CGFM- Section 1, Chapter 2 (Cost Accounting)

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Cost is reasonable

A cost is reasonable if it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. In determining reasonableness of a given cost, consideration shall be given to: • whether the cost is of a type recognized as ordinary and necessary for the operation of the governmental unit or the performance of the federal award; • restraints or requirements imposed by such factors as sound business practices; arm's length bargaining; federal, state, and other laws and regulations; and terms and conditions of the federal award; • market prices for comparable goods or services; • whether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the governmental unit, its employees, the public and the federal government; and • significant deviations from the established practices and policies regarding the incurrence of costs, which may unjustifiably increase the federal award's cost.

CGFM- Section 1, Chapter 2- The Basis of Cost Accounting- Direct Cost

A direct cost is a cost that can be specifically identified with a single cost objective. Examples of direct costs include: • Salaries and other benefits for persons who work directly on a cost objective; • Materials and supplies used exclusively for the cost objective; • Travel of persons working on the cost objective; • Costs associated with office space, equipment, facilities, utilities, etc., provided they are used exclusively for the cost objective; and • Costs of goods or services received from others, provided they are used exclusively for the cost objective. For example, suppose it is desired to ascertain the cost of providing classroom training. The fee paid to the instructor who teaches a class would be a direct cost of that class—so would any travel expenses paid to the instructor to arrive at the classroom.

CGFM- Section 1, Chapter 2- User Fees- Determining a Price w/ Different Cost Objectives

A government operates a print shop for which it charges a user fee based on the cost per copy. During the year, the government purchases equipment costing $50,000 that has a useful life of 10 years, with no salvage value. The annual depreciation would be $5,000. To acquire the equipment, the entity borrowed $50,000 at 5 percent interest per annum and agreed to repay the money over five years in annual installments of $10,000. The government estimates the following operating costs for the forthcoming year: Salaries and wages Salaries: $500K Fringe: $100K Rent and utilities: $120K Paper and Printing Suppliers: $250K Misc: $30K Total: $1M

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Combining Multiple Functions 2

Actual conditions must be considered in selecting the base to be used in allocating the expenses in each grouping to benefited activities. When an allocation can be made by assignment of a cost grouping directly to the function benefited, the allocation shall be made in that manner. When the expenses in a grouping are more general in nature, the allocation should be made using a selected base that produces results that are equitable to both the grantor and the grantee. In general, any cost element or related factor associated with the governmental unit's activities is potentially adaptable for use as an allocation base, provided that: • it can readily be expressed in terms of dollars or other quantitative measures (total direct costs, direct salaries and wages, staff hours applied, square feet used, hours of usage, number of documents processed, population served and the like); and • it is common to the benefited functions during the base period. The separate groupings of indirect costs allocated to each major function shall be aggregated and treated as a common pool for that function. The costs in the common pool shall then be distributed to individual federal awards included in that function by use of a single indirect cost rate.

CGFM- Section 1, Chapter 2 (Cost Accounting)

After completing this chapter, you should have a general understanding of the following: • The purposes for accumulating and reporting cost information; • The determination of the full cost of outputs; • Preferred order in assigning costs; • Cost accounting for federal agencies; • Criteria for determining allowable costs under an intergovernmental cost-reimbursement contract or grant; • Methods for allocating indirect costs; • General concepts for calculating user fees; and • Various cost recovery objectives.

CGFM- Section 1, Chapter 2- User Fees- Difference B/W Cost and Price

An entity needs to make several decisions in deciding what the user fee should be. Should the fee encompass all costs or only a portion of the costs? Does the entity desire to break even on the function or service? Should the costs or fee be based on policies other than cost, such as cover the cost of an individual service or function or a group of services or functions? For example, an entity that operates a parks and recreation program may have a goal to break even for the entire program, but not for individual activities within the program. The entity may not charge a fee for the use of the parks and the playgrounds, but may establish fees for use of baseball diamonds, soccer fields or shelters. These fees would be set at a level that covers the cost of maintaining the diamonds, fields and shelters, but an additional amount would be needed to cover the entire cost of the parks and playgrounds

