far cost accounting standards

far cost accounting standards

The Importance of Implementing Far Cost Accounting Standards

1. Introduction to FAR Cost Accounting Standards

FAR Part 30 concerns “Cost Accounting Standards”. The FAR describes Cost Accounting Standards (CAS) as “uniform guidelines for measuring, assigning, and allocating costs to contracts with the Federal Government.” The basic objective of CAS is to ensure that the negotiated contract price receives the proper allocation of costs in accordance with relative benefits derived by the customer and the contractor. The objective seems simple and straightforward, however, in practice, implementing CAS is challenging and onerous, being “much maligned in the U.S. government procurement process.” The paper examines the CAS by explaining the requirements and questions the system’s effectiveness by citing defective majority opinions.

A federal contractor who negotiates a contract with the United States government or a subcontractor receives a contract award subject to regulatory order. The regulatory framework for government contracts includes the FAR, which incorporates government-wide procurement regulations. The FAR is self-described as being “the primary regulation for use by all executive agencies in their acquisition of supplies and services with appropriated funds.” It specifically addresses the acquisition process of executive agencies and encompasses all aspects of federal acquisition through 53 Parts written in regulatory language.

2. Key Principles and Concepts of FAR Cost Accounting Standards

The structure and format of this book adds significant value to your ability to access information. We have included several book “features” so you can easily identify key points. To read the main ideas quickly, look for book “features” such as chapter and section titles, paragraph headings, a diagram, tables, figures, and shaded tips. These book “features” are your key point summary devices. They should be checked over before spending time on the text so you can focus on key points throughout the text. Remember your goal is to become familiar with FAR cost accounting standards.

Finding cost or cost accounting standards that are not also regulatory or compliance standards does not have to be a difficult task. However, challenging established commercial or government systems that are already considered sources for cost accounting standards information can add a new complexity to finding and assessing the potential benefits of alternative FAR cost accounting standards or practices. Therefore, in order to have the key principles and concepts of FAR cost accounting standards available for user consideration, discussions, analysis, commentary can be compared traditionally with GAAP when planning, reviewing, and implementing education, training, and consulting-oriented activities or projects by educators, trainers, and consultants who consider FAR cost accounting standards important.

3. Benefits and Impacts of Implementing FAR Cost Accounting Standards

A working cost accounting system must, for any specific point of interest in time, include, in classified and assembled accumulated form, under dominant management decision control, major aggregate classed costs and expense categories—direct and, if appropriate, burdens, representing costs of resources consumed, to which allocation objectives for the working accounting function is an (in principle) operational subset. Status of management decision process interest that appropriately details the objective under scrutinized cost accumulations is a major internal and external uniform predetermined cost accounting and reporting requirement to enhance the working system. The might of the Department of Defense and its representative in the U.S. Government Contractors for cost accounting purposes has resulted in 191 accounting principles promulgated for use by government contractors.

Present day difficulties of measurement and assignment of cost objectives are for the most part traits of the physical world, however measured and perceived although with wide variation and intuition. Government contractors for one type of management interest and decision-making have as cost objectives master work assignments authorized by government agencies.

Cost accounting systems for a given entity at a point in time must begin with the relevant accounting, and especially the cost or expense data, to which are allocated those costs that are definitely assignable or for which a reasonable relationship can be established. A basic set of accumulated accounts with direct assignment of costs to cost objectives may be a minimal satisfactory working accounting system. Similarly, the disregard of burdens in favor of direct costs is commonly assessed as inadequate in the present status of accounting development, excessive and unusual though general and uniform. Large accumulations of data on a number of items, serving as the recorded origins of large and complex indirect allocation procedures, are prerequisites to the development of cost-effective cost accounting systems in the general traditional business community.

3.1. Why is cost accounting necessary?

4. Challenges and Barriers to Compliance with FAR Cost Accounting Standards

The apparent low level of MSIS reported compliance with the Cost Accounting standards supports this conclusion. The most frequently cited reason for the low level of estimated compliance is the many perceived subjective interpretations of the rules. Cost rehabilitation and accounting software is geared to developing uniform cost estimates across the corporation and meeting detailed disclosure requirements rather than applying one set of internal rules. Each user’s ability to determine whether line items in the cost estimate represent pool and allocation base combinations that conform to the standard’s requirements is based on experience with business practices and knowledge in other nonfinancial areas. While the GAO Report complains that the Management Information System Reporting Standards for the Defense Industry rely too much on detailed cost accounting rules and don’t seek to promote economical reporting of the needed cost and technical data, focusing on the modernization and computerization of the cost accounting standards could relieve these problems. Companies that could not base pricing information on a given disclosed classification should disclose the additional costs of providing alternative presentation to the government, and the government could pay prejudice rules as an availability constraint.

Understanding the factors that mitigate a contractor’s ability to comply with the Cost Accounting Standards and the revisions is important for a number of reasons. Fully understanding and identifying cost accounting barriers would reveal areas that are particularly burdensome to address and understand. These costs should be positioned against benefits to make sure that the revisions do not create a cost greater than their benefits. A complete review underscores areas in which additional guidance or improvements to the cost accounting facilitate or compliance process are warranted to reduce the rebalancing effect. Additionally, identifying areas in which compliance is difficult to achieve without guidance or improvements to the cost accounting facilitate or compliance process would clarify areas in which auditors should pay particular attention in determining how costs are allocated.

5. Best Practices and Strategies for Successful Implementation of FAR Cost Accounting Standards

The opinions expressed in this work are those of the author and do not represent any government agency, institution, or organization. Mention of a commercial product or company does not constitute an endorsement by the author or any publisher of the product or company. This work was supported in part by the U.S. Air Force Institute of Technology Libraries. The FAR is a government publication, and the standardization implemented via the FAR often pertains to programs receiving government funding, contracts, or subcontracts. As such, government policy requirements for implementing standards and guidelines are subject to compliance laws. In other cases, some standards such as full cost accounting may be implemented due to sound management theory (such as activity-based costing, ABC) without regulation.

The critical need for consistent, reliable, and accurate cost data has been emphasized in Part I of this paper. The majority of companies have not addressed the full cost accounting needs of products and services in an enviable manner but instead have attempted a blend of financial and management accounting information to develop some picture of cost. Because this information may not meet your contractual or regulatory requirements, FAR cost accounting standards will likely have to be implemented. This section is intended to assist you both in a comprehension of what FAR cost accounting standards are and in how to implement those standards to achieve your goals. When implemented effectively, the FAR cost accounting standards provide a uniform set of cost accounting guidelines that can help you meet full cost accounting needs.

5.1. Introduction