the Washington Monument). Public utility commissions recognize that, if there are no plans to replace these assets, either because they will never wear out or because they are surplus, their economic cost is zero -- as is their replacement cost.

Public utility commissions also understand that, even if non-exhaustible items have value only to a specific entity or in a specific use, if they must eventually be replaced, their use is costly, and the entity using the asset must be charged for its consumption. Since it is a fundamental rule of financial theory that the price of an asset must be equal to the discounted present value of the rents one could obtain from the asset, public utility commissions use replacement cost, adjusted for wear and tear, obsolescence, and actual maintenance levels, to estimate periodic rentals.

My point is that public utility commissions recognize the economic cost of using all non-exhaustible items (it is just that the cost is zero in some cases). In contrast, FASAB believes that non-exhaustible items that have no alternative uses should simply be excluded from an entity's accounts and the price of using them ignored. For example, FASAB asserts that, because weapons systems and space exploration equipment "are developed, used, and retired in a manner that does not lend itself to a 'systematic and rational' assignment of costs to accounting periods and, ultimately, to outputs" recognizing their consumption would contribute nothing "to measuring the cost of outputs produced or to assessing operating performance." However, the procedure used by public utility commissions to convert the replacement price of a wasting asset into a periodic rental price could easily, not to mention "systematically and rationally," be applied to the problem of costing the forces provided by the military departments to the combatant commands (see Thompson and Jones, 1994: Chapter 8; Roll, 1978).

It is true that, in commercial accounting, fixed assets are usually carried on the books at their historical cost and not their replacement cost. This means that business does not measure the quantity of non-exhaustible items actually consumed during an accounting period in a way that conforms to economic logic. However, where business is concerned there are good and sufficient reasons for this deviation (Whittington, 1988). First, historical cost information is usually easy to obtain; its use permits the communication of clearly defined data based on well understood rules to users on a caveat emptor basis. Second, until recently it was felt that no important information was lost through adherence to this principle; the economic value of the business entity as an ongoing concern is reflected far more accurately in the market price of its shares than it ever could be in any summation of alienable assets and liabilities. Third, given that the firm's purpose is to make a profit on its owners' investment, historical cost valuation is consistent with the provision of appropriate incentives to operating managers, e.g., to buy cheap and sell dear, to avoid unnecessary tax liability, to combine resources so as to maximize net revenue product, etc. Obviously, these reasons for deviating from economic logic do not apply to government.

Nevertheless, even businesses are increasingly using replacement costs to value alienable assets and liabilities (Quinn, 1992: 244). Many firms now recognize that their most valuable assets are not their tangible assets, but their intangible intellectual assets. One of the few measures of a firm's intellectual capital is Tobin's Q, the difference between the market value of its shares and the replacement cost of its tangible assets. Tobin's Q "is implicitly the extra value the market places on the intellectual and service value of the firm, i.e., the amount knowledgeable buyers would presumably be willing to pay to reproduce its intangible assets, if they could be bought." Of course, to calculate Tobin's Q, one must first measure the replacement value of a firm's tangible assets.

Many accounting theorists also note that a company's capital tied up in non-exhaustible items (fixed and working capital) also has a cost over and above depreciation measured according to standard commercial accounting practices and that a charge for its use should be included in a firm's accounts. FASAB is now looking at the appropriateness of incorporating a capital charge into federal financial statements. Areas of FASAB research include (1) practices in other countries, such as New Zealand (see Hay, 1992; Bourne, 1993), (2) private sector uses of this information, and (3) pilot studies at federal agencies. This approach makes sense given the approach to the measurement of the use of non-exhaustible items taken in FASAB Statement No. 6. However, financial theory says that it would be better to use opportunity cost to measure the cost of capital. The public utility approach to measuring the consumption of the non-exhaustible items implicitly includes a capital charge.

One difficulty with the public utility approach is that the cost analyst must select an appropriate discount rate to calculate a rent. In many cases, the market will provide a satisfactory nominal rate (i.e., the interest rate that the entity must pay to borrow funds matched to the remaining life and, perhaps, the type of asset (see Boardman and Greenberg, forthcoming)). Arguably, however, where national governments are concerned, whichever marginal cost is the higher of taxation or debt should be used (see Diewert, Lawrence, and Thompson, forthcoming).

