Managerial Cost Accounting System Requirements: Exposure Draft

Published by the Government Accountability Office on 1997-04-11.

Below is a raw (and likely hideous) rendition of the original report. (PDF)


Cost Accounting

                     February   1998
What is JFMIP?

        he Joint Financial Management        Improvement      Program (JFMIP) is a joint and cooperative
        undertaking    of the U.S. Department      of the Treasury, the General Accounting      Office, the
        Office of Management      and Budget, and the Office of Personnel Management,            working in
cooperation    with each other and other agencies to improve financial management             practices in
government.       The Program was given statutory authorization        in the Budget and Accounting
Procedures Act of 1950 (3 1 USC 65). Leadership           and program guidance are provided by the
four Principals of the JFMIP--Comptroller         General of the United States, Secretary of the
Treasury, and the Directors of the Office of Management            and Budget, and the Office of
Personnel Management.         Each Principal   designates a representative    to serve on the JFMIP
Steering Committee,      which is responsible for the general direction of the Program.        The JFMIP
Executive Director, and a program agency representative            (who serves for 2 years) are also on the
Steering Committee.

    The Program promotes strategies and guides financial management                   improvement     across
government;     reviews and coordinates       central agencies’ activities and policy promulgations;        and,
acts as catalyst and clearinghouse       for sharing and disseminating      information      about good
financial management        practices.    This information    sharing is done through conferences and
other educational     events, newsletters, meetings with interagency         groups and agency personnel,
and through FinanceNet,        an electronic clearinghouse      on the Internet.

    The JFMIP has worked on interagency          projects that developed a financial systems framework
and financial systems requirements.       For the lirture JFMIP plans to assist Federal’agencies       in
improving    their financial systems through its Program Management             Office. The Office will
work on revising the Federal government’s         requirements   definition,   testing and acquisition
processes, the first target of opportunity     is core financial systems. The objectives of the Office
are to develop systems requirements,       communicate      and explain Federal and agency needs,
provide agencies and vendors information          to improve financial systems, ensure that products
meet relevant system requirements,      and simplify the procurement         process.

   Information     on JFMIP can be found           at its website at
www.fmancenet.gov/financenet/fed/jfmip/jfmip.htm                 or call (202) 5 12-920 1.
In&oduction        __________-_____________________________--------------------------------------*--------------                             i

I. Overview of System Requirements                                  for Managerial                   Cost Accounting---------------    I- 1
    Summary       of Information                  Requirement.+                 ________________________________________----
                                                                                                                 - _____I-2
    S-mary        of Fm&onal                   Requiremen&--                   ________________________________________-----------
    S-mary        of Intqp~on                   Requiremen@                  ________________________________________------------

II. Information         Requirements                  ______-------__---------------------------------------------------              II-1
    Financial     Information               Classification              Structure ____________________________________
    Operations Information    Classification Structure ______________________________________
    program I&m-&on        Classification Smcme ________________________________________--

III. Functional        Requirements                 _______-________-___----------------------------------------------III-1

    System Administration                   ________________________________________-------------------------------
    Data Capme            ________________________________________-------------------------------------------III-3
    Cost &signment              ________________________________________---------------------------------------III-5
    Cost Classificatjon            ___________________________
                                                       -- ________________________________________--------
    Cost Monitoring             _____________________________r__________---------------------------------------III-9

Appendix        A. Laws and Policies Affecting Managerial                                            Cost Accounting      Systems -- A-l

Appendix        B. Contributors                _____________________________________s
                                                                                                    B- 1
          he JFMIP System Requirements fir Managerial Cost Accounting document
          is one of a seriesof JFMIP publications on federal financial ~
 I        management system requirements. All of these documents should be
considered together when determining.how best to use information
technology and supporting services to meet a ,federal agency’s financial
management needs. The Framework for Federal Financial Management Systems
describes the basic-elements of a model for integrated financial management
systems, the relationships between the model elements, and specific
considerations in developing and implementing integrated financial
management systems. Each of the other documents in the series, beginning
with Core Financial System Requirements, describes the functional requirements
for a particular type of system. This particular document is called System
Requirements for Managerial      Cost Accounting, rather than Managerial Cost
A&bunting     System Requirements, because cost accounting functions may be
supported by many types of systems, such as the core financial system,
inventory and fixed asset systems, programmatic systems, and others, in
addition to systems dedicated to cost accounting.

   This System Requirements for Managerial Cost Accounting document is intended
for systems analysts, systems accountants, and systems developers as well as
program managers and other users who are ,defining requirements that
software supporting managerial cost accounting functions in their
organizations must meet; ‘This document builds upon, and provides a means
to implement, requirements related to cost accounting set forth in the Chief
Financial Offkers.Act (CFO Act), Government Performance and Results Act
(GPRA), Statements of Federal Financial Accounting Standards (SFFAS),
Office of Management and Budget (OMB) circulars, and other sources. It
accomplishes this by specifying information and functional processing
requirements for accumulating and analyzing cost data consistent with
governmentwide guidance. Laws and policies affecting systems for managerial
cost accounting are identified in Appendix A. Glossaries of terms relating to
managerial cost accounting may be found in SFFAS Number 4, Managerial
Cost Accounting Concepts and Standards for the Federal Government, and the
Managerial Cost Accounting Implementation Guide prepared by the
Governmentwide Cost Accounting Committee of the Chief Financial Officers

   As shown in Illustration 1, standards and system requirements assist
agencies in selecting effective and efficient systems: The requirements in this
document are intended to facilitate the acquisition, development, and
enhancement of systems that provide information useful in managing and
controlling the cost of government. The document establishes the standard,
governmentwide system requirements that an agency should consider for
systems supporting managerial cost accounting functions, but also allows
flexibility to address agency-specific requirements, such as those associated
with the choice of costing methodology (e.g., activity-based costing).

    JFMIP does not expect the .requirements provided herein to be sufficient by                                          !
 themselves to enable an agency to make an informed decision regarding a                                                 g
1system’s ability to meet the agency’s,needs for managerial cost accounting, but                                         ;
 rather to .provide a starting point for such an: analysis by identifying applicable                                     p
 governmentwide policies and standards. Each agency should integrate its                                                 i
 unique information, functional, and technical requirements with the                                                     I
 requirements provided in this document to determine the complete set of
 system requirements for managerial cost accounting in its particular                                                   /I
 environment.                                  ,’
                   ‘/                             .,                                                                    I
                                                                      illustration   i
                                                    ,‘.           5                          / i
                                          Financial       System Improvement              Projects

               Standards/                                                    ,Agency lmplemdniation
              lequirements                                                     .’              ,’

                  . Standard Reporting

                                                               . Additional                            . Adaptation
                  . U.S. Government      Standarc                Agency
                    General Ledger                                Fupctipnal
                  l   Core Financial   System
                      Requirements                                                                     . Procedures

                                                               ‘. Additional
                                                                                                       . Training
                  . Travel System

                                                                                                       . Documentatkm
              . Seized/Forfeited Asset
                 System Requirements

              . Direct Loan System

              l       Guaranteed LOan System                   . scfhvare/
                      Requirements                               Hardware
              . hlveotcry system

               . Managerial cost
                   Accounting System            I
              -------                           1

              . Other Standards

I-   -1               Subject of
          ,           this report


                Although      some agencies, particularly.           those++th     manufacturing         or other
            commercial-like        operations,       have some experience           with managerial         cost
            accounting,      many agencies are just now dealing with it for the first time.
           Agencies for whom cost accounting                   is a new .discipline      may have some
            difficulty   at .first in complying         with the fe,deral accgunting         standards for
            managerial      cost accounting.          ;However, combiningcost             accounting,
           performance          measurement,        financial~reporting;and           budgetary       control in an
         : agency’s ,single, integrated           fmancial ,management            system can be expected to
           provide srgnificant b.enefits by facilitating                more; mformed        allocations     of
           limited     federal resources and, other,management.                   decisions.     Furthermore,
           agencies can develop and improve their managerial                         cost accounting
           capabilities     over time.         .’                        ‘. ,‘,

              SFFAS .Number 4, Managerial               Cost Accounting Concepts and Standards for the
          Federal Government, requires reporting               entities to perform at least a certain
          minimum        level of cost accounting          and provide a basic amount of cost
          accounting       information      necessary to accomplish          the many objectives
          associated with planning,            decision making,       and reporting.        This minimum
          level includes collecting         cost information       by responsibility       segments,
          measuring       the full cost of outputs, providing           information       for performance
          measurement,          integrating     cost accounting      and general financial accounting
          with both using the Standard General Ledger, providing                         the appropriate
          precision of information           (it should be useful but not unnecessarily              precise or
          refined),, and accommodating               any of management’s          special cost information
          needs that may arise due to unusual or special situations or circumstances.
          While each entity’s managerial              cost accounting      should meet these basic
          requirements,         the standard does not specify the degree of complexity                    or
          sophistication        of any managerial        cost accounting      process. As long as the entity
          complies with the managerial               cost accounting     standards, it may use a cost
          accounting       system or use cost finding techniques              and other cost studies and
          analyses. Some entities may use a combination                     of a system supplemented         by
          cost studies.

