Cost Allocation in Government Contracts

Abstract

The main cost accounting task involves indirect cost allocation to cost items. For allocating these common or overhead, or indirect costs, the basis chosen is cost drivers. Choosing cost drivers proves crucial to the formulation of costing methodology. To enhance allocation credibility and accuracy, the most relevant drivers of cost should be chosen, with two or more of these applied. Hence, the decision regarding the kind and number of cost drivers that must be utilized is crucial. Cost drivers must be optimal in number since skewed outcomes result if too many cost drivers are employed.

Introduction

It is a complicated task to carry out business transactions with the US Federal Government; however, at the same time, it may be intensely fulfilling. Competitive neutrality aims at achieving efficient resource allocation between private and public enterprises. It calls for governmental businesses to establish rates that cover expenses, at the very least (which includes return on invested capital and every applicable tax and charge), termed by the CPA (Competition Principles Agreement) as full cost attribution. When it comes to independent enterprises like GTEs (Government Trading Enterprises) that function within competitive markets, managers cost allocation grounds will probably not be an important matter for complaints divisions (Commonwealth Competitive Neutrality Complaints Office, 1998). Rather, independent enterprises cover total costs if they earn commercial rates of medium-term return on assets.

If complaints divisions or other entities that implement competitive neutrality have to compare an enterprises earnings with costs, various challenges surface. Ascertaining the cost of resources utilized by an agencys business division isnt easy in all cases. For example, what portion of the corporate services of an agency is attributable to its commercial division? Various techniques exist to measure enterprises costs, with considerably variable outcomes (Commonwealth Competitive Neutrality Complaints Office, 1998). Thus, for each technique, the judgments or decisions to be made and data requirements vary. The CPA allows individual jurisdictions to exercise competitive neutrality based on their respective agendas.

This paper revolves around pricing and cost allocation, in line with responsibilities established for complaints divisions under the CPA (i.e., ascertaining whether a governmental enterprise has been underpricing its services and products). But the above obligation doesnt entail taking into account more general resource allocation problems that stem within the context of competitive neutrality. To evaluate how to gauge whether or not a GTE having statutory monopoly within certain markets has been adhering to competitive neutrality principles, for example, this study doesnt raise the question of whether the monopoly is justifiable. More generally, it simply accepts the existing governmental role of providing non-commercial and commercial services, failing to gauge whether it is rational for a government to participate in its...

Nevertheless, such general aspects are certainly of significance from the point of view of efficiency. Indeed, some are dealt with under other competition policy areas. Hence, this papers findings concerning government-provided commercial service costing and pricing ought to be overtly recognized as being linked to a single facet of improving how governments carry out business activities, instead of being viewed as the blueprint of effective service provision to the masses.

Literature Review

Decision-making is typically done by adopting linear models to avoid complexity. In cost accounting, indirect labor cost is usually allocated to the cost object (i.e., services or products) based on direct labor hours. Conventional cost allotment techniques assume a linear linkage between the cost allocation basis and costs, which proves challenging when allocating overheads where multiple product lines exist, each demanding a different quantity of resources (Chiang, 2013).

Chiangs (2013) model relates indirect labor cost to direct labor hours using diverse ways that...

…G&A rates are higher when compared with the overall cost input technique.

Single cost element: Although uncommon, it encompasses all expenses linked to any given element (for instance, every direct labor cost).

Fringe Pool. These costs aim to attract and retain personnel and encompass employer taxes, 401(k) plans, health insurance, compensated leave, bonuses, etc. (Chiang, 2013). Costs are generally allocated over overall labor dollars, considering indirect and direct labor, internal R&D personnel, and proposal and bid labor.

Facilities Pool. This represents an intermediate pool that keeps track of expenses such as utilities, rent, maintenance costs, depreciation, etc., allocating them overheadcount or square footage for their allocation into eventual indirect pools.

The DCAA and CAS positions form the appropriate G&A allocation base, which ideally represents overall business activity. Keeping everything equal, the Total Cost Input base forms the favored allocation base (Chiang, 2013; Holland & Hobson, 1999) and maybe defined as total costs minus G&A costs or, in other words, fringe costs, direct costs, overhead costs, and unallowable direct costs. The chosen allocation base should be applied consistently in case of all contracts.

Conclusion

According to the CPA, prices for services and products that are supplied by major governmental enterprises ought to echo full cost attribution. But it does not provide any additional guidance on cost attribution. Full cost isnt any precise word. For independent governmental enterprises, full enterprise costs are clear-cut. Under the FDC (fully distributed cost) technique, overall enterprise costs are allotted on all non-commercial and commercial outputs. Further, direct costs will be allocated to individual outputs, whereas joint and indirect expenses are averaged over all outputs. Therefore, cost bases for individual outputs cover a share of direct capital costs as well as those indirectly utilized in output production. The latter might, for example, cover a share of capital costs of corporate service functions of…