Communicate the Impact of Poor Cost Information on a Decision Principles of Cost Analysis and Management

FASAB’S SFFAS #4 These are the answers to the self-study exercise. Discuss with fellow students: How would the guidance on Cost Reporting affect your organization? What would it measure? What methods might it use? Activity Step 3 This is a self-study activity. Follow the steps in the student version of the slides. We will then review as a class.

FASAB’s SFFAS #4 Executive Summary of Federal Accounting Standards Advisory Board’s Statement of Federal Financial Accounting Standards #4 How do we know that FASAB Considers Cost Accounting a High Priority? List the Five Fundamental Elements of Cost Accounting: 1. Accumulating and reporting costs of activities 2. Establishing responsibility segments 3. Determining full costs of goods and services 4. Recognizing the costs of goods and services provided among federal entities 5. Using appropriate methodologies to assign costs Activity Step 4 Describe the provisions of FASAB SFFAS #4 How do we know that FASAB Considers Cost Accounting a High Priority? FASAB tackled Cost Accounting very early in its standard setting process. SFFAS = Statement of Federal Financial Accounting Standards. #4 means it was the only the fourth one issued. List the Five Fundamental Elements of Cost Accounting: (1) accumulating and reporting costs of activities on a regular basis for management information purposes, (2) Establishing responsibility segments to match costs with outputs, (3) determining full costs of government goods and services, (4) recognizing the costs of goods and services provided among federal entities, and (5) using appropriate costing methodologies to accumulate and assign costs to outputs.

FASAB’s SFFAS #4 Read the Introduction to SFFAS #4 What are three goals of federal financial reporting? 1. Costs of specific programs and activities and the composition of, and changes in, those costs; 2. Efforts and accomplishments associated with federal programs and their changes over time and in relation to costs 3. Efficiency and effectiveness of the government's management of its assets and liabilities Activity Step 4 Describe the provisions of FASAB SFFAS #4 Help users to determine: -- Costs of specific programs and activities and the composition of, and changes in, those costs; -- Efforts and accomplishments associated with federal programs and their changes over time and in relation to costs; and -- Efficiency and effectiveness of the government's management of its assets and liabilities

FASAB’s SFFAS #4 Who are the users of federal financial information? Users Decisions: 1. Government -spend resources to Managers achieve expected results 2. Congress -program decisions Federal Executives -evaluate performance 3. Citizens -resource allocation Activity Step 4 Describe the provisions of FASAB SFFAS #4 Who are the users of federal financial information? And, who are the PRIMARY users? Government managers are the primary users of cost information. They are responsible for carrying out program objectives with resources entrusted to them. Reliable and timely cost information helps them ensure that resources are spent to achieve expected results and outputs, and alerts them to waste and inefficiency. (Essentially this refers to decisions on how to spend the money.) Congress and federal executives, including the President, make policy decisions on program priorities and allocate resources among programs. These officials need cost information to compare alternative courses of action and to make program authorization decisions by assessing costs and benefits. They also need cost information to evaluate program performance. Citizens, including news media and interest groups, are concerned with the costs and results of federal programs that affect their interests. They need program cost information to judge whether resources are allocated to programs rationally and if the programs operate efficiently and effectively.

FASAB’s SFFAS #4 What are objectives of managerial cost accounting information? 1. Provide program managers with relevant and reliable information relating costs to outputs and activities 2. Provide relevant and reliable cost information to assist the Congress and executives in making decisions about allocating federal resources 3. Ensure consistency between costs reported in financial reports and costs reported to managers Activity Step 4 Describe the provisions of FASAB SFFAS #4 What are objectives of managerial cost accounting information? These standards are aimed at achieving three general objectives: -- Provide program managers with relevant and reliable information relating costs to outputs and activities…The cost information will assist them in improving operational economy and efficiency. -- Provide relevant and reliable cost information to assist the Congress and executives in making decisions about allocating federal resources, authorizing and modifying programs, and evaluating program performance; and -- Ensure consistency between costs reported in general purpose financial reports and costs reported to program managers.

FASAB’s SFFAS #4 List the five topics addressed by the standard: 1. Requirement for cost accounting 2. Responsibility segments 3. Full cost 4. Inter-entity costs 5. Costing methodology Activity Step 4 Describe the provisions of FASAB SFFAS #4 (1) Requirement for cost accounting, (2) Responsibility segments, (3) Full cost, (4) Inter-entity costs, and (5) Costing methodology.

FASAB’s SFFAS #4 List the five purposes for using cost accounting information: 1. Budgeting and cost control 2. Performance measurement 3. Determining reimbursements and setting fees and prices 4. Program evaluations 5. Making economic choice decisions Activity Step 4 Describe the provisions of FASAB SFFAS #4 (1) budgeting and cost control, (2) performance measurement, (3) Determining reimbursements and setting fees and prices, (4) program evaluations, and (5) making economic choice decisions.