              SFFAS Number 4 defines a cost accounting               system as a continuous          and
     :    systematic cost accounting         process which may be designed to accumulate                  and
          assign costs to a variety of objects routinely          or as desired by the management.
          It also states that such a system may be best for some, though not all,

          reporting    entrties.   “Off-the-shelf’      software is commercially       available that can
          meet many of an agency’s needs related to managerial                  cost accounting.
          However, even if the agency is using such software, agency management                          still
          needs to make decisions regarding              the cost objects to be defined, the costing
          methodology        to be used, the types of costs to be included          for each reporting
          or decision making purpose (e.g., full cost), and other items of a similar
          nature,. Agencies should also carefully cons++- the need and opportunity                         for
          streamlining     or reengineering        their processes to take maximum            advantage of
          a new system. For example,           processes that might be examined             include those
          that would be used to provide input more reliably and efficiently                    to cost
          accounting    calculations,     those that might use information          resulting     from cost
          accounting    to make better decisions, and the cost assignment                processes
          themselves.     Use of managerial         cost accounting    has the potential       for making
                                            .. .
major changes, both good and bad, in the behaviors of managers and other

    Some agencies may find they have existing software, such as core financial
systemsoftware and reporting and data’ analysis tools, that can support many
of their needs,for ,cost accounting capabilities, especially when cost accounting
is being first introducedi Not until,an agency has some experience with cost
accounting and has determined they ‘truly have a need for more sophisticated
capabilitiesand.what, those. specific caipabilities are, should an agency pursue
additional-software.. Since agencies may use costfinding techniques and cost
studies as long ,as they,comply with,the;cost accounting standards and have
latitude in developing cost accounting systems, implementation of a cost
accounting “system” is not necessarily a prerequisite for compliance with
SFFAS Number 4; howeveri some agencies may find it much more difficult to
comply with the managerial cost accounting standards without a formal

                                              ’   ,,,

          ‘.              his document presents requirements’ for software designed to support
                          managerial cost accountingin a federal agency. It does not attempt to
                  T       discuss,in any detail:other,methods, such as cost finding techniques or
                coststudies and analyses, that an agency might use to comply with the
     :,         managerial cost,accounting standard,and meet other agency needs. This
                chapter provides an overview consisting of the following sections:
                   .’ ‘,.                 ;..’              .‘I< :   :
                    *Summary of Information Requirements, which describes the types of data
               ‘systems need to maintain to support managerial cost accounting. Additional
                detail on information requirements is provided .in the chapter titled
                “Information Requirements.“.               ‘,_)    ‘,‘I’
                  *Summary of Functionali R,equirements, v&h presents a brief description
               of the]functional requirements pertaining to systems supporting managerial
               cost’accounting. Additionaldetail    on ‘functional requirements is provided in
               the chapter titled “.Functional’Requirements.‘::      ’

                   *Summary of Integration Requirements, which provides the basis for
               required’data interchanges, between systems that support managerial cost
               accounting directly with other systems that provide or receive cost data or
               reiated information.

                  SFFAS Number 4 is a hybrid statement that contains both concepts and
               standards. Statements of concepts are more general than statements of
               standards; Unlike standards, concepts are not considered to be authoritative
               requirements for agencies, but concepts are intended to help preparers and
               users of financial information better u’nderstand federal accounting and
               financial reporting. The concepts section of SFFAS Number 4 states:
                                              ‘;   ,,
                  Managerial cost accounting should be a fiiitdamental part of the financial
               managelitent system and, to’the extent jvjicticible, should be integrated with
               other parts of the system. Managieal costing should use a basis of accounting,
               recognition, and measurement appropria‘te for the intended purpose. Cost
               information developed for diRerent purposes should be drawn from a common
               data source, and outpvt reports should be reconcilable to each other.

                   In describing the purposes of using cost information, SFFAS Number 4
               says, “In managing federal government programs; cost information is
               essential in the following five areas: (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.” An agency’s managerial cost accounting system(s), whether
               manual or automated, should be able to provide cost information with
               sufficient supporting detail to allow sound decision-making in each of these
               five areas.

                  To meet the various needs in these five areas, costs may be measured,
               analyzed, and reported in many ways. The concepts section of SFFAS Number
               4 states that cost information should be presented using the appropriate basis
               of accounting (e.g., accrual) and recognition/measurement   standards for the
 intended         use of the information;         ,Using different bases of accounting   and cost
 accounting           methods can produce different costs for the same item, activity, or
 entity, tihich can confuse users of the information.                 Therefore,  a key concept
 is that reports using different accounting. bases ;or different methods for
 recognition           and measurement        should be reconcilable,    and should fully explain
 those bases. and methods.             These concepts are also consistent with concepts in
 the JFMIP Framewor(z for Federal Financial Management                  Systems on process
 integration.         and financial data integrity       control.
,.’          ,-‘. )‘_:                 j ,‘j,,S.’
             ,,‘(,          :             /.’       ”
Summary of lnforma tion Requirements                 :
    The summary information             classification     structure consists of three separate
but related. information’       classification      structures: financial,    operations,    and
program.     The managerial         cost accounting’system           shares the summary
informatipn    classification     structure defined in the JFMIP Frumework for Federal
Financial Monugement         Systems with other‘fmancial            management      systems.
    /’              ,:,.I.     ,      !                 ,. ‘*
                        ‘Financial lnforma tion Classification   Structure
:.!   ;
    The financial information       classification     structure is the primary    structure
for capturing    accounting    information;       including     costs, revenues, and units of
input, such as labor, inventory,        etc.
  c                   Operations hforma tibn Classitka tion Structure
     The operations       information      classification structure is used to measure the
‘efficiency of an operation          and associate, costs to outputs.       The operations unit
 is the organization       unit and/or program contained             in the financial
 information     classification     structure for whichthe        costs of outputs are needed.
 In addition,    this .structure mcludes standards, which represent planned
 results, that provide a basis for evaluating,how             efficiently   the agency is
 producing     outputs.

      ‘.    ‘,          Program Informa tiofj Classifica tion Structure
    The program       information     classification    structure is used to measure
program     effectiveness and associate costs to outcomes where feasible. The
program     unit should correspond           with the program        in the financial
information     classification    structure.      In addition,   this structure includes goals
and objectives that provide a basis for evaluating               the effectiveness of a
particular   program..

                                     Chapter   I-   System .Requirements     Overview

Summary of Functiond        Requirements
   A managerial cost accounting system .should. perform      the following

     l m             ..         .’
                                to maintain the relatively static information that
         controls other system functions, manage application-level security, and
         manage’data storage’for the entire system.’ “I
     l   Data         to obtain data that is more dynamic than the data
         maintained, by the system administration function. This includes
         capturing data on costs, units (e.g., of inputs, of outputs), exchange
         revenues, and gains and losses.
     l Cos;                to assign costs to intermediate and final cost objects
       (e.g., outputs) either using direct tracing, on a cause-and-effect basis, or
       on a prorated basis using a cost allocation methodology.
         ‘,       .:
             classlficatlon to determine values of inventory, property, plant, and
       equipment; stewardship investment, amounts; and performance
                  . .
     0 Cost monltorlnp     to manage costs, operations, programs, and outputs
       according to management needs and external reporting requirements.

