Ch 1 - Defining Costs And Cost Analysis
Ch 1 - Defining Costs and Cost Analysis 1.0 - Chapter Introduction1.1 - Defining Contract Costs1.2 - Identifying Key Cost Analysis Considerations1.3 - Defining The Cost Estimating And Cost AccountingRelationship1.4 - Describing Cost Estimating Methods1.0 IntroductionThis chapter describes contract costs and cost analysis.1.1 Defining Contract CostsContract Costs. Contract costs are monetary measures of thecapital and labor required to complete a contract. Not allcontract costs result from cash expenditures during thecontract period. The following table presents the threemost common ways costs are incurred:Contract Cost SourceCash expenditure-theactual outlay or dollarsin exchange for goods orservices.Expense accrual-expensesare recorded foraccounting purposes whenthe obligation isincurred, regardless ofwhen cash is paid out forthe goods or services.Draw down of inventory-theuse of goods purchased andheld in stock forproduction and/or directsale to customers; refersto both the number ofunits and the dollaramount of items drawn out.ExampleThe payment by cash,check, or electronic fundstransfer to a vendor forraw materials.The incurring of anobligation in the currentyear to pay an employee aretirement pension at somepoint in the future.Electronic componentspurchased in large volumeagainst anticipated totaldemand and held ininventory until drawn outto fill a specific order.While the components werepaid for in the past, thedrawing out of a component
to meet a contract needresults in a cost beingcharged to the contract.The total cost of a contract is the sum of the directand indirect costs allocable to the contract, incurred orto be incurred, less any allocable credits, plus anyapplicable cost of money.A direct contract cost is any cost that can beidentified specifically with a final cost objective (e.g.,a particular contract). Costs identified specifically with a particularcontract are direct costs of the contract and arecharged to that contract.Costs must not be charged to a contract as directcosts if other costs incurred for the same purpose inlike circumstances have been charged as indirect coststo that contract or any other contract.All costs specifically identified with other contractsare direct costs for those contracts and shall not becharged to another contract directly or indirectly.For example: The cost of 5,000 pounds of sheet metal usedto fabricate covers for equipment built under a Governmentcontract, would be charged directly to that contract and noother contract.Indirect Cost (FAR 31.203). An indirect cost is any costNOT directly identified with a single final cost objective,but identified with two or more final cost objectives or anintermediate cost objective. After the contractor has charged all direct costs tocontracts (or other final cost objectives), indirectcosts are those remaining to be allocated to thevarious cost objectives.The distribution of indirect costs among variouscontracts should be based on the benefit accrued. Ifthe contract did not benefit, it should not share theindirect cost.Costs must not be charged to a contract as indirectcosts if other costs incurred for the same purpose inlike circumstances have been charged as direct coststo that contract or any other contract.
For example: A contractor is simultaneously working on twocontracts in the same rented building. The rent for thatbuilding should be allocated to those two contracts as anindirect cost. If one contract used 60 percent of thebuilding, it should be allocated about 60 percent of therent expense. Other contracts that do not benefit from theuse of the building should not be allocated any rentexpense for the building.Alternative Direct Cost Treatment (FAR 31.202(b)). Forreasons of practicality, any direct cost of minor dollaramount may be treated as an indirect cost if the accountingtreatment: Is consistently applied to all final cost objectives,andProduces substantially the same results as treatingthe cost as a direct cost.For example: The cost of inexpensive rivets used tofabricate equipment would be a direct cost. However, thecost of tracking each rivet to each unit of equipment couldbe more than the cost of the rivets themselves. It might bemore practical to treat the cost of these rivets as anindirect cost and allocate that cost to all items that usethose rivets. Remember this method may only be used if itis consistently applied to all cost objectives and producessubstantially the same results as treating the rivet costas a direct cost.Direct/Indirect Cost Decision (FAR 31.201, 31.202, and31.203). The decision to classify a cost as direct orindirect is not always a clear choice. There is no absolutelist of costs that must be treated as direct costs orindirect costs. Contractors have the right andresponsibility to define costs within their own accountingsystems. At the same time, the Government prescribesguidelines for use by contractors in making their decisionsand for use by you in reviewing the appropriateness oftheir decisions. Three sources of guidance are particularlyimportant. Cost Accounting Standards (CAS) are issued by the CostAccounting Standards Board (CASB). When thesestandards are applicable, they take priority overother forms of accounting guidance.