CGFM- Section 1, Chapter 2- The Basis of Cost Accounting- Indirect Cost

An indirect cost is a cost associated with two or more cost objectives. For example, there are typically several rooms in a facility in which classes are being taught. The cost of using that space is an indirect cost for each class being taught in the building. That cost can be determined by ascertaining the total cost for using the building (i.e., the heating, lighting, cleaning, and even depreciation costs for the building); and then assigning each classroom a portion of the total building cost that is equal to the proportion of each classroom's space, to the building's total space. This method assigns the indirect cost of using the building on a cause-and-effect basis.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- -What benchmarks are used by government financial managers to track costs?

Benchmarks include other governments with similar services, targeted performance goals from public interest organizations, and measures from the private sector.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- How do governments increase cost awareness among employees?

By accumulating cost information, reporting it, and tracking costs against benchmarks.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- How do governments aim to provide more services with fewer resources?

By letting different service providers compete to perform certain government activities, requiring departments to know their costs and making economic choice decisions based on cost information.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- User Fees How do governments use cost information to compare agencies, programs, and services?

By making comparisons among entities and within entities over time, ensuring that like programs or services are being compared.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting (2)

Cost accounting is just as important to governmental entities as it is to commercial entities. Commercial entities are tracking profits and efficiencies of production to maximize earnings potential. Governments, on the other hand, need cost information for a variety of management functions, including monitoring and improving program economy, efficiency and effectiveness; establishing user fees; preparing budgets and monitoring cost controls; receiving cost reimbursements for grants; comparing costs among agencies, programs and services; and making economic choice decisions. Although cost accounting information can be used by those outside the government, the primary users are government managers.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- User Fees What is a frequent use of cost data by state and local governments in relation to grants?

Determining reimbursements applicable to intergovernmental and other grants, as required by grant agreements and contracts.

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- Requirement for Cost Accounting

Each reporting entity should accumulate and report the costs of its activities on a regular basis for management information purposes. Costs may be accumulated either using cost accounting systems or using cost finding techniques. Agencies should establish procedures to accumulate and report costs continuously. This allows agencies to produce information required by the CFO Act of 1990 and the Government Performance and Results Act (GPRA) of 1993, and, thus, be able to support legislative actions. A cost accounting system is a continuous and systematic process which is designed to accumulate and routinely assign costs to a variety of objects, as desired by management. Such systems usually entail the charging of costs to cost objects as the costs are incurred.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant- 2

Federal awarding agency means the federal agency that provides a federal grant or award directly to a non-federal entity. Non-federal entity means a state, local government, Indian tribe, institution of higher education (IHE), hospital or nonprofit organization that carries out a federal award as a recipient or sub-recipient. As a result of receiving a federal award (i.e., grant or cost-reimbursement contract), a state, local or tribal government may incur costs in administering the award. For example, if the grant requires the addition of two staff members, the human resources department must advertise and recruit for the positions. After hiring the two staff, payroll will have two additional paychecks to process. If the staff requires supplies and materials, purchase orders must be processed. Invoices will have to be paid by accounting.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- Monitoring

Governments rely on cost information to monitor programs to ensure that they are operating efficiently (reducing unit cost of outputs) and effectively (achieving program outcomes). Governments must operate within legal constraints, such as budget authority and mandatory programs. Therefore, these constraints must be considered when evaluating programs to determine if the results are achieved in a cost-effective manner. Governments are constantly operating with shrinking resources amid increasing demands for new or enhanced programs. The budget process determines how limited resources are to be allocated. Cost information is often used to help make allocation decisions among programs.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Simplified Method (Single Function)

If a government department or agency has only one major function, or where all its major functions benefit from the indirect costs to the same degree, the allocation of indirect costs and the computation of an indirect cost rate may be done through the simplified method. • Step 1: classify the agency's total costs for the base period as either direct or indirect; • Step 2: divide the total allowable indirect costs (net of credits) by an equitable distribution base. Examples of an equitable distribution base may be: -total direct costs (excluding capital expenditures, e.g., equipment and other distorting items); - direct salaries and wages; or - another base which results in an equitable distribution.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Combining Multiple Functions

If a government's department or agency has several major functions that benefit from indirect costs in varying degrees, the allocation may require the accumulation of costs into separate cost groupings. Costs are then allocated individually to benefited functions by means of a base that best measures the relative degree or benefit of the activity for which the costs have been grouped. The indirect costs allocated to each function are then distributed to individual programs, awards and other activities included in that function by means of an indirect cost rate(s). The number of separate groupings should be held within practical limits, taking into consideration the materiality of the amounts involved and the degree of precision needed.