Summary of Integration Requiremen@
   The sources of the following integration requirements are OMB Circular
A-127, Financial Management Systems, and the JFMIP Framework for Federal
Financial Management   Systems, especially the Systems Architecture chapter of
that document.

. The agency systems architecture shown below provides a logical perspective
identifjring the relationships of various agency systems. Although this
architecture does not necessarily dictate the physical design of the system, it
does identify the system types needed to support program delivery/financing
and financial event processing for effective and efficient program execution.

Chapter I---System.   Requirements   Overview

                                                                Illustration   2

                                          Agency Systems Architecture

                                      ‘men1   \     /+J-----/                                   /+           \\

                              To be integrated, financial management systems need to have the following
                            characteristics as described in OMB Circular A-l 27:.
                                 l Common data elements     ”
                                 0 Common transaction processing
                                 l   Consistent internal controls
                                 0 Efficient transaction entry

                                Managerial cost accounting systems should be fully integrated with other
                            agency systems, that is, designed to eliminate unnecessary duplication of
                            transaction entry and share data elements without rekeying or reformatting.
                            In fact, managerial cost accounting functions may be so integrated into one or
                            more of an agency’s financial management systems that there is not a readily
                            identifiable managerial cost accounting system per se. Other agencies may
                            find it more practical or beneficial to implement software specifically designed
                            for managerial cost accounting that draws data needed from other parts of an
                            agency’s single, integrated financial management system. When this
                            document uses the term “managerial cost accounting system,” it should be
                            interpreted as meaning any of several possibilities: a separately identifiable
                            software module with interfaces or integration points with other systems; a
                            part of a system labeled as something else (e.g., core financial system); parts of

                                     Chapter   I,-   Systein Requirements    Overview

    several systems that together make up an agency’s single, integrated financial
    management system as defined in OMB Circular A-1?7; or other similar

      Managerial cost accounting system functions need to draw financial and
    non-financial (e.g., units) data from the core financial system, inventory
    system, payroll or labor distribution system, property management system,
    and others. This data may include but is not limited to labor costs, material
    costs, depreciation expense, labor hours; and number of items produced.
    Managerial cost accounting also needs to provide data to the core financial
    system, inventory system, property management system, financial reporting
    system, and possibly others. Examples of data provided include
    work-in-process values, finished goods values, and data for the Statement of
’   Net Cost.

        In most cases, the managerial cost accounting system itself is not a point of
     original entry for financial transactions, but instead uses data originally
     entered into or generated by other systems, such as labor costs and hours from
    ‘a payroll system, depreciation expense from a property management system,
     travel costs from a travel system, material and other costs from procurement
     and inventory systems, and other information maintained by the core financial
     system. There may be some situations in which financial transactions might
     be entered directly into the managerial cost accounting system, but this is not
     considered to be a standard, governmentwide requirement, and extreme care
     should be taken to maintain proper internal control and avoid
     double-counting or missing costs.
              ‘.    ,’

,’   ;


                                     :.,his chapter provides the information                                   requirements for managerial cost
                                        accoupting systems. The managerial                                      cost.accounting system shares
                                       -su:tirnary data with the cork financial                                 system and other transaction
                            ’ processirig systems. It manipulates this data                                    to support management’s
                              analysis and reporting of cost information.

      .’   j.   .:/;    ”
                              1 I Data kcaptured by the managerial cos’kaccounting system consistent with
                              these infkmation requirements’ and proces’Sed’&zcording to the functional
                , _//.( ;). requirements in the next chapter. It is sh,Fred with and returned to other
                           ‘, bystems and reported according to the repking       requirements. In order for
                              all this to be done systematically, the data needs to be defined and classified.
                              The information requirements here are consistent with the data and summary
                              information classification structures outlined in the JFMIP Framework for
                              Federal Financial Management    Systems. The data elements listed below are for
                              illustrative purposes, and individual agencies may add to or subtract from the
                              list to meet their specific needs. The following diagram lists the information
                              requirements for the three classification structures:

                                                                                                       ‘! /
                                                           Summiry        Information Classitka tion Structure                 Elements
                                                                         Used for Managerial Cost Accounting

                                                                                     Financial information

                                 Organization             Funding                 Accounting                                   Special         Financial
                                     Unit              Identification            Categorization                              Descriptors    Accumulators
                                                          4.’      a                                             : ..
                             l       Reporting         l    Fund year        l    SGLAccount           l   Program       l    Management      l           Dollars
                                     Cntity                 (optional)                                                        Special             l           Revenue
                                                                                  Object                                      Information                     (optional
                                                                             l                         l   Project
                             l        Responsibility   l    Account               Class/Cost                                  Needs
                                     ,+gment                Symbol                Element                                                             l      costs
                             l       Responsibility                          l    E&ly/Nonenlity
                                                                                                                                                      l      Planned
                                     Center                                       Indicator
                             l       ABC Activity                            . Federal/Non-                                                                  (optional)
                                     (Optional)                                federal
                                                                               indicator                                                      l           Units
                             l       Others      as
                                     Needed                                  l    Reporting        ”

                                                                                                                                                   -_           j
Chapter’:11 -   Ibfobktidti~~‘Requikements                                                   :                                                                      .,
                                    /                                                (d/,                           j. ‘,                                                     ,
                  ‘5,                                                                ‘.                                                                 ‘._.

                                                                                  Operations      Information


                       ,                Y Responsibility       l   ProductJSerbice     l    Eff&Aqxy            l   Planned Output         l   Output Units
                      ‘,      ../         Segment                  Type                     MeasureType             costs
                                                                                                                                           l   output costs
                                    l       kesesponsibility                                                    l   Planned Output
                                            Center                                                                  Units

                                    l       Program

                                        l   Project

                                                                             Program Information (Optional)

                                            l   Program               l   Planned Outcomes         l   Quantitative Outcome          l   Outcome Measures
                                                                                                                                     l   Program Costs
                                                                                                   l   Planned Program

                                    Financial Information                  Classification        Structure
                                       The financial information classification structure is used for collecting,
                                    categorizing, tracking, monitoring, and reporting information on the costs of
                                    a federal agency. The essential categories of the financial information
                                    rlassification structure for cost accounting are organization unit, funding
                                    identification, accounting categorization, program, special descriptors, and
                                    financial accumulators.

                                                   on 1Jr&. Organization unit is the level at which financial
                                    information is consolidated and reported within an agency or externally to
                                    central agencies. ,An organization unit may also represent a level at which
                                    financial information is further consolidated by central agencies after it is
                                    reported by program agencies. Based on existing law and policies, agency
                                    managerial cost accounting systems need at least three levels:
                                                 l    Reporting Entity, the level at which financial statements are produced
                                                 l    Responsibility Segments, required for the statement of net costs for
                                                      external reporting purposes

                                                                              Chapter        II:,F :Information.   .Requirements

                                                           ‘.   .,

                                         l   Responsibility Centers, a ,level below responsibility segment
                                         l   ABC Activity, used in activity-based costing (Optional)
                                                                           I             I

                                                     Funding identification is used to control the
                                                     of the budgeti: These elements are usually
                          assigned during the budget formulation and execution processes:
                                        1:,. Symbol
                                 l  FundYear                                                                                       !
                             Although cost accounting at the budget account level is not a specific
                          requirement of the managerial cost accounting standard, these elements have
                          been included to enable an entity to correlate budget accounts with related                              /
                          responsibility centers.
                                                                               ..,      ./
                                                                     .   .
                                                          The accounting categorization contains the
                     >.   elements used9to,track assets, costs and revenues in the cost system. At a
                          minimum, the cost system needs:
           .’                           .:,
                               l  Standard.General Ledgers Account
                .,                   l       Object Class/Cost Element
                                     l       Entity/Non-entity/Inter-entity   Indicator
                          ‘,         ‘:,                            /.
                                     l       Fed,eral/Nonfederal,Indicator
                                     l       Reporting Period
‘.,                                  f
                                    Revenue Source Code (Optional)
                             m.          Program contains the elements to support aggregation of
                          financial information related to specific activities or purposes. Each of these
                          could have several levels (e.g., program, subprogram, sub-subprogram). At a
                          minimum, the managerial cost accounting system needs:
                                     l       Program