The Federal Acquisition Regulation (FAR) provides bothgeneral and specific guidelines on accounting forcosts.Generally Accepted Accounting Principles (GAAP) aregeneral rules used by all business entities. They arenon-regulatory guidance developed and used byCertified Public Accountants. However, they providethe general guidelines followed by all firms inaccounting system development.The role of Government representatives-be theyauditors, analysts, or contracting officers-is not so muchdirecting or approving the direct/indirect cost decision asit is reviewing the adequacy and acceptability ofcontractor's accounting systems for use in Governmentcontracting.1.2 Identifying Key Cost Analysis ConsiderationsDefinition of Cost Analysis (FAR 15.404-1(c)(1)).analysis is: CostThe:Review and evaluation of the separate costelements and profit/fee in an offeror's orcontractor's proposal (including cost or pricingdata or information other than cost or pricingdata), ando Application of judgment;Used to determine how well the proposed costsrepresent what the cost of the contract should be,assuming reasonable economy and efficiency.o Required Cost Analysis (FAR 15.404-1(a)(3)). You must usecost analysis to evaluate the reasonableness of costelements when cost or pricing data are required.Optional Cost Analysis (FAR 15.404-1(a)(4)). You may alsouse cost analysis to evaluate information other than costor pricing data to determine cost reasonableness or costrealism.Cost Reasonableness (FAR 31.201-3). A cost is reasonableif, in its nature and amount, it does not exceed the cost
which would be incurred by a prudent person in the conductof competitive business.Cost Realism (FAR 15.401). To be realistic, the costs inan offeror's proposal must be: Realistic for the work to be performed under thecontract;Reflect a clear understanding of contractrequirements; andConsistent with the various elements of the offeror'stechnical proposal.Cost Analysis Supports Price Analysis (FAR 15.4041(a)(3)). Perform price analysis even when you performcost analysis. Assuring the reasonableness of individualelements of cost does not always assure overall pricereasonableness.For example, suppose that you wanted to procure a custommade automobile identical to a Pontiac Trans Am. At yourrequest, your neighborhood mechanic agrees to build yousuch a car. In building the car, the mechanic getscompetitive quotes on all the necessary parts and tooling,pays laborers only the minimum wage, and asks only a verysmall profit.How do you think the final price will compare to a caroff an assembly line? Probably at least ten times moreexpensive. Parts alone may be five times more expensive.The entire cost of tooling will be charged to one car.Labor, although cheaper per hour, will likely not be asefficient as assembly-line labor. Is the price reasonable?That decision can only be made using a thorough priceanalysis.Cost Analysis Techniques and Procedures (FAR 15.4041(a)(3)). As appropriate, use the following techniques andprocedures to perform cost analysis: Verify cost or pricing data or information other thancost or pricing data.Evaluate cost elements, including:o The necessity for and reasonableness of proposedcosts, including allowances for contingencies;o Projections of the offeror's cost trends, on thebasis of current and historical cost or pricing
data or information other than cost or pricingdata;o A technical appraisal of the estimated labor,material, tooling, and facilities requirements,and scrap and spoilage factors; ando The application of audited or negotiated indirectcost rates, labor rates, cost of money factors,and other factors.Evaluate the effect of the offeror's current practiceson future costs.o Ensure that the effects of inefficient oruneconomical past practices are not projectedinto the future.o In pricing production of recently developedcomplex equipment, perform a trend analysis ofbasic labor and materials even in periods ofrelative price stability.Compare costs proposed by the offeror for individualcost elements with:o Actual costs previously incurred by the offeror;o Previous cost estimates from the offeror or fromother offerors for the same or similar items;o Other cost estimates received in response to theGovernment's request;o Independent Government cost estimates bytechnical personnel; ando Forecasts or planned expenditures.Verify that the offeror's cost submissions are inaccordance with the contract cost principles andprocedures in FAR Part 31 and any applicable CostAccounting Standards Board Cost Accounting Standards.Determine whether any cost or pricing data necessaryto make the contractor's proposal accurate, complete,and current have not been either submitted oridentified in writing by the contractor. If there aresuch data:o Attempt to obtain the data and negotiate usingthe data obtained, oro Make satisfactory allowance for the incompletedata.Analyze the results of any make-or-buy programreviews, in evaluating subcontract costs.1.3 Defining The Cost Estimating And Cost AccountingRelationship
Cost Estimating System (FAR 15.407-5, DFARS 215.407-570(a), 215.407-5-70(d), and 252.215-7002).A contractor's cost estimating system is the policies,procedures, and practices for generating cost estimates andother data included in cost proposals submitted tocustomers in the expectation of receiving contract awards.It includes the contractor's: Organizational structure;Established lines of authority, duties, andresponsibilities;Internal controls and managerial reviews;Flow of work, coordination, and communication; andEstimating methods, techniques, accumulation ofhistorical costs, and other analyses used to generatecost estimates.An acceptable estimating system should provide for theuse of appropriate source data, utilize sound estimatingtechniques and good judgment, maintain a consistentapproach, and adhere to established policies andprocedures.Audit Review of Cost Estimating System (FAR 15.407-5).When appropriate, the cognizant auditor will establish andmanage regular programs for reviewing selected contractors'estimating systems or methods, in order to: Reduce the scope of reviews to be performed onindividual proposals;Expedite the negotiation process; andIncrease the reliability of proposals.For each estimating system review, the auditor will: Document review results in a survey report.Send a copy of the survey report and a copy of theofficial notice of corrective action required to eachcontracting office and contract administration officehaving substantial business with that contractor.Consider significant deficiencies not corrected by thecontractor in subsequent proposal analyses andnegotiations.
