cost accounting standards

cost accounting standards

The Importance and Implementation of Cost Accounting Standards

1. Introduction to Cost Accounting Standards

Circumstances at the time indicated that the sole purpose of CAS was to mandate disclosure by contractors in their books and records of costs relative to government contracts and subcontracts, their identification and accumulation, and the pricing and settlement thereof. Those circumstances came in the form of Federal and Military Procurement Rules, such as the Armed Services Procurement Act of 1947, Armed Services Procurement Regulation, and Armed Services Procurement Act of 1947. The first publication incorporating the Cost Accounting Standards was in conjunction with the Armed Services Procurement Act of 1947, Armed Services Procurement Regulation.

1. Introduction Cost Accounting Standards (“CAS”) 9901.501-9903.205 were codified via 48 CFR 9901, 9903, and 9904 by the Secretary of Defense with the concurrence of the National Aeronautics and Space Administration and the Administrator of General Services pursuant to Section 26 of the Act on October 26, 1970 (5 U.S.C. 501 et seq.). The status of CAS 9901-9903 as part of the Federal Acquisition Regulation System was elevated to a separate “Cost Accounting Standards System” when a revision to that system was made pursuant to Section 804 of Pub. L. 102-190. The revisions were published in the Federal Register at 56 Federal Register 29214 et seq.

2. Key Principles and Concepts of Cost Accounting

Guideline 3: While the report does not provide a comprehensive evaluation of the Department of Defense and National Aeronautics and Space Administration’s function completed contract or completed combined contract methods, the report raises several concerns of which auditors should be aware when examining contractor and subcontractor cost accounting systems or reports containing the use of these methods.

Guideline 2: Proper allocation of home office expenses and equitable distribution of this expense to contracts are critical to the economy of government contracts. Similar problems are often associated with the manufacture of gaming software.

Guideline 1: The use of cost accounting standards in the regulation of contractor and subcontractor accounting provides uniformity when estimating, accumulating, and reporting costs (i.e., costs directly incurred or incurred in connection with a contractor’s home office activities).

Cost accounting serves as a major managerial tool for decision-making as it facilitates initial and incremental decision processes. Cost accounting in the United States has primarily been concerned with the production of specific government contracts. The primary goal in the use of cost accounting standards is the uniform application of standards and methods in determining costs in order to achieve more consistent and reliable pricing of contracts and their subcontracts. This guide focuses on the audit process and the substantive review, examination, and verification of a contractor’s cost accounting information. The gaming software industry is a rapidly expanding area with many potential challenges, especially in terms of cost allocation and the application of cost accounting standards.

3. Benefits of Implementing Cost Accounting Standards

In recent years, aided by the recommendations of several government and professional associations, accounting has become an issue advanced by a committee member of Congress. Since 1970, 24 accounting cost standard boards developed accounting standards in colleges and universities in addition to those developed in business corporations. Of these recommendations, two set mandatory regulations involving the Cost Accounting Standards. One was by a committee of the House of Representatives under the chairmanship of Congressman Moss, and one by several accounting business associations. Regulatory boards have been recommended for the Federal Government and are also responsible for the development of accounting standards for business enterprises. Several presidential announcements followed expressing similar proposals. In response, the Congress detailed the General Accounting Office to develop a White Paper endorsed by 14 other Federal agencies. Subsequently, the Office of Management and Budget was directed to establish the Cost Accounting Standards Board (CASB).

All interests in mandatory accounting standards, whether federal or required by state government agencies or by business corporations to protect their interests, focused attention at different times on specific problems. This paper reports the special issues leading to the implementation of the Cost Accounting Standards (CAS) by the United States Government. However, summary conclusions that would apply to anyone interested in improving their accounting systems are included in this paper. Among the findings of principal interest is that more studies should be completed on accounting concepts of time, attribute, and relationship consistency at practical levels of accounting rather than the general philosophical levels emphasized currently. These additional studies would be helpful in developing further CAS or in other accounting issues beyond the scope of CAS.

4. Challenges and Solutions in Adopting Cost Accounting Standards

(7) The high cost of hiring external assistance and the low demand for the service have reduced the opportunities for small and medium-sized audit firms to gain practical experience. (8) The lack of specialized experience in CAS and the perverse disincentive that the audit firm faces can sometimes lead to a lack of appropriate assistance in adopting CAS. (9) The experience in accounting firms with the design and costing of organizational processes, business models, or commercial decisions is still very weak. Without this experience, it will be impossible for the auditor to evaluate the cost system and provide a useful report. (10) Finally, the absence of an internal audit institution may lead an organization to irresponsibly rely on its auditor to assume the responsibilities of a controller, consultant, or other administrative functions that would hinder non-audit services. As commercial services and independent auditor reports change, these high-level policy details need to be addressed to maintain the benefits of high-quality financial reports. Only in this way can certain challenging provisions of the Sarbanes-Oxley Act, through detailed plans for priority issues, be effectively incorporated.

The key external challenges to implementing CAS are as follows:

(1) Inadequate attention and supervision from senior management to the operational details of the specific cost structure. (2) Poor cooperation by different functional groups in the ISO organization with the implementation and analysis of the detailed costing process. (3) Lack of strategic thinking and systemic planning for CAS adoption. (4) Inadequate fringe benefits and shallow experience of the cost accounting staff. (5) The lack of employees with significant experience to take on the contractor’s role in helping to transform the existing cost accounting system. (6) Zero integration with a Business Process Improvement (BPI) or Lean Management (LM) transformation.

Now that I have articulated the challenges in adopting CAS in Section 3, let me summarize the principal internal and external challenges of adopting CAS. The key internal challenges are as follows:

4.1 Challenges of Implementing CAS

5. Case Studies and Best Practices in Cost Accounting

This process is particularly worth noting, as the standard-setters for all case studies uniformly reject further consideration and inquiry beyond the process they have established. Finally, for reasons of improved quality, TVA recommended reliance on the Financial Accounting Standards Board. We strongly endorse better relationships and input between business units and standard-setters and better accounting, communication, and control. We are less dismissive of instructions and standard-setting for all business units, opponent with preserving good communications and harmonization with business systems, information management, and all organizational needs.

TVA underscored the significant costs and minor benefits of applying all CAS to its self-assessed contracts and proposed a major revision of CAS generally and of 413 and 420 specifically. It felt that the standards do not support important principles of accounting relevance and that disclosures required by Financial Accounting Standards should be sufficient to protect the interests of interested parties. It proposed that business units be able to obtain input with implications for accounting objectives, principles, standards, and processes.

This chapter presents a detailed analysis of the implementation of CAS for TVA. It recounts in-depth work on two Time and Material contracts, one of which met CAS 413 but was improperly classified. Other more detailed discussions of TVA’s experience can be viewed in the appendix.