                                       es-      . Special descriptors are additional descriptive elements
                          that can be used by management to capture costs according to special
                          information needs, such as geographic location, commodity code, etc.
                          Standards have not been defined because the specific elements needed
                          depend on the information needed for particular purposes. The managerial
                          cost accounting system should provide flexibility in its coding structures to
                          meet a variety of needs.
           Chapter.WT       Jnformation.         Requirements

                                                      Financial                . Financial   accumulators       are the dollar amounts of
                                       t:         inputs and;the related.unit    information     (e.g., units, labor hours) aggregated
                                                  from financial events in other systems reflecting         time periods (e.g., daily,
                                                  mohthly~‘current   year, inception    to date). A managerial        cost accounting
                                                  system should be capable of accumulating          the monthly,     current year, four
                                                  prior years and inception    to date total for:


                                                               l     Planned     total revenue   dollars (Optional)

                                                                     Planned     total cost dollars       j’
                                  ,         ,’                                              ,,
                                                               *     Units                       f             :
                                                      I.             a                    ’                    i

                                                  Operations                 lnforma tion Classification Structure
                                                                                .‘,       ”             :
                                                      ,The’operations       ‘information classmcation      structure in the managerial     cost
                                                  accounting       system capturesinformation         on the outputs of an operation.
                                                  Since cost is only one part of a measure of efficiency, this structure is also used
                                                  in other systems to collect non-financial          information,    such as number of
                                                  payments made on time. The cost per output together with other measures of
                                                  efficiency helps managers evaluate the efficiency of an operation.                 While data
                                                  standards are less defined for this type of information             than for financial
                                                  information,       consistency in the collection.of      this type of data is necessary to
                                                  ensure that proper comparisons            are made when benchmarking            one operation
                                                  to another.       The essential categories of the operations        information
                                                  classification     structure are operations    unit, activity type, efficiency measures,
                                                  operations      accumulators.

                                                              ons Unit. Operations     unit is the unit to which outputs will be
                                                  associated.    The managerial   cost accounting    system operations  classification
                                                  structure should include:
                                                              .,                                         ‘,
                                                         @ Responsibility  Segments

                                                           l         Responsibility    Centers

                                                           l         Program

                                                               . .
                        !                            ctrvrtv. Tyq~. Activity type identifies the type of output to be measured
                                            .’ within an operation          to accurately diagnose problem     areas or areas needing
                                               improvements          in efficiency, such as case ‘processing, publications   printed, or
                                            ‘_ tax returns processed.           Therefore, the managerial    cost accounting   system
                                               should identify:


_--.---.-.-...___.                                                                                                    ------.-.-.--.--.   --
                                                                          Cliapter   II,,- ‘information   Requirernenfb

      ‘,             ,’                                             .(         ‘.

                ‘,         ,.I           l  Product/Service Type
                                                 Mew        Efficiency measures are based on the relationship
                                                 ts and the volume of output for this activity type, such as 20,000
                                   cases processed. Therefore, the managerial cost&counting system should
                                   capture information on:
                                        l    Efficiency Measure Type,
                                      Standards . Standards represent,performance targets. These are normally
                                   established by agency management. Therefore, the managerial cost
                                   accounting system,should capture information on:
                                        l    Planned OutputUnits
                                        l   Planned Output Costs
                                                  Accumulators. Operations accumulators capture the actual
                                   number of output units and the actual output unit cost. These can then be
                                   compared to the established standards,(targets). Therefore, the managerial
           ‘.                     ”cost accounting system should:capture information on:
                                         0 Output Units
                                        .    Out@.it costs

                                   ‘Prkgram ,’ hiformation    Classifitiation Structure j
                                        The program information classification structure categorizes cost
                                     information to be used ix-revaluating&e ,effectiveness of program
                                 i performance. Data standards for this information are among the least
                                     defined. Although not required, some agencies may find it very helpful for the
                                     managerial cost accounting system to be capable of associating program costs
                                    ,with the outcomes identified in an agency’s strategic plan prepared in
                                     accordance with the Government Performance,and Results Act (GPRA) of
                                     1993. Under GPRA, the required strategic plans and performance goals
                                    would be a primary means of defining or identifying performance indicators
                                     to measure and assessoutputs, service levels, and outcomes for each program
                                     activity. In discussing the use of cost information for performance
                                    measurement, SFFAS No. 4 states “While effectiveness in itself is measured by
                                     the outcome or the degree to which a predetermined objective is met, it is
                                    commonly combined with cost information to show ‘cost-effectiveness.“’
                                    Therefore, there could be a role for the managerial cost accounting system in
                                    assessing part of the effectiveness of a program by reporting on the costs of
                                    the program and of those outcomes which are quantifiable in terms of cost.
                                   ,The categories of the program classification structure are program unit,
                                    effectiveness measures, goals and objectives, and program accumulators.

                                                                                                          1                       . ,..,.
                                                                                  .“. ,,..,’‘,
 Y.,                                  /
Ch+ter,y   11
                -   Information   Reqiuirements                          ,,_ ‘.                                      .’      .;I .! ,:., :’
                                                                                                    I.’       .,,’        ‘:..~.\‘,
                                                                                                                              I> .,‘, ‘,

                                      ProgTam.        Program unit is the program level to which outcomes will be
                                   associated. This may be a large program involving a single agency or even
                                   several agencies, or a smaller program existing only within one agency
                                   bureau. ‘Therefore, the managerial cost accounting system should categorize
                                   information by:
                                      Effectiveness.          Effectiveness measures reflect the planned
                                   outcomes to be;achieved by a program unit, such as number of students
                                   graduating and obtaining jobs. Therefore, the, managerial cost accounting
                                   system should capture information on:
                                          l Planned Outcomes
                                                     .    .
                                                     rectlves Goals and objectives describe management’s
                                   projected outcomes and results. These include the ones identified in the
                                   agencies’ strategic plans. Therefore, the managerial cost accounting system
                                   should capture information on:
                                          0 Quantitative Outcome Goals
                                          l Planned Program Costs    ~
                                    mAccumulators.           Program accumulators enable quantifiable
                                  measures used to determine the cost ,effectiveness of program activities.
                                  Therefore, the managerial cost accounting system should capture information
                                          l       Outcome Measures
                                          l       Program Costs

            rs          chapter provides the functional requirements for systems
           I        supporting   managerial costaccounting ,The term “managerial cost
                    accounting system” is.used in a generic-sense. to indicate those
          portions of .an agency’s, integrated financial management system that together
          provide managerial cost accounting information for the agency or component
          parts. An agency’s managerial cost accounting system may be comprised of
          several system applications (or parts .thereof), and in fact may not be
          separately identifiable in an agency’s, inventory of financial management
     ,*   syste,ms. The major requirements can be grouped into the following
          functional areas:
                          .., ;.
                 l   System Administration
                 6 ,’ Data Capture
                 0 Cost Assignment
                 0 Cost Classification
                 l   Cost Monitoring

          System Administration
              System administration for the managerial cost accounting system is
          performed by a relatively small number of people, compared to the number of
          potential users of the system’s information. They maintain the relatively static
          information that controls other system functions, manage application-level
          security, and manage data storage for the entire system. In many situations,
          systems administration would be most effective and efficient if it is performed
          together for all applications in an agency’s inte,grated financial management
          system. Although integrated system administration is a highly desirable
          option, it is not a mandatory, governmentwide requirement. System
          administration is, however, required to be performed in some manner.
          Requirements associated with system administration of the managerial cost
          accounting system have been classified as data classification structure
          maintenance, cost assigmnent rules maintenance, security, and data

                                  truv.                      The data classification
          structure provides for the accumulation of required accounting information.
          Chapter II presents a data classification structure designed to collect,
          maintain, and associate financial, operational, and program information
          related to managerial cost accounting. Accordingly, the managerial cost
          accounting system must support the information requirements in Chapter II
          and use the data classification structure described there.