Product Costing

Where the problem of measuring the consumption of non-exhaustible cost items has been satisfactorily dealt with, product costing in organizations that produce a single product or perform a single service or activity is straightforward. Full costs are merely the sum of all exhaustible and non-exhaustible cost items used for a cost object. Full unit costs are merely average total costs -- the sum of direct costs and rents (sometimes called period costs) divided by the total number of units of products produced or services or activities performed. This situation also gives rise to a predictable set of cost functions.

Where there are several layers of cost objects (i.e., a final product/service consists of several intermediate services, each of which is produced in one or more organizational units) and processing is sequential or seriatim, product costing is equally straightforward. The cost object of one organizational unit is a merely a cost item for the next unit in line. This means that, where a single product, service, or activity is concerned, measured cost provides a reliable basis for estimating the cost of replicating the cost object (decision facilitating) and an unambiguous basis for evaluating managerial performance against a target, benchmark, or standard (decision influencing). That is to say, measured product cost is a highly useful guide to decisions about product provision (retain/divest) and pricing, alternate mixes of cost items, the rate, volume, and timing of production, and even alternative processing sequences, although in these instances counterfactual estimates must be derived from other measures. Where there are two or more layers of cost objects, measured product cost is also a useful guide to decisions about whether to make or buy cost objects (see Horngren and Foster, 1991; Kaplan, 1982). Indeed, whenever these issues can be decided on the basis of direct costs, measured cost will satisfactorily perform the decision facilitating function as well as the decision influencing function.

The utility of product cost measurement becomes problematical only where cost items are shared by two or more cost objects -- these can be either final products or layers of cost objects. Where the service delivery process is dominated by joint cost items, cost measures that serve the decision influencing function will rarely, if ever, also satisfactorily serve the decision facilitation function. This means that different costs are required for different purposes (see Kaplan, 1988).

Accountants tried to ignore this fact by pretending that allocated costs were satisfactory proxies for both opportunity costs and responsibility costs. For a long time they got away with this pretense. This was possible for three reasons: (1) most production processes were dominated by exhaustible items that could be traced to a single cost item (direct labor or machine hours, materials, etc.); (2) managers were held responsible only for controllable cost items (i.e., those that could be significantly influenced by the actions of the manager); and (3) given joint cost items, the only alternative to cost allocation was statistical cost estimation. Since statistical costs cannot be tied directly to an entity's system of dual entry bookkeeping, accountants tended to distrust their validity.

Cost Allocation

Traditional cost allocation is a two step process: (1) direct cost matching, and (2) indirect cost allocation. As a practical matter, most accountants do not distinguish between non-exhaustible cost items traceable to a single cost object, exhaustible cost items benefiting two or more cost objects, and non-exhaustible cost items benefiting two or more cost objects. They are all lumped together as indirect costs or overheads (i.e., any cost item not directly associated with a final cost object), pooled in cost centers, and distributed to cost objects. This step involves the selection of a basis of allocation (i.e., a measure of activity associated with the pool of common costs being distributed) and a method of allocation.

Cost accountants rely on three methods to allocate cost pools to cost objects. The simplest is known as single step allocation. Under this method, analysts allocate each cost pool to all the cost objects that use its services, but not to any others. For example, building maintenance and housekeeping services performed by a state department of administrative services could be allocated to various other departments and agencies based on the number of square meters of office space they occupy. Where there are several layers of cost objects, cost accountants usually rely on the two stage or step down method. Under this method, the cost pools are trickled down to other pools and cost objects using a variety of allocation bases. Usually analysts begin with the cost pool that serves the greatest number of other pools or final cost objects and spreads its costs over the others. They continue in this fashion with all other pools until all costs have been allocated to final cost objects.

For example, the allocation process could begin with depreciation of buildings and fixtures. These costs would be distributed across all remaining cost pools. The amount to be distributed from the next pool (building maintenance and housekeeping services) now includes not only its own costs but also the amount allocated to it from the previous step. This total would them be allocated to all the remaining pools, and so forth.

Two important aspects of the step down method are (1) no reverse allocation takes place; that is, once a pool's costs have been allocated, that pool receives no additional allocations from other pools; and (2) pool costs are allocated both to other pools and to final cost objects (or the administrative units directly responsible for their delivery), but final cost objects (or the administrative units directly responsible for their delivery) are not allocated to other final cost objects (or the administrative units directly responsible for their delivery). Because no reverse allocation takes place, the sequence of the steps in the step down is an important cost accounting decision. Although the effect of different step down sequences often is not great, in some circumstances the choice may have a huge influence on the measured costs of final products.