FASAB’s SFFAS #4 Managerial cost accounting is the process of… 1. accumulating 2. measuring 3. analyzing 4. interpreting 5. reporting …cost information useful to both internal and external groups Activity Step 4 Describe the provisions of FASAB SFFAS #4 Managerial cost accounting is the process of accumulating, measuring, analyzing, interpreting, and reporting cost information useful to both internal and external groups

FASAB’s SFFAS #4 How are cost accounting and financial accounting related? Cost information generally originates with transactions recorded for financial accounting purposes How are cost accounting and budgetary accounting related? Managerial cost accounting should provide budgetary accounting with cost information accounting should provide budgetary accounting with cost information Activity Step 4 Describe the provisions of FASAB SFFAS #4 How are cost accounting and financial accounting related? Managerial cost accounting and financial accounting are closely related or integrated. In part, it is because cost information generally originates with transactions recorded for financial accounting purposes. How are cost accounting and budgetary accounting related? Managerial cost accounting should provide budgetary accounting with cost information.

FASAB’s SFFAS #4 What basis of accounting should be used? “The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used.” “…using a basis of accounting …appropriate for the intended use of the information.” Activity Step 4 Describe the provisions of FASAB SFFAS #4 What basis of accounting should be used? A particular cost measurement has meaning only when considering its purpose. The measurement of costs can vary depending upon the circumstances and purpose for which the measurement is to be used. Therefore, managerial cost accounting should provide cost information “using a basis of accounting and recognition/measurement standards that are appropriate for the intended use of the information.” When providing information to support financial decisions, the cost information should use the accrual basis of accounting. When providing information to support budget decisions, the cost information should use the budgetary basis of accounting.

FASAB’s SFFAS #4 Read the standard on Costing Methodology “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 to the segment's operating environment…” Activity Step 4 Describe the provisions of FASAB SFFAS #4 Read the standard on Costing Methodology “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 to the segment's operating environment…”

FASAB’s SFFAS #4 The cost assignments should be performed by the following methods listed in the order of preference: (a) directly tracing costs wherever feasible and economically practicable, (b) assigning costs on a cause-and-effect basis, or (c) allocating costs on a reasonable and consistent basis. Activity Step 4 Describe the provisions of FASAB SFFAS #4 Read the standard on Costing Methodology “The full costs of resources that directly or indirectly contribute to the production of outputs should be assigned to outputs…” The cost assignments should be performed by the following methods listed in the order of preference: (a) directly tracing costs wherever feasible and economically practicable, (b) assigning costs on a cause-and-effect basis, or (c) allocating costs on a reasonable and consistent basis.

FASAB’s SFFAS #4 Costing Terminology: Costing Terminology: Cost Accumulation - the process of collecting cost data in an organized way Cost Assignment - the process that identifies accumulated costs with reporting periods and cost objects. Cost object - an activity or item whose cost is to be measured Activity Step 4 Describe the provisions of FASAB SFFAS #4 Costing Terminology: Cost accumulation. Cost accumulation is the process of collecting cost data in an organized way. Cost Assignment The term "cost assignment" refers to the process that identifies accumulated costs with reporting periods and cost objects. Cost Object The term "cost object" refers to an activity or item whose cost is to be measured. In a broad sense, a cost object can be an organizational division, program, activity, task, product, service, or customer. The final cost objects of a responsibility segment are its outputs: the services or products that the segment produces and delivers, the missions or tasks that the segment performs, or the customers or markets that the responsibility segment serves. There may be intermediate cost objects that are used in the course of the cost assignment process.

FASAB’s SFFAS #4 List the four Costing Methodologies outlined in the standard: 1. Activity Based Costing 2. Job Order Costing 3. Process Costing 4. Standard Costing Activity Step 4 Describe the provisions of FASAB SFFAS #4 List the four Costing Methodologies outlined in the standard: 1. Activity Based Costing 2. Job Order Costing 3. Process Costing 4. Standard Costing We have already looked at Job Order Costing. We will look at Activity Based Costing on Day 8, and Standard costing (as it relates to cost explanation) on Day 13.

Other Provisions of SFFAS #4 Requires Cost Accounting Accumulate and report costs of activities for management information purposes May use either Cost System or Cost Finding Techniques Define Responsibility Segments Measure and report costs of each segment’s outputs Activity Step 4 Describe the provisions of FASAB SFFAS #4 Requires Cost Accounting Accumulate and Report Costs of Activities for management information purposes May use either Cost System or Cost Finding Techniques Define Responsibility Segments Measure and Report Costs of each Segment’s Outputs

Other Provisions of SFFAS #4 Report and Measure Full Cost in General Purpose financial reports Include direct and indirect costs incurred in the reporting segment AND Identifiable supporting costs incurred in other segments and entities Incorporate cost of goods and services received from other entities, if Significant and Identifiable Activity Step 4 Describe the provisions of FASAB SFFAS #4 Full cost, as defined here, is useful in helping managers understand the impact of their decisions not only on costs incurred in their own responsibility segments, but also in other responsibility segments and other entities. Report and Measure Full Cost in General Purpose financial reports Include direct and indirect costs incurred in the reporting segment AND Identifiable supporting costs incurred in other segments and entities Incorporate cost of goods and services received from other entities, if Significant and Identifiable The entire methodology accounting for with reimbursements, cost transfers, and other benefits exchanged between responsibility segments is described. Students should know where to find this information if this is a significant issue in their organizations.