            As described in the JFMIP Framework for Federal Financial Management
          Systems, many of the data elem,ents contained within the data classification
          structure are shared with other financial management systems. The JFMIP
          Core Financial System Requirements identifies maintenance of the financial

Chaptcbr 111:‘~ Fundtional      Requiiem,ents

                                     information classification structure and parts of the operations and program
                                     information classification structures as afunction of the core financial system.
                                     Other elements in these structures’are likely to be maintained in other
                                     systems, such as inventory, property management, and systems that support
                                     programmatic activities.                      1
                                        Ideally, maintenance of the data classification structure is integrated across
                                     system applications such that there is no duplication of effort or data. Where
                                     possible and practical, the managerial cost’accounting system should access
                                     the’other systems’ tables (or other data structures) that define codes in the
                                     data classification structure, rather than ‘maintaining its own set of tables for
                                     these data elements. ‘Although certainly, not the preferred method, the
                                     managerial cost accounting system may maintain its own set of data (due to
                                     system architecture restrictions, for example), reconciliation and replication of
                                     the duplicated data between the’ other system and the managerial cost
                                     accounting system must be easy,‘frequent, and reliable to minimize data
                                     integrity problems.

                                        The managerial cost accounting system may also use data classification
                                     elements that are unique to it, for example, activities in an activity-based
                                     costing system. The managerial cost,accounting system must allow authorized
                                     users to maintain this data and use it for editing and reporting purposes.
                                     Different users may have different access and update capabilities.          ~
           ’                                          /
                                        v.                                       Cost assignment rules provide the
                                     mechanism, for attributing costs to cost objects. A cost object may be a
                                     particular output (good or service produced), a program, an organization, an
                                     activity performed, or other item whosecost is to be measured. Costs may be
                                     assigned to a cost object by direct tracing, cause-and-effect basis, or

                                       The majority of an agency’s costs would be assigned to outputs (as either
                                    direct costs or indirect costs) of its programs. Some costs may be considered
                                    to be non-production costs assigned to programs but not to outputs, because
                                    they are related more to the period in which they occurred than to the
                                    ongoing production of goods or services (e.g., costs of a reorganization, other
                                    post-employment benefits resulting from a reduction in force). A few costs,
                                    such as high-level general management and administrative support costs
                                    incurred by the Department Secretary’s office, are attributable to the
                                    reporting entity or responsibility segment but cannot be assigned reasonably
                                    to programs or their outputs.

                                       The cost assignment rules control the assignment of costs by the managerial
                                    cost accounting system. They specify which method (direct tracing,
                                    cause-and-effect basis, or cost allocation) of cost assignment will be used to
                                    assign a particular type of cost to a particular cost object, and how that
                                    method is to be applied. For example, the rules might identify the types of
                                    resources (e.g., labor, material, equipment),’ the, measurements (e.g., person
                                    hours, computer time, square feet of lumber) to be used in assigning the costs
                                    of the resources to a cost object such as an activity or output, the amounts to

                                                                              _--.                       --..-   ___-
                       A___..   __-_-.-   _..--   - -
                                                             Chapter III-    Functional   Reqirirements

                     ‘be assigned per unit’of resource (e.g., rate per hour, percentage of total costs),
                      and the. order irrwhich to apply the various rules (e.g., multiple step-down).
    .I              :The particular form the rules will take in any given managerial cost
:            ,‘,      accounting system will depend on the costing methodology (or
                      methodologies) choserrby the agency. A system that supports activity-based
                      costing will have a different set of rules and capabilities than a system that
         :           uses an older,..cqst,allocation approach to assigning costs. The cost
                      assignment ,rules: maintenance process, must suppo,rt the costing
                      methodologies, cost objects, and resources chosen by the agency for its use.
                   .aThe, managerial cost accounting’ system is not. required to support all of the
                      costing methodologies that might be possible. .To attempt to do so would
                     likely be impractical and wasteful.          ! )
                         The system administration function of the managerial cost accounting
                      system enables authorized users to maintain the rules for cost assignment.
                     The cost assignment function applies these,rules, to assign costs to cost objects,
                      including outputs.

                      &cur@. System security must be ,established and maintained following the
                   computer security policies set forth in Appendix, III to OMB Circular A-130,
                   ,Security of Federal Automated Information Systems. Unauthorized access to system
                   functions and data must be prevented.                ‘.

                      Data.                 Data management is the:process of storing, retrieving,
                   archiving, purging, and manipulating data. ,Archiving moves data from a
                   medium used for current processing, for,example, disk, to a long-term storage
                   medium such as tape. Purging deletes data altogether. Data must be
                   maintained for the periods needed for compliance with applicable standards,
                   laws and regulations and to meet management’s needs for historical
                   information.    For example, SFFAS Number 8, Supplementary Stewardship
                   Reporting, requires five .years worth of reporting on stewardship investments in
                   human capital and research and. development. Although keeping this data
                   may not be strictly a requirement of the managerial cost accounting system,
                   the agency will need- to maintain it, somehow, and the managerial cost
                   .accounting system may be the logical place to do so for many agencies.
                    Historical data kept over a number of years,would also be useful to managers
                   desiring to examine cost trends over time.

                    Data Capture
                      The managerial cost accounting system must capture or be able to access
                    several types, of data. The data capture function obtains data that is more
                    dynamic than the data maintained by the system administration function.
                    This includes data on costs, units, exchange revenues, and gains and losses.

                      Cost w               . According to SFFAS Number 4, Managerial Cost
                   Accountirzg   Concepts and Standardsforthe Federal Government, “cost” is the
                    monetary value of resources used or sacrificed or liabilities incurred to achieve
                    an objective, such as to acquire or pro’duce, a good or to perform an activity or

                                                                                                           : ---
           Chapter ‘lllx-            Functional   Requirements

                                                     service. Cost accumulation is the process of collecting cost data in an
                                                     organized way. The accumulation occurring in .this function is for costs
                                                     incurred within. each responsibility segment, ,and does not involve the
                                                     assignment or allocation of.costs incurred by other supporting segments,
                                                     which is covered by the cost assignment function.
                                                                .’                                       i.
                                                      ! The managerial cost accounting system must capture (or share with other
                                                     systems) all data on costs needed to determine the costs of outputs and the
                                                     total net cost of the entity’s operations, .with the appropriate disclosures of the
                                                     components of net cost (e;g.,,operatingJcosts, acquisition of mission assets,
                                                   ‘rexchange ,revenue). Costs,captured by the, managerial cost accounting system
                                                     are stored according,to the data classification structure discussed above under
                                                    “‘system administration” and in Chapter II. In addition, costs are categorized
                                                     along many different dimensions for various analysis and reporting purposes.
                                                     Some examples are exchange/nonexchange, production/non-production,
                                                     direct/indirect, fixed/variable, controllable/uncontrollable,   and

                                                      The managerial costaccounting~system must capture summary information
                                                   on all costs from the core financial system and other systems of original entry
                                                   for cost transactions. These costs include,,but are not limited to, operating
                                                   expenses, costs of transfer payments, costs of goods .sold, work-in-process
                                                   costs, and mission asset costs. In addition, the managerial cost accounting
                                                   system should allow for direct input of cost information by authorized users
                                                   with an appropriate audit trail in order to capture costs that are not entered
                                                   into any other system. If costs are entered directly into the managerial cost
                                                   accounting system, it must summarize them and send them to the core
                                                   financial system for posting to the general,ledger. An example of this is
                                                   recording the estimated cost of goods and services received from another
                                                   entity without reimbursement and the corresponding financing source to
                                                   cover it, where the cost needs to be recorded at a level of detail not supported
                                                   by the core financial system.

                                                      Unit               . A unit is a determinate quantity (as of length, time, or
                                                   value) adopted as a standard of measurement; Unit information is captured
                                                   for two purposes: ‘(1) to associate units,.including,units  of inputs (e.g., labor
                                                   hours used, materials used, activities performed), outputs (e.g., goods and
                                                   services produced), and outcomes (e.g., program results), with a cost object,
                                                   and (2) to provide a basis for distributing indirect costs.