This problem can be mitigated by using the reciprocal method. Under this method, cost pools are not stepped down. Rather, the accountant develops a set of simultaneous equations that measure and allocate each pool's costs based on its use by all other cost pools, not just those below it in a step down sequence. Sometimes this process can become quite complex. For example, the cost model developed by the National Center for Higher Education Management Systems provides a set of 26! equations for allocating costs to student types and funded research activities.

Relevance Lost

As discussed under the topic heading "using measured costs to influence behavior" overhead cost allocation systems retain utility insofar as decision influencing is concerned. Increasingly, however, they have been rendered obsolete for purposes of facilitating decisions by changes in organization and technology. Most overheads are transaction costs. They reflect the organization's policies, its operating and administrative procedures, and its customer relationships. They involve activities like purchasing, materials handling, marketing, accounting, and asset utilization. Once upon a time overheads could be allocated to final cost objects on the basis of direct costs without significantly biasing key operating decisions (provision, pricing, input/output mix, rate, volume, or timing) simply because overheads were relatively insignificant (see Figure 1.2). In 1950 overheads accounted for a less than 15 percent of total manufacturing cost in the US; direct labor and machine hours more than 50 percent. Nowadays, overhead activities often have a greater effect on expenses than production volume. In the average US manufacturing plant, for example, direct manufacturing labor accounts for only ten to fifteen percent of costs; materials and purchased components typically account for thirty to forty percent more. This leaves roughly fifty percent for overheads. And that's the typical manufacturing plan; direct labor costs are practically irrelevant in the increasing number of high tech firms that rely on flexible computer aided design and manufacturing. In those organizations, 80 percent of life cycle costs are typically incurred before a product gets to market (see Figure 1.3).

The US Office of Technology Assessment (1984: 60-62) defines flexible manufacturing as a system:

… capable of producing a range of discrete products with a minimum of manual intervention. It consists of production equipment workstations (machine tools or other equipment for fabrication, assembly or treatment) linked by a materials handling system to move parts from one work station to another, and it operates as an integrated system under full programmable control.

Interestingly, flexible, computer aided design and manufacturing have had the effect of making manufacturing firms much more like service organizations. Most manufacturing costs were once engineered costs. The amount of labor and the quantity of material required to make products depended entirely on the volume of output. By contrast, most service costs have always been discretionary (i.e., they depend on policy decisions).

Paradoxically, however, although flexible production has reduced the significance of exhaustible cost items, where systems are linked by modern object oriented relational data bases, flexible production permits non-exhaustible cost items to be assigned to individual cost objects (job order costing) far more precisely than was ever before possible. In such an environment, cost analysts must still apportion expenses, but they rarely need to allocate them.

Activity Based Costing Systems

Like cost allocation, Activity Based Costing (ABC -- also called transaction cost analysis) starts by apportioning an organization's expenses to a set of cost pools, usually classified by activity rather than by organizational unit or department. Cost analysts then use statistics to determine which transactions cause these pools to vary in size (see Box 3). These are called activity drivers, resource drivers, or cost drivers. Examples of cost drivers in a manufacturing environment include the number of inspections, raw materials receipts, the number of components in inventory, machine setups, or change orders.

In many organizations, ABC is a by-product of quality management -- the basic elements of which are statistical process control, customer feedback, participative management, and supplier cooperation (Hyde, 1997). Under quality management, ABC is used to distinguish between activities that add value (to final products) and those that do not -- like inspection, rework, and scrap, which arise out of defects in the service delivery process. Because quality management pushes significant operating decisions down to the lowest levels of the organization, cost measures and cost estimates are needed at the lowest levels, as are measures of rework, activity cycle time, customer satisfaction, etc. Standards are also needed for cost/performance measures. Standards can be based on the best an organization has achieved over time (baselining), the best practice currently being achieved somewhere (benchmarking), or an engineering standard -- in target costing, for example, price targets are set by the market (price less planned markup equals allowable cost) and evaluated for feasibility by computer simulation (drifting cost) (Tani, 1995).

One of the better known estimates of the total cost of government regulation in the US uses the logic of ABC, although it applies it at an extremely aggregate level. Based on the presumption that firm level compliance costs are driven by new regulations and federal enforcement efforts, the Center for the Study of American Business at Washington University bases its estimates of regulatory compliance costs on the total number of pages in the Federal Register and the budgets of federal regulatory agencies. The Fraser Institute has a study underway using this approach to estimating the cost of regulation in Canada.