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 2

In July 1995, the Federal Accounting Standards Advisory Board (FASAB) issued Statement of Federal Financial Accounting Standards (SFFAS) 4: Managerial Cost Accounting Standards and Concepts. The standard became effective for fiscal years beginning after September 30, 1997. There have been several amendments to the Standard, including SFFAS 30 and SFFAS 55, which rescinded the provisions of SFFAS 30. The statement contains five requirements aimed at providing reliable and timely information on the full cost of federal programs, their activities and outputs. Such information can be used by Congress and executives to make decisions about allocating federal resources, authorizing or modifying programs, and evaluating performance.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Special Indirect Cost Rates

In some instances, a single indirect cost rate for all activities of a grantee may not be appropriate. It may not consider those distinct factors that may affect the indirect costs applicable to a particular program or group of programs. The factors may include the physical location of the work, the level of administrative support required, the nature of the facilities or other resources employed, the organizational arrangements used, or any combination thereof. When an award is carried out in an environment that generates a significantly different level of indirect costs, provisions should be made for a separate indirect cost pool applicable to that award. The separate indirect cost pool should be developed during the regular allocation process, and the separate indirect cost resulting therefrom should be used, provided that: • The rate differs significantly from the rate that would have been developed under either the simplified method or the multiple base method. • The award to which the rate would apply is material in amount.

CGFM- Section 1, Chapter 2- User Fees- 2

Many governments are supplementing general tax revenues with fees. The advantage is that it enables all or a portion of the cost of a service or activity to be borne directly by those who avail themselves of the service or activity. User fees are most common for services such as water and sewer, parks and recreational activities. The term fee is also used when a charge is imposed to regulate or control activities. For example, a fee is paid to obtain a driver's license needed to operate a motor vehicle. A permit is needed to build a house or make improvements to a house. These are considered licenses and permits, rather than user fees.

CGFM- Section 1, Chapter 2- User Fees- Formula for Determining a Break Even Fee

Next, in order to determine the amount of fee necessary to recover the costs, it is necessary to project the number of units of goods or services for which the user fee will be charged. The amount of fee so determined is called the Break-even Fee. The formula for determining the break-even fee is:

CGFM- Section 1, Chapter 2- User Fees- Policy Decisions Other than Cost

Once a cost is defined and the fee to recover that cost (i.e., break-even fee) is determined, a decision must be made whether to charge the cost, more than the cost or less than the cost. Reasons for setting fees other than costs are: • the government may decide it is politically or socially wise to charge less than the cost. For example, bus fares less than total costs discourage use of private autos, sewer use charge less than total costs enable poor people to use a service they might not otherwise be able to afford; • competition might necessitate charging less than cost (for example, undercutting rival cities' convention centers); • unfair competition with the private sector, for example, not using lower costs to charge lower green fees than a public, non-government golf course; • encouraging use at slow times, for example, charging less for using tennis courts during weekdays than for evenings or weekends; and • limiting use of a service or facility by charging more than cost for movies in the public library.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant- 3

The Uniform Guidance does not allow for profit or other increments above cost. All departments or agencies of the governmental unit desiring to claim indirect costs under federal awards must prepare an indirect cost rate proposal and related documentation to support those costs. These proposals must be submitted to the cognizant federal agency if the recipient receives more than $35 million in direct federal funding. The application of the cost principles is based on three fundamental premises: • Governmental units are responsible for the efficient and effective administration of federal awards through the application of sound management practices. • Governmental units assume responsibility for administering federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the federal award. • Each governmental unit, in recognition of its own unique combination of staff, facilities and experience, will have the primary responsibility for employing whatever form of organization and management techniques may be necessary to assure proper and efficient administration of federal awards.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Combining Multiple Functions 2