                                                      The managerial cost accounting system must capture (or share with other
                                                   systems) all data ‘on units needed to determine the costs of outputs and the
                                                   total net cost of the entity’s operations,’ with the appropriate disclosures of the
                                                   components of net cost; Units captured’by the managerial cost accounting
                                                   system are stored according to the data classification structure discussed above
                                                   under “system administration” and in Chapter II. Examples of unit
                                                   information to be captured include amounts and unit types (e.g., hours,
                                                   items). These data elements are used to represent actual units of inputs and
                                                   outputs, equivalent units (such as full-time equivalent employees), percentage
                                                   of completion of a project, and measurements of outcomes.

                                                                 I                                                        --.--~----.-     .-.
-1-..---           .--. --   -----      -.i
                                                          ‘Chapter III I   Functional   Reqdrements

                       The managerial costaccounting system captures (or shares) information on
                   units,from the core financial system and other. systems of original entry. In
                   addition, ‘the managerial cost accounting system ,should allow for direct input
                   of unit information by authorized users with an appropriate audit trail in
                  .order to .capture unit information ,not, entered into any other system.
 $1        > ! ”           ,:,       I:;‘.‘,:,,      i, ‘, I,‘,,;, ‘i, ,‘, ‘.,’
.’                     ~                                                        This is an optional
                   process for the managerial cost ,accounting system !Ihe agency is required to
                   capture and report on exchange revenues, gains, and losses for purposes of
                   preparing: the,Statementof Net Cost, but.is not required to maintain that
                   information ata, detailed-level thatmatches the.,managerial cost accounting
                   system. Some agencies, particularly, those performing commercial-type
                  functions, may wish to maintain this information at a lower level of detail in
                   the managerial cost accountingsystem so that it can be matched easily to cost
                  information to determine the net cost of a particular cost object, such as a
                   specific product or service, and improve management’s control over their.
                  operations and pricing schemes.
                         j     ;,
                      .Exchange revenues, tgains; and losses are included in the calculation of net
                  cost of .operations of a reporting entity and the net cost of outputs, regardless
                  of whether the entity keeps,the revenue,for its own use or transfers it to
                  another entity. ,Exchange revenue’ that is immaterial or cannot be associated
      2’          with particular .outputsis. deducted, separately in calculating the net cost of the
                  program, suborganization, or reporting entity as appropriate. Nonexchange
                  revenues .and other financing sources aresnot deducted from gross cost in
                  determining the net cost of operations for’ the .reporting entity and are shown
                  on -adifferent financial statement. The com,ponent parts of net cost should be
                  shown separately to enhance analysis and understanding.            More specific
                  guidance and certain exceptions are found in SFFAS Number 7 and in
                  FASAB’s Implementations Guide to SFFAS Number 7; If this functionality is
                  desired, the managerial cost accounting system would capture (or access)
                  information on exchange revenues (net of revenue adjustments) and gains and
                 ‘losses resulting from exchange transactions (net of adjustments) from the core
                  financial system and other systems of original entry.

                  Cost Assignment
                     ‘I’he cost assignment function assigns (or attributes) accumulated costs to
                  cost objects. 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. However, the
                  purpose of cost, accounting by a responsibility segment is to measure the costs
                  of its outputs. Thus, 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.

Chapter      Ill’-,    Functional             Requirements;

                                                                   Some responsibility             segments of an entity may provide supporting                              services
               /’       .’                !                    or deliver intermediate               products. to. other segments within the same entity.
     ‘.i       /’                             ,.’ ,, ‘1 The’costs of the supporting,services,andintermediate                                           products should be
                / ”I                                           assignedto         thesegments           thatreceive~the,services                  and products. This is
                        ‘. j                   ?!.             referred to ‘as the intra?entity                 cost assignments; 1 In addition,                 an entity should
                                                               recognize inter-entity             costs for goods and services received from other federal
                 ‘.,’                                          en&s,,‘,       The inter+ntity,,costs&oul,d                   also be assigned to the responsibility
    ..“?S                                                      segments that use.the inter-e,ntity,servicesand                              products.
                                   ,,               ,,:,.                       ,J i.              ; .                       i..“.,.
             1                *                 s’         ,,      3Thus;with respect’to:each.responsibili,ty~                          segment, the.costs that are to be
                                                               assignedto         outputs’ i,nclude: (a) direct and indirect costs incurred within the
                                                               responsibility’segment,,              (b). costs of other responsibility                  segments that are
                           I.                                  ‘assigned: to the segment, ,and (c) inter-entity                           costs recognized        by the receiving
       I ,                             ,:                     ,entity and assigned to the segment. -If a’responsibility                                 segment produces one
                    .,.,                                       kind of output only;,costs of resources used to produce the output are
          ,‘,, :                         :                     assignedato the,output.                       :                 .a , : ”        ‘_
                                                                                              .,              .I’        ”      .. ,:
                                                                   The costing methodology                  standard section in SFFAS Number 4 describes
           1:             ,:         //           ‘,           several costing :methodolo,gies                    *that can be’ used but does not require the use of
                        : I, s ! (’                            a particular        type of costing system or costing methodology.                               It does, however,
                                                               provide the following order of.preference                             for,costmethods           in principle:     (1)
          .,’ ,.,                          ,                  .directly tracing costs wherever‘economically.feasible,                                (2) assigning costs on a
                .I’                                            cause-and-effect          basis, and (,3) allocating-costs                   on ,a reasonable and consistent
         k ,                                                   basis. The’choice.of            method:depends’on                   theirrelative        costs and benefits.
                ,.            .;           ‘,/          ‘.     These principles:apply               to all levels i&cost, assignments                   including:      (1) assigning
                               :                               inter-entity       costs. to .segments, (2) asdi~gming the,costs of support services and
              !                 ,: ).                          intermediate          @roducts among’ segments of aa entity (the intra-entity                                cost
                                                               assignments),          and (3) assigning direct and ,indirect costs to outputs.                             As a
                        ?,,             ,                      general ‘rulej.directly          tracing costs and.assigning                     costs on a cause-and-effect
                                                           .’ basis are more expensive than cost allocations,                                but produce more precise cost
                      ‘,           ,’                          information.         :! :            ’
                ,.u           :,
  ’         >                                                      The four costing methodologies                        described in SFFAS Number 4 are
                                                               activity-based’costing,            jobvorder costing, process costing, and standard costing.
                                                               These costing methodologies                      are not mutually             exclusive.      Both activity-based
                                                               costing and standard costing can be applied to job order or process costing
                                                               systems. The managerial                   cost accounting, system should support one or more
                                                               of these methodologies,                but is not limited             to them as long as the methodology
                                                               used complies with the principles                       in SFFAS’ Number              4.
                                                                           I,                                                         ‘.
                                                     If the cdst’assignment   process affects, the values of SGL accounts in the core
  ,,.                                          ‘financial    system’s’general   ledger, ‘such as inventory    or fixed asset .accounts, the
                                                 summarized       impact of cost assignments    should be sent to the core financial
                                  ”              system for posting to the general ledgersand         external reporting.     If, on the
                                                other hand, cost assignment         merely ‘moves costsibetween classification
                                                 structure elements other than SGL accounts ,(e.g.,’ organizations,           programs),
                                                posting changes to the core financial system is’optional.            The posting of these
                                                amounts in the core financial system may enhance financial data integrity
                                               Chapter ‘1~11
                                                          - Functional: Requirements

      control as described in JFMIP’s Framework for Federal Financial Management
      Systems; however, ‘the cost and complexity may not be worth the added benefit.
        If.posting to the core financial system is not :p,erformed, alternate controls
       must be in place to-ensure that all costs have been properly accounted for.
       The agency .(either a cost,accounting or’the core financial system) should be
   .; able to report costs uporrrequest, both before distribution (i.e., as originally
       recorded) and after distribution of indirect costs.
                      .I, .(
      ,;-.        <”         ,,      .’         /.          ,
       Cost Class&ation                     ‘8,
  , I
            Assigning ,costs.to time periods recognizes costs either as expenses or assets
       for each reporting period. This type of assignment, or “classification” as
‘_     described’here to avoid confusion with assignment of costs to cost objects, is
       governed by accounting standards on‘ recognition ‘of assets and expenses.
       Costs can be classified as operating expenses, assets, or stewardship resource

        In financial accounting and reporting, those costs that apply to an entity’s
     operations for the current’ accounting period are recognized as expenses of
     that period. Assets benefit future periods and include inventory and related
     property (discussed in SFFAS Number 3),, and property, plant, and equipment
     (PP&E) (discussed in SFFAS Number .6). Stewardship resources (discussed in
     SFFF Number 8) consist of heritage,,assets; national defense property, plant,
     and equipment (e.g.,‘weapons systems?; stewardship land; nonfederal physical
     property; human capital investments; and research and development
     investments. The following types of calculationsrelating   to cost classification
     are discuss,ed below: inventory and related property calculations, PP&E
     calculations;‘and stewardship resource calculations.