The EPA has used a similar method to figure how much it costs to adopt a new rule -- if it is pushing to get the rule out promptly -- two years and about $2 million (Asimow, 1994: 167). The American Dental Association has used Activity Based Costing to find out much OSHA regulations cost its members-- about $23,713 annually for each office (Feldman, 1994). And, French (1992) has proposed the use of a similar approach to estimate the cost of new or revised labeling regulations to the food industry.

Oates, Portney, and McGartland's (1989) study of the costs of alternative approaches to environmental standard setting also used activity based methods to estimate the costs and benefits of controlling total suspended particulates in Baltimore. They then used these estimates to determine total suspended particulate levels under least cost, incentive based policies designed to achieve prescribed regulatory standards and command and control methods and to identify the marginal costs and benefits associated with each of these alternatives. What they found is that, when command and control methods were designed with at least one objective being cost savings, the over control that makes them more expensive may also make them more efficacious.

Activity based costing has also recently been applied to the problem of estimating the costs of the Federal Acquisitions Process in the United States. These regulatory costs are especially interesting to the federal government, because they currently have a direct impact on spending for goods and services acquired from the private sector. Based on a survey of 206 firms, Jacques Gansler (1995: 123-124) found that plants serving the federal government spent about four times as much to administer contracts as their commercial counterpart and employed four times as many administrators. He also reports that goods supplied to the federal government cost 30 to 50 percent more than their commercial equivalents. For high tech products, costs are typically 200 to 500 percent higher.

A second study, conducted by Software Productivity Research of Burlington, Massachusetts, confirms these findings (The Economist, January 23, 1994: 79). It used a method called function point analysis to estimate the productivity and cost effectiveness of three kinds of software projects: small management information systems, large scale systems, and military systems. Based on a sample of thousands of software projects selected from around the world, Software Productivity Research found that American military software productivity lags behind France, Israel, Korea, the United Kingdom, Germany, Sweden, and even Italy. The same study showed that the United States is in first place in the production of management information systems and runs a strong second to Japan in large scale systems software projects. Differences in cost per function point are due primarily to the amount of paperwork required per point.

Preparation of this paperwork takes a lot of engineering time, but contributes no function points to the finished product. American military projects require five times as much paper and cost twelve times as much per point as management information systems projects. They are six times as costly per function point as big systems software projects, which are arguably comparable to military software projects. This comparison is particularly telling. Software production is mostly overhead -- product development, design, documentation, and administrative support; it invoves no production labor, no capital, no materials. Once codes have been written and documentation prepared, software can be reproduced innumerable times at almost no cost. What this comparison suggests is that, for activities like software engineering, federal procurement regulations may account for more than half their cost.

These studies confirm the weakness of existing accounting systems for purposes of measuring the cost of government actions. Existing accounting systems tend to focus on direct labor costs and to assign overheads on the basis of labor hours or machine time. This approach may have made sense thirty years ago when direct labor was the key to manufacturing productivity, but it is unrealistic today and has probably always had the effect of diverting attention from transaction costs that arise out of the administrative process.

This fact was forcefully brought home to me by an experience working with a firm that makes trailers for the US Army. Trailers are technologically unsophisticated and their manufacture appears to be a pretty straightforward exercise in metal bashing. The company in question established a second production line at a new location for its military business, because that was the easiest way to comply with federal cost accounting standards and other government reporting requirements. Of course, duplication of facilities increases the average cost of the firm's trailers -- an increase that should properly be attributed to the policies that caused it and not to the trailers themselves. This firm tries to practice the principles of lean management and just in time inventory control.

On its commercial side, it has succeeded fairly well. Its inventories have been cut to the bone, and manufacturing cycle time -- the time from the start of production to shipment of the finished product -- is usually less than thirty six hours. Products are shipped to customers when they are finished. This allows the firm to apply just in time inventory control to the production of finished goods as well as to raw materials, components purchased elsewhere, and work in progress inventories. On its military side, total inventories were once 25 times higher. This doubled the company's working capital requirements and increased rent, insurance, utilities, and depreciation expenses, since they also varied directly with inventory size. Inventory size was higher on the military production line because cycle time was higher; cycle time was higher because the Army required inspection at each stage of manufacture and because the Army preferred to take delivery in large batches. Increased cycle time also meant less intensive use of the firm's plant and equipment, which increased the capital cost of each trailer. The same thing happened with management time. Consequently, although direct labor costs per trailer were not significantly higher, overhead costs per trailer were more than twice as high on the military line as on the commercial line (see Thompson and Jones, 1994: 112-113).

