Pages: 13

The primary objective of cost accounting is to provide cost and related information that is essential for an organization to determine how best to run its internal operations. This includes, among others, how to explain cost behavior, how to analyze, assign, allocate and control costs, and what measures to take to improve cost performance. In government, where efficiency and accountability have always been a concern, cost accounting can fill an important gap by producing information that is critical to the economic and financial success of the government. Cost accounting is often discussed in conjunction with two other areas of accounting – managerial and financial, although they are not the same. This introductory chapter presents a brief background discussion of cost accounting, as it relates to government, as well as nonprofit organizations. This is followed by a discussion of the differences between cost, managerial, and financial accounting, along with a brief overview of cost reporting, the rules of cost commitment, and ethics in cost accounting.

Pages: 48

No chapter abstract available.

Pages: 24

Cost is central to effective decision making in an organization. It is the cement that holds together the different elements of an organization into a viable operating structure. For governments, as well as for non-profit organizations, it serves as the principal guiding force that underlies most decisions they make, especially those related to the provision of goods and services. More importantly, without some knowledge of costs it will be difficult for these organizations to know what kinds of goods and services to provide, the level of their provision, the length of time for which they will be provided, and the costs the provisions will incur. This chapter introduces several key concepts that are useful in cost studies and defines and distinguishes between different types of costs. It also illustrates the contrast between cost, expense, and expenditure, and how to reconcile the differences. A term that often appears alongside cost is depreciation. This chapter highlights the relationship between cost and depreciation, followed by a detailed discussion of some of the commonly used depreciation methods in cost studies.

Pages: 22

Price plays an important role in decision making in both public and private organizations. In the private sector, price is generally determined by calculations that reflect the profit-maximizing interest of firms and businesses. These calculations typically include factors such as the target return on an investment, the market share the firm must maintain, the price it must charge to match competition, the need to maintain a stable price to avoid fluctuations in demand, and so forth. But the same calculations do not readily apply to public goods because of congestion costs, the free-rider problem, and the difficulty of producing them in discrete units, which makes it difficult to determine the price the public must pay for their consumption. However, there are goods that a government provides that have some of the same characteristics as private goods, called proprietary goods, in that they can be produced in discrete units, thus making it possible to provide them in a business-like manner. This chapter provides an overview of pricing strategies for delivering goods and services, followed by a detailed discussion of some of the commonly used pricing methods in government, along with a brief discussion of the rate structure of cost.

Pages: 37

A fundamental principle that underlies the cost behavior of an organization is that there exists a direct relationship between cost and quantity. Although variables other than quantity, such as the price of factors of production, the structure of an organization, and the organization’s ability to efficiently utilize the input resources have a bearing on cost, they are usually held constant in most cost studies, especially in the short run. In the long run, all costs and related factors of production are variable because of changes in technology, price of labor, and so forth. This chapter discusses three basic elements of cost behavior that are important to understand the nature of costs and how they affect the functioning of an organization: time frame of costs, general properties of cost functions, and cost estimation. Of these, cost estimation is particularly important, as it provides the information necessary for an organization to determine the nature of current as well as future costs of an organization. The chapter provides a detailed discussion of cost estimation.

Pages: 30

An important financial consideration for firms and businesses in the private sector is to be able to determine the level of operation at which they will have the maximum profit on their investments or, at a minimum, earn just enough profit to break even. A government does not operate to maximize profit, but it is just as important for a government to know in advance the level of operation at which a project or activity will be economically and financially viable in that it will not incur a loss. Break-even analysis plays an important role in this process. Besides determining the level of operation at which it will break even, break-even analysis can be used for a wide range of economic and financial decisions, from expanding the level of activity, to lowering price, raising revenue, to dealing with multiple operations or activities, among others. Break-even analysis can be linear as well as non-linear. This chapter presents a detailed discussion of linear break-even analysis involving both single and multiple activities. It also discusses break-even analysis with a flexible cost structure and under conditions of uncertainty. The chapter concludes with a brief discussion of non-linear break-even analysis.