                               d Propertv Calculations . Inventory is tangible
     personal property that is (1) held for sale, (2) in the process of production for
     sale, or (3) to be consumed in the production of goods for sale or in the
     provision of services ,for a fee. Operating materials and supplies are tangible
     assets to be consumed in normal operati,ons. Stockpile materials are strategic
     and’critical materials held due to statutory requirements for use in national
     defense,,conse,&ation, or national emergencies. Other property types are also
     described in SFFAS Number 3. I

         Items of.inventory or supply that are merely acquired and held until used
      are likely to be handled by an inventory or”supply system that records them as
      assets without involving the managerial cost accounting system. However, the
      managerial cost accounting system supports the inventory system (or other
      property system) by accumulating costs from multiple sources for inventory
      and related property that has been acquired, is undergoing repair, or is in
    : production (work-in-process). Examples of costs that the managerial cost
      accounting system would accumulate include costs of production,
      transportation, and installation that must be added into acquisition costs;
      repair costs to be capitalized; and costs of direct labor, direct materials, and
      overhead for work-in-process. Costs may be assigned to jobs, processes,

Chapter, Ill -   Fundional   Requirements

                               activities, or other cost objects based on the costing methodology used by the
                               agency. The managerial cost accounting system should provide accumulated
                              ‘costs, including applicable indirect costs, ‘to the appropriate system for
                               recording as the appropriate asset or expense type. In addition, the
                               managerial cost accounting system needs. to,provide cost data to systems that
                               need it to calculate revenue amounts for :goods and services being produced.
                                                                        I.    ,].   ,,
                                  Property. Plant.,                                  Property, plant, and
                               equipment (PP&E) is classified by SFFAS Number 6 as general PP&E, federal
                               mission PP&E, heritage assets, and stewardship land. General PP&E is
                               defined as ,property, plant, and equipment used and consumed in providing
                               goods or services. The cost ‘of general PP&E items are carried as an asset on
                               the agency’s books, The other three categories are treated differently, as
                               stewardship resources, as described
                                                                 :’ in the next section and in SFFAS Number 8.
                                 The managerial cost accounting system should accumulate and determine
                              the full cost of general PP&E under construction. Costs for the current period
                              and in total should be maintained for each construction project and item of
                              property, When a project is completed, construction in progress is transferred
                              to the appropriate asset account. This information should be passed to the
                              core financial system and property management system(s) for asset valuation
                              purposes;                     ”

                                 The appropriate property management system should calculate
                               depreciation expense for.cap,italized items. Depreciation is used to spread out
                              .the acquisition cost of a capital item’ as expenses over the item’s useful life.
                               The managerial cost accounting system should capture and handle these
                               depreciation expenses in much the’same way it captures expenses associated
                              with labor, materials, and other items.

                                 Steward&@&source       C&X&&QIB; Stewardship resources involve
                              substantial investment’by the federal government for the benefit of the nation.
                              When made, these investments are treated as expenses in the financial
                              statements. Stewardship ‘resources as described in SFFAS Number 8 consist of
                              stewardship PP&E and ste+ardship u-rvestments. Depending on the nature of
                              the resources, stewardship reporting’can include financial and non-financial
                              data. The managerial cost accounting system would assist in the reporting of
                              financial data related to stewardship resources.’

                                 Stewardship PP&E consist of the follotiing    subtypes:
                                    l   National Defense. Property, plant, and equipment acquired to meet
                                        the unique Federal government defense mission.
                                    l   Heritage Assets. Property, plant, and equipment held for the nation’s
                                        general welfare possessing one of the following characteristics: (1)
                                        historical or natural significance, (2) cultural, educational or artistic
                                        value, or (3) significant architectural characteristics.

                                             Chapter   lll-   Functional   Requirements

          l     Stewardship Land. Land owned by the Federal government not
                associated with general PP&E, e.g., land used as forests and parks and
                land used for wildlife and grazing.
        To comply with SFFAS Number 8, the managerial cost accounting system
     must ‘capture and classify costs,of,.ac,quiring, constructing, improving,
     reconstructing, or renovating heritage assets, the costs of acquiring national
     defense PP&E, and, the costs of acquiring stewardship land and preparing it
     for its intended use. It also must support the proper accounting for multi-use
     heritage assets, such as a,building that both provides reminders of our
     heritage and is used for day-to-clay government operations unrelated to the
,i   assets themselves.          / ’       I”

        Stewardship investments are items treated as expenses in calculating net
     cost but merit special treatment to highlight their substantial investment and
     long-term-benefit  nature. They include investment in human capital,
     research and development, and non-federal physical property. These items
     generally have no other controlling system such as the inventory system or the
     property system discussed above. Therefore, these costs must be accumulated
     and maintained in the managerial cost accounting system on an annual basis
     for stewardship reporting for a period of five years.

     Cost Monitoring
        The cost monitoring function supports management’s review of the costs of
     operations and allows management to hold individuals accountable for their
     performance. Financial reporting illustrates the performance of an agency in
     terms of the costs of programs and outputs to the taxpayer. In performance
     reporting, unit cost reports assist management in identifying areas that may
     need to be reengineered for more efficient and effective operation. In
     addition, there are times when management may wish to perform special cost
     analyses, such as determining the incremental cost of adding a program.

        The managerial cost accounting system should be able to provide cost data
     needed to produce the Statement of Net Cost for the agency’s financial
     statements. Optionally, it should also maintain the exchange revenue data
     needed to produce the Statement of Net Cost. Based on the conference report
     accompanying the Government Performance and Results Act, whenever
     possible, agencies should include performance indicators that correlate the
     level of program activity with program costs such as costs per unit of result,
     costs per unit of service, or costs per unit of output. The managerial cost
     accounting system should be capable of supporting cost management by
     performing such tasks as the following:
          l   Accumulate costs in agency defined cost centers that are associated with
              agency defined performance measures.
          l   Accumulate numerically valued agency defined output information.

          l   Calculate the unit cost of outputs.
          l   Produce unit cost reports by output.
          l   ‘Produce project, job order, and work order reports showing costs from
              inception ‘to date.
          l    Produce contract reports showing revenue and costs.
        Special cost analysis mcludes such things as trend analysis; what-if analysis
     including the ability for ,the cost analyst to tag information in different ways,
     such as fixed and variable; and multi-dimensional analysis, such as program
     by organization by object class/cost element.



                                Chief Financial Officers    Among the many.requirements of the CFO Act,
      ;.,        ,‘.           Act of 1999 (CFO Act)        it supports, intepation and modernization of
          ;2                       .:.,         *. ,I,      the government’si financial systems and
         a.* .’                    ,.        ::      >’/’   provides for development of, and reporting of,
        : ;.            .-       ._/ ., i,,‘.           5   cost information.
                  ‘>’       1 ; ,(.,I ,,
       ;                        .’          : *_’ i./
         ;,’., I           ‘:I ;Government Performance      The GPRA requires agencies to develop
” ,,., 3:..                     and Results Act (GPRA) of   strategic plans and performance goals, and to
                             .:1gg3            :: -’        measure and report on performance compared
     8                                  ‘. , .,,
                                                            to goals by 1999. Unit costs and other types of
                                                            cost information are indicators of performance.
                                                            Managerial cost systems will be needed to
                                                            enable comparisons ofactual costs with cost
                                                            goals and to compare costs with outputs and

                            Government     ’                The GMRA expanded the financial statement
                            Management Reform Act           reporting requirements of the CFO Act. It
                            (GMRA) of 1994                  requires agencywide financial statements for
                                         2                  each CFO Act agency as well as audited
                                                            financial statements for the entire U.S.