In Canada, which like the United States mandates cost benefit analysis of all new major" regulations, a public-private partnership involving the Canadian Manufacturer's Association, the Treasury Board Secretariat, Industry Canada, and Consulting and Audit Canada has developed an activity based analytical tool [(BIT-CMA Quality Software, see Littrell and Thompson, 1997)] designed to help government, business, or other interested parties measure the expense of complying with regulation and other government actions. This activity based analytical tool can also be used by firms as a should cost model to estimate the total cost of alternative compliance strategies and to assess their effects on a firm's operations, organization, and innovation activities. The Canadian government is committed to using this tool to measure regulatory compliance costs and, by comparing after the fact cost measures with its before the fact cost estimates, use the tool to pull itself up by its own bootstraps, thereby refining and revising parameter values and increasing the accuracy of should cost estimates.

Using Measured Costs to Influence Behavior

One area in which traditional cost measurement continues to play a significant role in cost analysis is the field of management control (i.e., decision influencing). Management control is a process for motivating and inspiring people, especially subordinate managers, to serve the policies and purposes of the organizations to which they belong. It is also secondarily a process for detecting and correcting unintentional performance errors and intentional irregularities, such as theft or misuse of resources. In many organizations the primary instrument of management control is responsibility budgeting, which embraces both the formulation of budgets and their execution. In responsibility budget formulation, an organization's policies, the results of all past policy (capital budgeting, see Thompson, 1997) decisions, are converted into financial targets that correspond to the domains of administrative units and their managers (Anthony and Young, 1996: 19). In responsibility budget execution, operations are monitored and subordinate managers evaluated and rewarded.

Responsibility budgeting is as much organizational engineering as it is cost accounting. Like large organizations themselves, it is a product of the bureaucratic revolution. Large organizations are justified by economies of scale and scope. Economies of scale are produced by spreading fixed expenses over higher volumes of output, thereby reducing unit costs. Economies of scope are produced by exploiting the division of labor -- sequentially combining highly specialized functional units in multifarious ways to produce a variety of products. Large organizations are made possible by hierarchy and bureaucracy. Bureaucracy breaks tasks down into their simplest component parts and recombines them to produce complex goods and services, allocates scarce resources to administrative units, and formulates organizational strategies (Chandler, 1962; Rosenberg and Birdsall, 1986).

Under responsibility budgeting, work is arranged into administrative units according to mission, function, and/or region. An organization's administrative units and their relationships to each other -- the structure depicted in organization charts -- constitute its administrative structure. Responsibility budgeting requires authority and responsibility to be allocated to individuals within the organization. This constitutes an organization's responsibility structure. Finally, responsibility budgeting requires a system of measuring and evaluating performance --information on inputs, costs, activities, and outputs. This is the organization's account or control structure. Under a fully developed responsibility budgeting and accounting system, administrative units and responsibility centers are coterminous and fully aligned with the organization's account structure, since the information it provides can be used to coordinate unit activities as well as to influence the decisions of responsibility center managers.

 

Bibliography of Costing Literature

Standards and Principles

CFO Managerial Cost Accounting Guide.

Cost Accounting Standards Board, "Statement of Objectives, Policies, and Concepts," Cost Accounting Standards Guide, July 1992.

Federal Financial Management Improvement Act of 1996, P.L. (104-208), Sept. 1996.

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

Government Performance and Results Act of 1993, 31 USC 1101-1115, P.L. 103-62, Aug. 1993.

Joint Financial Management Improvement Program, Exposure Draft: Core Financial System Requirements, FFMSR-1, Dec. 1993.

National Association of Accountants, Statements on Management Accounting, Englewood Cliffs, New Jersey: Prentice-Hall, 1990.

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

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

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

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

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

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

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

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

Office of Management and Budget, Statement of Federal Financial Accounting Concepts No. 1: Objectives of Federal Financial Reporting, Sept. 1993.

Office of Management and Budget, Statement of Federal Financial Accounting Concepts No. 2: Entity and Display, June 1995.