The distribution base used in computing the indirect cost rate for each function may be: • total direct costs (excluding capital expenditures); • direct salaries and wages; or • another base which results in an equitable distribution. For example, allocating indirect costs for accounting services might be based on the number of vouchers or documents processed. Allocating legal services might be based on hours of service provided by each lawyer. Allocating the cost of maintaining facilities might be based on square footage. An indirect cost rate should be developed for each separate indirect cost pool developed (accounting, legal services, facilities maintenance, etc.). The rate in each case should be stated as the percentage relationship between the indirect cost pool and the distribution base identified with that pool.

CGFM- Section 1, Chapter 2- User Fees- Defining the Costs to Recover

The first question in pricing a fee to cover costs is whether to consider only direct costs or the total costs, which would include indirect costs, variable costs and fixed costs. One would also have to consider whether costs will be determined using the cash, accrual, modified accrual basis or some other basis of accounting. At a minimum, the price should include all direct costs. If it does not, then a subsidy or transfer from another revenue source might be required. It is not unusual for governments to subsidize a particular fee or activity. Most public transit systems are not able to recover even direct costs, excluding capital costs, from fare box revenues.

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- Inter-Entity Cost

The fourth requirement is titled inter-entity costs. It recognizes that the federal government is the only economic entity to which FASAB's standards apply, the agencies are components of that entity, and any component can provide goods or services to other components without charging them for those goods and services. Because of that unique situation, the standard specifies that each entity's full cost should include the cost of goods and services provided by other entities, even when there is no cost charged. For this requirement to be effective, entities providing goods or services without charge have the responsibility to provide the receiving entities with information on the full cost of such goods or services

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- Costing Methods

The last requirement is that the costs of resources consumed by responsibility segments should be accumulated by type of resource, such as employees, materials, capital, utilities, rent, etc. Outputs produced by responsibility segments should be accumulated and, if practicable, measured in units. The full costs of resources that directly or indirectly contribute to the production of outputs should be assigned to outputs through costing methodologies, or cost finding techniques that are most appropriate for management's needs and the operating environment. The standard does not require the use of a particular costing methodology. Costing methodologies (or systems) can be used selectively and in combination to suit distinctive styles of activities, or to deliver a different focus or perspective on a government's costs. The more common ones are ABC Costing, Job Order Costing, Process Costing, Standard Costing

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- Responsibility Segments

The second requirement is that the management of each reporting entity should define and establish responsibility segments. Responsibility segment is the term FASAB uses in SFFAS 4 Managerial Cost Accounting to denote cost objective. A responsibility segment is responsible for carrying out a mission, conducting a major line of activity, or producing one or a group of related products or services. The segment's managers report to top management directly, and their resources and results of operations can be clearly distinguished from those of other segments. Some entities may have only one segment if they perform one single mission or one type of service. Others may have several segments. Also, a suborganization may be a reporting entity and, at the same time, be a responsibility segment to a higher-level entity to which it belongs. For each segment, managerial cost accounting should:

CGFM- Section 1, Chapter 2- The Basis of Cost Accounting- 2

The simplest way to understand cost accounting is to start with the three basic elements: cost objective, direct costs and indirect costs. A cost objective is that of which you want to determine the cost. It could be an organization, a location, a function, an activity, a product, a service, a contract or any other work unit for which cost data are desired—and for which provision is made to accumulate and measure the cost. Every cost objective is composed of two kinds of costs: direct costs and indirect costs.

CGFM- Section 1, Chapter 2- Assignment of Costs

The term "cost assignment" refers to the process that identifies accumulated costs with reporting periods and cost objects. There are many ways to attribute costs: direct tracing, cause-and-effect basis and cost allocation. To obtain the best information through cost accounting, the preferred method for assigning cost is by directly tracing the costs used in the production of outputs. Employees who work on a project would show the hours worked on their timesheet. They would also assign travel costs by indicating the project involved. For instance, a crew involved in snow removal would indicate the time involved for each employee, equipment used, as well as the amount of fuel and salt consumed. A programmer would reflect the amount of time spent on a particular program.