                            Clinger-Cohen Act of            This Act requires agencies to establish a
                             1996, formerly knoivn as       planning’process for capital investments in
                            the’Information’-    ’          information technology, encourages interagency
               t.           Technology Management           and governmentwide acquisitions of systems
                            Reform (ITMRA) Act              and, when advantageous, the use of commercial
                                                            off the shelf software. It also authorizes Chief
                                                            Information Officers at the agencies and stresses
                                                            integrated information systems.

:                        Federal Financial          FFMIA mandates.that agencies implement and
                         Management                 maintain financialzmanagement systems that
        I,            ’ zImprovement Act            comply substantially with federal financial
    0                    (FFMIA) of 1996            management system requirements and
                                                    applicable federal accounting standards, and
                                                    fully implement the U.S. Government Standard
                                                    General Ledger at the transaction level. It
                                                   ,directs auditors ,performing financial statement
                                                    audits to rep,ort on agency compliance.
                                                   Agencies not in compliance are required to
                                                    develop a remediation plan in consultation with

                       Federal Managers’             FMFIA requires agency heads to establish
                       Financial Integrity Act       systems and controls that provide reasonable
                       (FMFIA) of 1982               assurance that (i) obligations and costs comply
                                                    with applicable laws; (ii) funds, property, and
                                                     other assets-are safeguarded against waste, loss,
             ;                                     : unauthorized use; or misappropriation;    and (iii)
                                                     revenues and expenditures are properly
                                                     recorded and accounted for.

                       JFMIP Framework for         The document describes the framework for
                       Federal Financial           establishing and maintaining federal financial
                       Management Systems          management systems, and explains what is
                                                   meant by a single, integrated agency financial
                                                   management system. A managerial cost
                                                   accounting system 1s an essential part of the
                                                   integrated management system.

                                                                        Appendix    A


OMB. Bulletin No.              The bulletin provides specific guidance for the
97-O 1, “Form and.             preparation of financial statements, including
Cement of Agency               minimum disclosure requirements. The
Financial,Statements”          Statement of Net Costs, for example, is a
(updated periodically)         required basic statement whose completion is
                               facilitated by a managerial cost accounting
             :                 system.

OIvIB Circular A- 11,          The circular establishes the policies and
“Preparation and               procedures for preparation and submission of
Submission of Budget           agency budget estimates to the Office of
Estimates”. (updated           Management and Budget. This circular also
annually)                      describes object classifications that are used to
                               report obligations for past year/budget year for
                               each account according to the nature of the
                               services or articles procured. If the cost element
                               classifications used by the managerial cost
                               accounting system are similar to or the same as
                               the object classes used in the budget processes,
                               comparisons of cost data and budget data will be

OMB Circular A-25,             The circular establishes guidelines for federal
“User Charges”                 agencies to determine fees assessed for
                               government services and prices for the sale or
                               use of government property or resources. Full
                               cost is one of the bases for these determinations.
                               Managerial cost accounting systems can provide
                               this data and determine the extent to which full
                               costs are being recovered through fees and


                                  Ol’vIB Circular A-34,         The circular sets forth the requirement for
.‘,                               “Instructions on Budget       apportionments and reports on budget
            _. I                  Execution” (updated           execution. It also addresses applied costs for
           ~ ,. .    /,        a, periodically)                 business-type activities.
                . .:                 ‘.                      :’               .’
       :                                        ,(
      1                   ‘.

                                  OMB Circular A-76,          The circular establishes federal policy regarding
                                  “Performance of             the operation of commercial activities. The
                                  Commercial Activities”      supplemental handbook sets forth procedures
                                 ‘and Revised                 for determining ivhether commercial activities
                                  Supplemental                should be performed in-house using
                                  Handbook                    government facilities and personnel or under
                                                              contract.with commercial sources. These
                                                              procedures require reliable cost information,
                                                              which can be provided by managerial cost
                                                              accounting systems.

                                 OMB Circular A-123,          The circular provides guidance to federal
                                 “Management                  managers on improving the accountability and
                                 Accountabilitv and           effectiveness of federal programs and
                                 Control”      ,’             operations by establishing, assessing, correcting,
                                                              and reporting on management controls.
                                                              Managerial cost accounting systems generate
                                                              cost information and related reports necessary
                                                              for cost control.

                                 OMB Circular A- 12’7,        The circular prescribes policies and standards
                                 “Financial Management        for executive departments and agencies to
                                 Systems”                     follow in developing, operating, evaluating, and
                                                              reporting on financial management systems.
                                                              These requirements must be satisfied in setting
                                                              requirements for managerial cost accounting

                                                                           Appqmdix A

.,‘,’         Requmawnt

        GMB Circular A- 130,         The circular estabhshes policies and procedures
        “Management of               to be followed by executive departments and
        Federal Information          agencies in managing information, information
        Resources”                   systems, and information technology. These
                                     policies and procedures affect the development
                                     and implementation of new cost systems.
                                     Managerial cost systems can provide data useful
                                     to agencies in making benefit-cost analysis of
                                     proposals to use new systems and technology to
                                     improve operational efficiency.

        Standard General             The SGL, published as a supplement to the
        Ledger (SGL)/Treasury        Treasury Financial Manual, provides a uniform
        Financial Manual             chart of accounts to standardize federal agency
        Bulletin No. S2-93-O 1,      accounting and to support the preparation of
        “U.S. Government             standard external reports. Bulletin No.
        Standard General             S2-93-01 informed federal agencies of changes
        Ledger” (updated             to the U.S. Government Standard General
        periodically)                Ledger (SGL). Managerial cost accounting
                                     systems will need to use the SGL and will need
                                     additional SGL accounts to support new cost
                                     related reports.

        Statement of Federal         The statement sets forth one broad accounting
        Financial Accounting         concept and five broad accounting standards for
        Standards (SFFAS) No.        managerial cost accounting, which should be
        4, “Managerial Cost          incorporated in the design of managerial cost
        Accounting Concepts          accounting systems.
        and Standards for the
        Federal Government”

AppemLdix A


                        Other Statements of      Each of the other seven SFFAS also impact the
                        Federal Financial        requirements for the managerial cost
                        Accounting Standards     accounting system. Also see FASAB’s
                                                 Implementation Guide to SFFAS No. 7.

       :           ,.

                        Treasury Financial       Chanter 4100 describes the Denartment of the
                        Manual, Chapter          Treku-y’s requirements for federal agency
                        4 100, “Federal          financial reports to Treasury. Information in
                        Agencies’ Financial      some statements submitted to the Treasury may
                        Reports” (updated as     be obtained from the managerial cost
                        needed)                  accounting system.


O&e of Management and Budget
Norwood (Woody) Jackson (Co-chair                               of Project Team)
Robyn Seaton

General Accounting O&e
Jeff&y Steinhoff (Co-chair                     of Project Team)
Philip Calder
Larry Modlin
Janett Smith

James Campbell             ______-__-_____--___-------------------------------------                   -Department    of Energy

Ron Dobranski            ------------------------------------------------~ep~~entofVeterans                               Affairs

Bill Cooke ________________________________________-----------
                                            Env~o~ental      pl-ote&on Agency

Pat Smith --------------------------------------------------------------~epar~ent                                OfAgricul~e

Advimy/Review Group

Irwin Ted David -----------------------------------------------------~ep~~entofAgriculhue

Joseph      Donlon---------------------------------------------------------------------~rantThornton

R. Schuyler Lesher -------------------------------------------------Depar~ent                                   of he Interior

Jim Reid ______--____________-------------------------------------------------
                                                                        Department of Energy

Doug Webster ________________________________________----------------------------
                                                           iprice Waterhouse

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