Office of Management and Budget, Circular A-25: User Charges, July 1993.

 

Handbooks

Belkaoui, A., Handbook of Management Control Systems, New York: Quorum Books, 1986.

Ernst & Young, The Ernst & Young Guide to Total Cost Management, New York: John Wiley & Son, 1992.

Kaplan, Robert S., Advanced Management Accounting, Englewood Cliffs, New Jersey: Prentice-Hall, 1982.

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

 

Cost Accounting Systems

Bernheim, Richard C., "The Right Way to Design a Cost Accounting System," Management Accounting, Sept. 1983: 63-65.

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

Gauntt, James E., and Grover L. Porter, eds., "Management Information Systems," Management Accounting, April 1985: 74.

Grady, Michael W., "Is Your Cost Management System Meeting Your Needs?" Journal of Cost Management, Summer 1988: 11-15.

Kaplan, Robert S., "One Cost System Isn't Enough," Harvard Business Review, Jan.-Feb. 1988: 61-66.

Sourwine, Darrel A., "Does Your System Need Repair?," Management Accounting, Feb. 1989: 32-36.

 

Cost Allocation

Blanchard, Garth A., and Chee W. Chow, "Allocating Indirect Costs for Improved Management Performance," Management Accounting, March 1983: 38-41.

Bost, Patricia, "Do Cost Accounting Standards Fill a Gap in Cost Allocation?" Management Accounting, Nov. 1986: 34-36.

Brunton, Nancy M., "Evaluation of Overhead Allocations," Management Accounting, July 1988: 22-26.

Cardullo, J. Patrick, and Richard A. Moellenberndt, "The Cost Allocation Problem in a Telecommunications Company," Management Accounting, July, 1987: 22-26.

Carman-Stone, Marie Sandra, "Unabsorbed Overhead: What To Do When Contracts are Canceled," Management Accounting, April 1987: 55-57.

Cook, Ian, and Angela M. Burnett and Paul N. Gordon, "CMP and Managing Indirect Costs in the Eighties," Journal of Cost Management, Spring 1988: 18-28.

Cornick, Michael, William Cooper, and Susan B. Wilson, "How Do Companies Analyze Overhead?" Management Accounting, April 1988: 41-43.

Johnson, Douglas, Steven Kaplan, and Bill B. Hook, "Looking for Mr. Overhead: An Expanded Role for Management Accountants," Management Accounting, Nov. 1983: 65-68.

Schwarzbach, Henry R., "The Impact of Automation on Accounting for Indirect Costs," Management Accounting, Dec. 1985: 45-50.

Thomas, Arthur Lawrence, The Allocation Problem in Financial Accounting Theory, Evanston, IL: American Accounting Association, 1969.

Thomas, Arthur Lawrence, The Allocation Problem: Part Two, Evanston, IL: American Accounting Association, 1974.

 

Activity-Based Costing

Anderson, Bridget M., "Using Activity-Based Costing for Efficiency and Quality," Government Finance Review, June 1993: 7-9.

Brimson, James A., Activity Accounting, New York: John Wiley & Sons, Inc. 1991.

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

Cooper, Robin and Robert S. Kaplan, "Activity-Based Systems: Measuring the Costs of Resource Usage," Accounting Horizons, Sept. 1992: 1-13.

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

Crane, Michael, and John Meyer, "Focusing on True Costs in a Service Organization," Management Accounting, 74/8, Feb. 1993: 41-45.

Harr, David J., "How Activity Accounting Works in Government," Government Accountants, Winter 1992: 15-24.

Harr, David J., "How Activity Accounting Works in Government," Management Accounting, 72 September 1990: 36-40.

Kaplan, Robert S., "In Defense of Activity-Based Cost Management," Management Accounting, Nov. 1992: 58-63.

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

Keys, David E., "Tracing Costs in the Three Stages of Activity-Based Management," Journal of Cost Management, Winter 1994: 30-37.

Kreuze, Jerry G., and Gale E. Newell, "ABC and Life-Cycle Costing for Environmental Expenditures," Management Accounting, 75/8, Feb. 1994: 38-42

Rotch, William, "Activity-Based Costing in Service Industries," Cost Management, Summer 1990: 4-14.

Staubus, George J., Activity Costing for Decisions, New York: Garland Publishing, Inc. 1988.

 

Other

Alchian, Armen, "Cost and Outputs," in The Allocation of Economic Resources, M. Abramowitz and others, Stanford: Stanford University Press, 1959.