Characteristics of an Acceptable Estimating System (DFARS215.407-5-70(d)). When evaluating the acceptability of acontractor's estimating system, consider whether it: Establishes clear responsibility for preparation,review and approval of cost estimates;Provides a written description of the organization andduties of the personnel responsible for preparing,reviewing, and approving cost estimates;Assures that relevant personnel have sufficienttraining, experience and guidance to performestimating tasks in accordance with the contractor'sestablished procedures;Identifies the sources of data and the estimatingmethods and rationale used in developing costestimates;Provides for appropriate supervision throughout theestimating process;Provides for consistent application of estimatingtechniques;Provides for detection and timely correction oferrors;Protects against cost duplication and omissions;Provides for the use of historical experience,including historical vendor pricing information, whereappropriate;Requires use of appropriate analytical methods;Integrates information available from other managementsystems, where appropriate;Requires management review including verification thatthe company's estimating policies, procedures andpractices comply with applicable regulations;Provides for internal review of and accountability forthe adequacy of the estimating system, including thecomparison of projected results to actual results andan analysis of any differences;Provides procedures to update cost estimates in atimely manner throughout the negotiation process; andAddresses responsibility for review and analysis ofthe reasonableness of subcontract prices.Indicators of Potentially Significant Estimating SystemDeficiencies (DFARS 215.407-5-70(d)). Be on the lookoutfor conditions that may produce or lead to significantestimating deficiencies. This includes:
Failure to ensure that historical experience isavailable to and utilized by cost estimators, whereappropriate;Continuing failure to analyze material costs orfailure to perform subcontractor cost reviews asrequired;Consistent absence of analytical support forsignificant proposed cost amounts;Excessive reliance on individual personal judgmentwhere historical experience or commonly utilizedstandards are available;Recurring significant defective pricing findingswithin the same cost element(s);Failure to integrate relevant parts of othermanagement systems (e.g., production control or costaccounting) with the estimating system so that theability to generate reliable cost estimates isimpaired; andFailure to provide established policies, procedures,and practices to persons responsible for preparing andsupporting estimates.Cost Accounting System (DCAM 9.302a). An effective costestimating system integrates applicable information from avariety of company management systems. The accountingsystem is not the only source of such information, but itis the primary source.A firm's accounting system consists of the methods andrecords established to identify, assemble, analyze,classify, record, and report the firm's transactions and tomaintain accountability for the related assets andliabilities. The accounting system should be well-designedto provide reliable accounting data and prevent mistakesthat would otherwise occur.An inadequate cost accounting system can provide datathat are not current, accurate, and complete data insupport of an offeror's proposal. The defective cost datacan create inaccurate estimates no matter how well theestimating uses the data provided.Characteristics of an Adequate Accounting System (DCAM9.302b). To provide the data required for cost estimatingpurposes, a firm's cost accounting system must containsufficient refinements to provide (where applicable) costsegregation for:
Preproduction work and special tooling;Prototypes, static test models, or mockups;Production by individual production centers,departments, or operations-as well as by components,lots, batches, runs or time periods;Engineering by major task;Each contract item to be separately priced;Scrap, rework, spoilage, excess material, and obsoleteitems resulting from engineering changes;Packaging and crating when substantial; andOther nonrecurring or other direct cost itemsrequiring separate treatment.Two Common Cost Accounting Systems. There are twocommonly-used systems for cost accounting, job-order andprocess. Either system can provide adequate results, whenit is properly maintained by the firm. However, systemdifferences will affect the presentation of availableinformation.Job-Order Cost System. Under a job-order cost system thefirm accounts for output by specifically identifiablephysical units. The costs for each job or contract normallyare accumulated under separate job orders. When a contract is for a limited number of units thatare neither very complex nor costly, the costs of allunits may be accumulated under one job order withoutany further breakdown.When the contract is for items that are both complexand costly, the total quantity may be broken down intosmaller production lots. The job order for the totalcontract may be supported by a separate job order foreach lot.o The use of lots permits the contractor toestablish better control over the work, and thehistorical cost data from a series of lots lendthemselves to a projection of estimated costs forfuture production.o Experience with the product normally determinesthe number of units for which costs are to beaccumulated.For example: A contract for 100 units of an item that hasnever been produced may have 10 separate lots under the joborder. Four years and thousands of units later, the costs
