The Basics of Cost Accounting

Understanding cost accounting and managing government contract cost is imperative to meeting DCAA requirements. In simplest terms, cost accounting is a means of weighing expected profits against costs by utilizing the records of the past in order to predict those of the future.

Accounting in this form consists of the internal balancing of costs and profits, as well as assessing operational costs and budget analysis to cut a company's costs and improve profitability; the federal government simply wants to ensure that the companies it contracts with do so in an organized and approved manner.

In order to meet compliance, it is first necessary to understand the required federal government regulations defined by the DCAA Cost Accounting Standards and Federal Acquisition Regulations. These standards were developed to achieve consistency and uniformity in the measurement and allocation of costs to Government contracts.

A compliant Government accounting system must do the following:

  • Track and consistently allocate costs
  • Track employee labor by intermediate and final contract objectives
  • Consistently estimate, accumulate, and report costs
  • Properly segregate direct and indirect costs
  • Determine standard costs for direct material/labor
  • Account for unallowable costs
  • Account for cost of compensated personal absence
  • Account for insurance costs
  • Account for research and development/bid and proposal costs
  • Generate accurate and timely invoices

Proper cost accounting is a critical function that should be taken seriously, not only to achieve compliance with federal regulations but also to generate greater profits for your company. With sufficient accounting measures a company can generate the data and knowledge necessary to measure performance, reduce and manage costs, determine pricing for goods and services, and decide whether programs should be modified or discontinued. If maintaining profitability and achieving DCAA compliance are a major priority for your company, a true understanding of cost accounting is necessary.