Anthony, R.N., "New Frontiers in Defense Financial Management," The Federal Accountant, XI, June 1962: 13-32.

Anthony, Robert N., and David W. Young, Management Control in Nonprofit Organizations fifth ed., Homewood, IL: Richard D. Irwin, 1995.

Arwidi, Olof, and Lars A. Samuelson, The Development of Budgetary Control in Sweden: A Research Note, Management Accounting Research, 4/2, June 1993: 93-107.

Asimow, Michael, "On Pressing McNollgast to the Limits: The problem of Regulatory Costs," Law & Contemporary Problems, 57/1-2, Winter 1994: 127-137.

Bailey, Martin J., 1967. "Defense Decentralization through Internal Prices," in Defence Management, S. Enke (ed.) Englewood Cliffs NJ: Prentice-Hall, 1967.

Beniger, James R., The Control Revolution: Technological and Economic Origins of the Information Society, Cambridge MA: Harvard University Press, 1986 .

Boardman, Anthony J., and David Greenberg, "Discounting and the Selection of a Discount Rate," in Handbook of Applied Public Finance, Fred Thompson and Marc Green (eds.), New York: Marcel Dekker, Inc., forthcoming.

Bourne, Michael "Should we go the Kiwi way?" Accountancy. 111/11, February, 1993: 88-89.

Brinker, Barry J. ed., Emerging Practices in Cost Management, Boston: Warren, Gorham & Lamont, 1992.

Bruggeman, Werner, "The Impact of Technological Change on Management Accounting," Management Accounting Research, 6/3, Sept. 1995: 241-252.

Buchanan, James M., Cost and Choice: An Inquiry in Economic Theory, Chicago: Markham Pub. Co., 1969.

Bunce, Peter, Robin Fraser, and Lionel Woodcock, "Advanced Budgeting: A Journey to Advanced Management Systems," Management Accounting Research, 6/3, Sept. 1995: 253-265.

Carlton, D.W. and J.M. Perloff, Modern Industrial Organization, Glenview, IL: Scott, Foresman-Little, Brown Higher Education, 1990.

Chandler, Alfred, Strategy and Structure: Chapters in the History of Industrial Enterprise, Cambridge, MA: MIT Press, 1962.

Choate, G. Marc, and Maser, Steven M., "The Impact of Asset Specificity on Single-Period Contracting," Journal of Economic Behavior & Organization, Aug.1992: 373-389.

Colman, Robert D., "Overview of Leveraged Buyouts," in Handbook of Mergers, Acquisitions, and Buyouts, S. Lee and R. Colman (eds.) Englewood Cliffs, NJ: Prentice-Hall, 1981.

Cropper, Maureen L., "Environmental Economics: A Survey," Journal of Economic Literature, 30/2, June 1992: 675-740.

DeBruine, Marinus, and Parvezz R. Sopariwala, "The Use of Practical Capacity for Better Management Decisions," Journal of Cost Management, Spring 1994: 25-31.

Diewert, Irwin, Denis A. Lawrence, and Fred Thompson "The Marginal Costs of Taxation and Regulation," in Handbook of Applied Public Finance, Fred Thompson and Marc Green (eds.), New York: Marcel Dekker, Inc., forthcoming.

Demski, Joel, and G. Feltham Cost Determination, Ames: Iowa State University Press, 1976.

Diamond, Peter A., and Jerry A. Hausman, "Contingent Valuation: Is Some Number Better than No Number?" Journal of Economic Perspectives, 8/4, Fall 1994: 45-64.

"Software Engineering: Made to Measure," The Economist, January 23, 1993: 79.

"A Guide to Better Buying." The Economist, October 18, 1986: 71.

Feldman, Marye C., and James B. Bramson, "What is the Cost of Compliance?" Journal of the American Dental Association, 125/6, June 1994: 682-686.

Fisher, Gene H., Cost Considertations in Systems Analysis, New York, American Elsevier, 1971.

French, Michael T., Dierdre M. Neighbors, Lori K. Carswell, Richard A. Williams, and Laina M. Bush, "A Model for Estimating Industry Compliance Costs of Food Labeling Regulations," Agribusiness, 8/2, Mar. 1992 165-186.

Ganley, J. A. , and J.S. Cubbin Public Sector Efficiency Measurement: Applications of Data Envelopment Analysis, New York: Elsevier Science Publishers, 1992.