for a quantity of 100 units may be accumulated under thecontract job order without any further breakdown by lot. Because the physical units of production under a joborder cost system are identified with specific joborders and lots, the labor distribution andaccumulation system used by the contractor willidentify the direct factory labor cost associated withthe units produced under such job-orders and lots.Supporting data will identify:o All persons who worked on the items produced, howmuch time they expended, and their rates of pay.o Total labor cost with subtotals and breakdowns bytypes of labor.Process Cost Systems. Under a process cost system, directcosts are charged to a process even though end-items (whichmay not be identical) for more than one contract are beingrun through the process at the same time. At the end of theaccounting period, the costs incurred for that process areassigned to the units completed during the period and tothe incomplete units still in process. Process cost systems are typically used by firms thatcontinuously manufacture a particular end-item, likeautomobiles or chemicals which require identical orhighly similar production processes. A process is onepart of a complete set of activities that an item mustpass through during manufacture.o The completed item results from a series ofprocesses, each of which produces some changes inthe item.o The number of processes involved will vary withthe complexity of the item.o The greater the similarity between two end-items,the more likely they are to go through the sameprocess, during the same period of time, withfactory laborers devoting a part of their time toeach item.A number of different methods may be used to assigncosts to end items.o If all items being processed are identical, thecontractor may add the costs incurred during theaccounting period to the cost of the beginningwork-in-process inventory and subtract theestimated cost of the ending work-in-processinventory to arrive at the total costs of items
completed. Unit cost is determined by dividingthe total cost by the number of units completed.o If all items being processed are not identical,the contractor may use standard costs and, at theend of the accounting period, multiply thestandard cost for each item by the
Defining The Cost Estimating And Cost Accounting Relationship 1.4 - Describing Cost Estimating Methods. 1.0 Introduction. This chapter describes contract costs and cost analysis. 1.1 Defining Contract Costs. Contract Costs. Contract costs are monetary measures of the capital and labor required to complete a contract. Not all
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defining relative clauses are used to add important information. The sentence would have a different meaning without the defining relative clause. I’m going to wear the skirt that I bought in London. The defining relative clause tells us which skirt. The skirt, which is a lovely dark blue colour, only cost 10.
FISH & WILDLIFE COSTS 17TH ANNUAL REPORT TO THE NORTHWEST GOVERNORS PAGE 3 Figures 08 Figure 1: Costs by Major Area, FY2017, as Reported by Bonneville's Fish and Wildlife Division 09 Figure 2: Costs by Types of Species 10 Figure 3: Costs of FCRPS BiOp Projects 11 Figure 4: Costs Associated with ESA Listed Fish 12 Figure 5: Costs by Fund 13 Figure 6A: Costs by Category
Table 2 The Various Measures of Cost: Thirsty Thelma's Lemonade Stand Average Costs Average costs can be determined by dividing the firm's costs by the quantity of output it produces. The average cost is the cost of each typical unit of product. Average Costs Average Fixed Costs (AFC) Average Variable Costs (AVC)
comprise of core APC costs of 26.4 billion in 2015-16, mental health costs of 6.9 billion, community costs of 5.4 billion and ambulance costs of 1.7 billion. 15. Figure 2 shows the total costs reported in 2015-16, split by setting10. The largest single proportion of costs is non-elective inpatient care, which accounts for 25.9% of
2017 Affordable Rental Housing Program & Underwriting Guidelines Elderly: A person sixty-two (62) years of age or older. Eligible Costs - project costs that can be paid with CDD funds. Costs include, but are not limited to, costs or partial costs of acquisition, verifiable hard construction costs, reasonable soft costs,
2. Non-defining relative clauses DEFINING RELATIVE CLAUSES These describe the preceding noun in such a way to distinguish it from other nouns of the same class. A clause of this kind is essential to clear understanding of the noun. The boy who was playing is my brother. Defining Relative Pronouns SUBJECT OBJECT POSSESSIVE For people Who That Whom/Who That Whose For things Which That Which That Whose Of which Defining Relative Clauses: people
USING INQUIRY-BASED APPROACHES IN TRADITIONAL PRACTICAL ACTIVITIES Luca Szalay1, Zoltán Tóth2 1Eötvös LorándUniversity, Faculty of Science, Institute of Chemistry, Pázmány Pétersétány1/A, H-1117 Budapest, Hungary, luca@chem.elte.hu 2University of Debrecen, Faculty of Science and Technology, Department of Inorganic and Analytical Chemistry,, Egyetem tér1., H-4010 Debrecen, Hungary,
