Cost accounting is the practice of anticipating for the costs associated to running a business or producing a product.Â Since many costs can be flexible, it is not an exact science but when dealing with large volumes, the price distortions were generally not very big.
Since cost accounting relates directly to a business and its managers, the practice varies greatly from company to company and even from department to department within the same company. Unlike general accounting, the figures in cost accounting do not generally need to be compared to those of other companies and as such, there is no reason why a uniform method needs to be used. Cost accounting is not governed by general rules and principles such as the Generally Accepted Accounting Principles (GAAP). Though generally businesses will chose one of a number of general methods such as standardized, activity-based, lean, etc.
However, in the case of a company who is contracting to the Government, cost accounting standards (CAS) were put into place due to the difficulty the previous lack of standards posed for conducting general internal audits of defense contractors. These standards also assured agreement and integrity in understanding and applying cost to Government contracts.
Though the General Accounting Office (GAO) was asked by congress to study the possibility of instating such standards in 1968, the cost accounting standards (CAS) were not implemented until 1980.
A Government contractor will probably need to submit a disclosure statement, which is “a written description of a contractor’s cost accounting practices and procedures.” [48 CFR 9903.202-1(a)] Though what needs to be included in this disclosure statement depends on a few factors, including the value of the contract. The disclosure statement must be complete and compliant. That is to say, it must not only properly explain the contractor’s cost accounting practices, but these practices must also be compliant to the cost accounting standards (CAS). The disclosure statement will be reviewed by the contract auditor.
In the Department of Defense (DOD), the cost accounting standards (CAS) are audited by the Defense Contract Audit Agency (DCAA).
It is important for a business who will be dealing with these agencies in a contractor capacity to be familiar with the cost accounting standards (CAS). In the case where you, as a contractor, are not compliant to these standards, a revised disclosure statement will need to be provided outlining the changes that will be made as well as the impact those changes will make on the contract costs within sixty (60) days from the time the disclosure statement was found to be non-compliant.
Though it may seem like a headache to comply to these standards when your business may already have its own cost accounting practices that differ from the cost accounting standards, it is easiest to become familiar with these standards so to facilitate the procurement of a federal contract. You can also feel good to know that the costs in your business’ bid will be judged in a manner that is uniformed with other bidders.