Pages: 28

While break-even analysis serves as an important first step in the financial decision-making of an organization, it should be combined with other decision tools to have a better understanding of the decision process. For a decision maker to be able to make the best possible decision, it is important to have more than one alternative to compare. From a financial and accounting perspective, comparison allows the decision makers to evaluate different alternatives against a criterion or criteria to determine the alternative that would produce the best possible choice for the organization, such as the greatest amount of return, the greatest amount of savings, best value, and so forth. There are a wide range of methods that can be used in cost analysis that would fall into this category, called differential analysis. The term differential analysis seems appropriate because the decision to select the best alternative is based on comparison of the differences between two or more alternatives. This chapter discusses four methods that are frequently used in differential analysis: differential cost analysis, buy or lease, benefit cost analysis, and life-cycle costing. Of these, benefit-cost analysis has a long and established history that precedes most other methods of cost analysis.

Pages: 105

No chapter abstract available.

Pages: 20

All costs boil down to three things: materials, labor, and overheads. A responsible manager must know how to keep track of these costs, as they accumulate. In the private sector, managers keep track of their costs by assigning them to an individual consumer, a cost unit, or to a unit of goods produced. Unfortunately, for most public goods, except for those that are provided in a business-like manner, it is difficult to determine the exact quantity of the goods that individuals consume. As a result, public organizations often maintain cost information based on a specific job, an item of goods, or a service rather than on a per capita or per unit basis. Job costing is part of an accounting system that can effectively deal with it. This chapter begins with a brief discussion of a cost accounting system, followed by a detailed discussion of job costing that is frequently used in government as well as non-profit organizations. The chapter concludes with a brief discussion of two other methods frequently discussed alongside job costing: variable costing and absorption costing.

Pages: 19

Governments have a long history of outsourcing or contracting out many of the goods and services it provides to private providers, for profit as well as non-profit organizations. The term frequently used to describe accounting for outsourcing or contracting out is contract costing. Contract costing is a variation of job costing. The difference between job costing and contract costing is that a contract is much larger in scope than a job and often with longer duration. Perhaps, more than anything, what makes contract costing important is the sheer amount of money governments spend on contracts each year that runs into hundreds of billions of dollars. This chapter provides an overview of contract costing. It begins with a brief history of government contracts, followed by a discussion of the characteristics of contract costing, types of contract costs, contracting process, guidelines and procedure, contract costing standards, contract accounting reports, and contract performance management. The chapter concludes with a brief overview of government and nonprofit contract relationships, since the nonprofit organizations frequently partner with government agencies to provide goods and services that are beneficial to both.

Pages: 20

Goods and services an organization provides go through a process. A process is a sequence of activities that takes place in stages where each stage may consist of one or more jobs. In this respect there are some similarities between job costing and process costing in that both track and assign costs to a product (an item of goods or a service for government and nonprofit organizations). Both use the same cost flows, both use double entry accounting, both use a predetermined overhead rate for indirect costs, and the basic information used by both to assign costs is the same, which are mostly physical units. But the two are not the same: One focuses on assigning costs to a product (an item of goods or a service), while the other one assigns costs to each stage of the production or delivery process. As such, both job costing and process costing belong to a category of costing called product costing. This chapter focuses on process costing. It begins with a brief discussion of process costing versus job costing, followed by a discussion of the stages of process costing, and the methods commonly used in process costing. The chapter concludes with a brief overview of process costing with multiple products.

Pages: 20

All functional units of an organization, such as departments, serve two important purposes: those that provide service to other functional units, called service departments, and those that use the service the service departments provide called user departments. In providing a service, like any service provider, the service departments incur costs that they must allocate to the user departments. In general, the service the service departments provide to other departments does not generate any revenue for the organization, but they are essential for the effective functioning of the organization. Although there is no actual transfer of money between the departments since the activities are internal to the organization, without recognizing the costs the service departments incur and allocating them to respective user departments, the total cost of operation of the organization would be seriously undermined. While cost allocation is relatively simple when it comes to direct costs, indirect costs are much more difficult because they cannot be easily attributed to a single department providing the service. This chapter focuses on cost allocation, with an emphasis on the cost allocation process, followed by a discussion of the methods commonly used in cost allocation.