Gansler, Jacques S., Defense Conversion: Transforming the Arsenal of Democracy, Cambridge, MA: The MIT Press, 1995

Hammer, M. "Reengineering Work: Don't Automate, Obliterate," Harvard Business Review, July-August, 1990: 104-112.

Hanemann, W Michael., "Valuing the Environment through Contingent Valuation," Journal of Economic Perspectives, 8/4, Fall 1994: 19-43.

Harr, David J., "Productive Unit Resourcing: A Business Perspective on Government Financial Management," Government Accountants Journal, Summer 1989: 51-57

Harr, David J., and James T. Godfrey, "The Total Unit Cost Approach to Government Financial Management," Government Accountants, Winter 1992: 15-24.

Harr, David J., and James T. Godfrey, Private Sector Financial Performance Measures and Their Applicability to Government Operations, Montvale, NJ: National Association of Accountants, 1991.

Hay, David "Public Sector Accounting in New Zealand: An Update and a Clarification," Financial Accountability & Management, 8/1, Spring, 1992: 1-6.

Horngren, Charles T., and George Foster, Cost Accounting: A Managrial Emphasis. 7th ed., Englewood Cliffs, New Jersey: Prentice-Hall, 1991.

Hyde, Al "Cornerstones of Quality: Special Section," Government Executive, 29/7, July 1997: 47-68.

Johansen, Carole, L.R. Jones, and Fred Thompson, "Management and Control of Budget Execution," Chapter 29 in Public Budgeting and Finance, fourth edition, R. Golembiewski & J. Rabin (eds.), New York: Marcel Dekker, 1997: 577-584. .

Joskow, Paul, "Asset Specificity and the Structure of Vertical Relationships: Empirical Evidence, Journal of Law, Economics, and Organization, 4/1, Spring 1988: 95-118.

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Lapsley, Irvine, "Responsibility Accounting Revived? Market Reforms and Budgetary Control," Management Accounting Research, 5/3,4, Sep-Dec 1994 : 337-352.

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Appendix A: Listing of Cost Accounting Software

 

(Following is a list of commercial off-the-shelf managerial cost accounting systems . This list is provided for informational purposes only and is not intended to be all inclusive. The source of this list is The Journal of Cost Management, which annually reviews cost accounting/ABC software.

 

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

 

 

Appendix B: CFOA Glossary of Cost Accounting Terminology

 

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 cost 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 and 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 measures 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 cost 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 agencywide 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.

 

CLEAN UP 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 at permanent or temporary closure or shutdown of associated PP&E.

 

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.

 

COMMON INTERENTITY COSTS - Those costs incurred by one entity on behalf of multiple entities in the federal government generally because that is where funds are appropriated to cover the cost of the activities.

 

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 cost 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 = $5x) 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 + $10x 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 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 service.

 

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 nonreciprocal 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 and directly or indirectly contribute to the output, and (2) the costs of identifiable supporting services provided by other reasonability 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 MANAGEMENT SUPPORT COSTS - Costs that are necessary for the overall management or operations of the reporting entity and responsibility segment is responsible for producing the activity, output, or cost object. These costs would include high-level management functions that are involved in planning and establishing policies related to the organization or overseeing the organization.

 

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 as well as general management support costs 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.

 

NEGOTIATED INTER-ENTITY COST - The cost of services or activities provided by another entity where agencies have substantial or full discretion over who provides the services, generally as a result of negotiations between the agencies.

 

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 plantwide 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 cost 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 common 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.

 

PROGRAM RELATED COST - A type of common inter-entity cost that is related to or in support of activities necessary to provide a service to the public or to carrying out a responsibility of the Federal government, e.g. costs of activities such as specific legal services provided by the Department of Justice and the Department of the Treasury check writing services.

 

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.)

 

RELATIVE SALES VALUE METHOD - Manner of allocating joint cost in proportion to relative sales values of joint products. For example, joint products X and Y have joint cost 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 cost while Y would be allocated $1200 X ($50/$120) = $500 of the cost.

 

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 precommitment 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 - This is a type of common inter-entity cost that relates to the specific resources used to produce the output or service; e.g. direct and indirect costs covering people, equipment, materials, supplies, facilities, etc.

 

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 redeterminations, 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 which 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 without significantly increasing the costing bias. 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 variance 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 cost 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, and 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) 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.