CGFM- Section 1, Chapter 2- The Basis of Cost Accounting- Inter-entity- Cost

The term inter-entity costs is used sometimes. Inter-entity costs are costs incurred by one organization that are legitimate costs of a cost objective in another organization. These costs should be associated with the cost objective(s) for which they are incurred. This rule applies whether or not the organization initially incurring the inter-entity costs charges the other entity. In the latter instance, they would be considered an imputed cost, as explained later. So, the basic cost accounting rule is that you want to determine the full costs for each cost objective, and the preferred method for doing so is to first assign, to the greatest extent possible, the direct costs for the cost objective; to then assign the indirect costs on a cause-and-effect basis, to the extent there are reasonable cause and effect bases; and, finally, to assign the remaining costs on an equitable and consistent basis. This notion is elaborated upon in the following pages.

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- Full Cost

The third requirement is that all reporting entities should report the full costs of outputs in general purpose financial reports. The full cost of an output produced by a responsibility segment is the sum of (1) the costs of resources consumed by the segment that directly or indirectly contribute to the output, and (2) the costs of identifiable supporting services provided by other responsibility segments within the reporting entity, and by other reporting entities.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Composition of Cost

The total cost of federal awards is comprised of the direct cost of the program plus the allocable portion of allowable indirect costs less applicable credits. Both the direct and indirect costs shall exclude capital expenditures, e.g., equipment, other distorting items and unallowable costs. However, unallowable costs must be included in the direct costs if they represent activities to which indirect costs are properly allocable. Direct costs are those that can be specifically identified to a particular final cost objective. Typical direct costs are compensation, supplies and materials, equipment, and travel. Indirect costs are those: • incurred for a common purpose, benefiting more than one cost objective; and • not readily assignable to the objective without effort disproportionate to the results achieved. Indirect costs include those originating in the grantee department that meet the above description, as well as those incurred by other departments in supplying goods, services and facilities.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Types of Rates

The type of rate a grantee will use depends upon the organization's accounting system and the stage of the grant. • Provisional rate. A temporary rate applicable to a specified period that is used for funding, interim reimbursement and reporting indirect costs on federal awards, pending the establishment of a "final" rate for that period. • Predetermined rate. An indirect cost rate, applicable to a specified current or future period, usually the governmental unit's fiscal year. This rate is based on an estimate of the costs to be incurred during the period. Except under very unusual circumstances, a predetermined rate is not subject to any adjustment. There are restrictions on the use of this type of rate. For example, a predetermined rate may not be used under federal contracts. Also, predetermined rates may not be used by governmental units that have not submitted and negotiated the rate with the cognizant agency for indirect costs. In view of the potential advantages offered by this procedure, negotiation of predetermined rates for a period of two to four years are encouraged where the cost experience and other pertinent facts are deemed sufficient to enable the parties involved to reach an informed judgment regarding the level of indirect costs during the period(s) covered by the predetermined rate. • Fixed rate. An indirect cost rate which has the same characteristics as a predetermined rate, except that the difference between the estimated costs and the actual, allowable costs of the period covered by the rate is carried forward as an adjustment to the rate computation of a subsequent period. • Final rate. An indirect cost rate applicable to a specified past period, which is based on the actual allowable costs of the period. A final audited rate is not subject to adjustme

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Guidelines for allowable costs

To be allowable, costs must: • Be necessary and reasonable for the performance of the federal award and be allocable thereto under these principles. • Conform to any limitations or exclusions set forth in these principles or in the federal award, as to types or amount of cost items. • Be consistent with policies and procedures that apply uniformly to both federally financed and other activities of the non-federal entity. • Be accorded consistent treatment. A cost may not be assigned to a federal award as a direct cost if any other cost incurred for the same purpose, in like circumstances, has been allocated to the federal award as an indirect cost. • Be determined in accordance with generally accepted accounting principles (GAAP), except for state and local governments and Indian tribes only, as otherwise provided for in this part. • Not be included as a cost or used to meet cost-sharing or matching requirements of any other federally financed program in either the current or a prior period. • Be adequately documented. • Cost must be incurred during the approved budget period. The federal awarding agency is authorized, at its discretion, to waive prior written approvals to carry forward unobligated balances to subsequent budget periods pursuant to §200.308(e)(3)1.