Pages: 24

A real challenge in cost allocation is how to allocate indirect costs, since it is easier to allocate direct costs than indirect costs. In traditional costing, indirect costs are allocated using a predetermined rate, usually based on the rate for the entire organization, which is easy to determine. Traditional costing works well for indirect costs in situations where the focus is on volume such as amounts of labor hours, amounts of materials, and so forth. But in situations where volumes are not necessarily the sole determining factor in cost allocation, or in situations where indirect costs have not been clearly identified, it tends to produce less than satisfactory results. This is where methods such as Activity-Based Costing (ABC), which was specifically designed for allocating indirect costs, become useful. This chapter provides a broad discussion of activity-based costing, followed by a brief discussion of two related topics, time-driven activity-based costing and performance-based activity-based costing. The chapter concludes with a brief discussion of activity-based management.

Pages: 89

No chapter abstract available.

Pages: 23

Perhaps the single most critical element for an organization, especially from a cost management perspective, is cost control. Cost control is the process of ensuring that the cost of operation for an organization does not exceed its target cost and that there are no cost overruns. Ideally the more an organization can control its costs without lowering the quality or quantity of goods and services it provides, the more efficient the organization. While occasional cost overruns are not unlikely because of events and circumstances over which an organization does not have enough control, it is important that all organizations, large or small, adopt measures that would ensure cost control as part of their normal operation. There is a diverse array of these measures, ranging from cybernetics which deals with the study of all forms of control, to simple variance and ratio analysis, to cost internal control, to decision tools such as those used in operations research. This chapter presents a brief discussion of the need for cost control, followed by a detailed discussion of the measures commonly used in cost control. This includes standard costing, variance analysis, ratio analysis, and cost internal control.

Pages: 30

Quality is critical to effective management of an organization. In government, as in the private sector as well as in nonprofit organizations, quality has been and remains a major concern resulting from two interrelated developments: One, an increase in public demand for lean and efficient government. Two, an increase in public expectation that the goods and services they receive from government in return for their tax dollars are of the highest quality. Quality control can ensure both; in particular, the latter by maintaining quality specifications throughout the production and delivery process, including the acquisition of materials, supplies and equipment, to the final delivery. This chapter focuses on quality control and related measures. It begins with an introduction to quality control and variations in quality, followed by a brief discussion of control charts frequently used in quality control. It also briefly looks at process capability and related measures, such as quality engineering, quality assurance, and costs in quality control. The chapter concludes with a brief discussion of total quality management.

Pages: 27

Budgeting plays a vitally important role in the functioning of an organization – public, private, and nonprofit, but more so in government. It involves a set of activities that take place throughout the year that are detailed, structured, and time-consuming. There is a direct relationship between planning, budgeting, and costs. Costs refer to expenses the activities incur, while budgeting deals with the process that deals with how to plan, allocate, manage, and control costs. To understand the role budgeting plays in all this, it is important to understand the essential elements of a budget that include, among others, the budget process, types of budgets, budget forecasts, budget structure, and the development of an operating and a capital budget. The elements are common in both government and nonprofit organizations, except that they are much more detailed and involved in government. This chapter provides a brief discussion of each, with an emphasis on government budget. This is not difficult to understand, considering the size of a government budget that can run from a few million dollars for a small local government, to hundreds of millions of dollars for a large government. The chapter concludes with a brief discussion of flexible budgeting.

Pages: 7

Organizations are not static or monolithic entities, as they were once perceived. They are constantly changing, making it necessary to change and adopt measures to keep up with the changes, as they occur. Increasing demand for goods and services, changing technologies, and rising expectations are placing additional demands on the management to become more responsible as well as responsive to those they serve. In government, where changes take place more gradually than in the private sector, one can expect to see the same kind of demand placed regularly on the decision makers to plan to keep up with the changes. This also applies to cost and managerial accounting in government. Cost and managerial accounting is an evolving field. As it continues to evolve, it will place new demands and challenges on government, nonprofit organizations, and other users. Although the fundamentals of the field will not change, there are areas that are likely to experience issues and challenges in the coming years that will also apply to government and nonprofit organizations. This concluding chapter briefly discusses some of these challenges and directions of change.