CGFM- Section 1, Chapter 2- Determining Allowable Costs Under an Intergovernmental Cost-Reimbursement Contract or Grant - Allocating Indirect Costs

To facilitate distribution of indirect costs, it may be necessary to establish several pools of indirect costs. Indirect cost pools should be distributed to benefited cost objectives on bases that will produce an equitable result in consideration of relative benefits received.

CGFM- Section 1, Chapter 2 - Uses of Cost Accounting- User Fees

User fees are becoming more prevalent among government entities, either to replace traditional tax assessments or to supplement taxes. User fees provide the opportunity to link revenues to services that are delivered. Cost accounting is a major factor in the establishment of user fees. This is one area where governments function in a manner that is like the private sector. However, there may be some variations, based on the government's objective regarding the recovery of costs.

CGFM- Section 1, Chapter 2- Assignment of Costs- Cause and Effect

When it is impractical to directly trace costs, then costs may be assigned on a cause-and-effect basis. Cause-and-effect assignment is the intermediate step between direct assignment or tracing, and cost allocation. Cause-and-effect assignments are based on the premise that outputs require the performance of certain activities, or use of certain resources, to occur and that the activities or resource-use cause the results (i.e., results in the costs). Thus, the activity/ resource-use is the link between the outputs and the costs. Continuing from the previous example, a plow used for snow removal consumes fuel. If it is impractical to readily ascertain the precise number of gallons of fuel used for the plow, an alternative would be to multiply the hours the plow was driven by the hourly consumption rate for that type of truck.

CGFM- Section 1, Chapter 2- Assignment of Costs- Allocation

When it is impractical, or not economically feasible, to assign costs directly or using cause-and-effect, then costs should be allocated on a reasonable and consistent basis. Most general management and administrative costs, support costs, depreciation, rent, maintenance, security and utility costs are commonly allocated. For the plow example, the total fuel used by the snow removal function at the department of public works could be divided by the number of plows stationed at the department; this will provide an estimate of the total fuel used by each snowplow, which—while not as accurate—is still reasonable and has been achieved at a low cost.

CGFM- Section 1, Chapter 2- Cost Accounting for Federal Agencies - 5 requirements- 4 Costing Methods

• Activity-Based Costing (ABC) focuses on the activities of a production cycle, based on the premises that (a) an output requires activities to produce, and (b) activities consume resources. ABC systems use cost drivers to assign costs through activities to outputs. A contracting office, for example, is an activity that negotiates contracts for goods and services of a responsibility segment. • Job Order Costing accumulates and assigns costs to discrete jobs (products, projects, assignments, or a group of similar outputs). Each job would have a different cost. Project Orders, for example, are widely used in the Department of Defense for major repairs of vehicles or equipment, and overhauls of ships and airplanes. • Process Costing accumulates costs by individual processing divisions. These processing divisions are involved in a continuous production flow, with each division contributing towards the completion of the end products. All jobs are similar and are accounted for by department. An example would be any manufacturing process with multiple steps that leads to a final product. • Standard Costing establishes predetermined or expected costs that can be applied to activities, services or products on a per unit basis. A good example of this is automobile repair, where a repair shop estimates the cost of a specific repair or service before they do the work.

CGFM- Section 1, Chapter 2- User Fees- Summarizing the concepts

• The user fee may be less than direct costs with additional costs subsidized from other sources. • The user fee will recover only direct costs. • The user fee will recover all expenditures, but not capital assets. • The user fee will recover all expenditures, including capital assets. • The user fee will recover expenses (costs using the accrual basis of accounting, including depreciation). • The user fee will recover expenses (including depreciation) plus an allowance for replacing equipment at a cost greater than the cost of equipment currently used. • The user fee will recover expenses, plus the amount required to pay principal on outstanding bonds in lieu of depreciation