DCAA COMPLIANT ACCOUNTING SYSTEMS
Management needs job cost accounting to contrast proposed/budgeted costs on each sales contract with actual incurred costs (AIC) on that one contract. To earn a Defense Contract Audit Agency (DCAA) approved Accounting System, the General Ledger segregates direct costs by job. With an approved GovCon DCAA Accounting System, the organization may attain GovCon-funded contracts that include cost reimbursements – as opposed to a bottom-line fixed price. Reimbursement may be for some costs (such as Travel, only) or for the entire contract (such as Cost Plus Fixed Fee). Before billing AIC, a consistently followed process for compliant recording of AIC is verified and approved.
Mahnke Consulting guides Job Cost Accounting to accumulate and separately record all the costs of the project or contract. Through pre-audit, we assist management in their implementation of compliant, accrual basis, Job Cost Accounting – which allows easy analysis of direct costs, allocation of indirect expenses, plus gross profit and net profit for each Job or contract. Clients benefit from our proven guidance and drafts in many areas of GovCon DCAA accounting.
Program Managers need accurate
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Cost controls are designed to segregate incompatible duties (even in very small businesses), verify General Ledger data with information from outside sources, intermittently analyze specific costs (by account or line item) for reasonableness (with follow-up of anomalies), and strengthen other internal controls. Management is responsible for protecting employees from unnecessary distrust; if one person has access to all components of a function, that person is the first suspect after fraud, theft, or other irregularities are discovered. Also, in an environment where GovCon funding (ultimately) pays for costs, the risk of non-compliance or even suspension/debarment outweighs the inconvenience of implementation. Controls affecting cost include:
- Written policies and procedures that are compliant with both laws and contract terms;
- Evidence of actual practices that mirror written policies and procedures;
- Travel, Business Meeting, and Reimbursement expense forms that facilitate compliance;
- At a minimum, separation between the requisitioner and the payment-approver of goods/services; and
- Adequately documented (complete and accurate) time tracking, for both direct and indirect labor hours.
Project Cost Analysis
Project Cost Analysis begins with a foundation of a well-designed Chart of Accounts (direct costs, each indirect pool, and unallowable costs each grouped), job numbers/names that are unique but comprehensive, and data-entry source documents that segregate costs into the correct account and job. These ingredients form the nature of job cost accounting. Project financial reports from the General Ledger provide information as originally recorded. The three well-designed foundations allow the following analysis:
- Contrast Direct Labor, Direct Material, and ODC for the same project from month to month – and drill down to the specific component causing a variance;
- Compare profitable or wasteful components, among projects, and center on the costs/practices to cultivate or reduce; and
- Improve the basis of spreading indirect costs to better match the causal/beneficial relationship between each pool and base.
Approved Accounting Systems
Job cost accounting formats the General Ledger to accumulate costs by project or contract. Alternatively, process costing excludes job cost accounting and may be substituted only for a continuous process with comingled output – such as pouring the same steel compound into the same mold, repeatedly. Standard costing tracks each component unit and AIC that vary from the standard cost of each (due to quantity variances and due to unit cost variances). Fund accounting segregates first by fund, then by job. One fund may have more than one job; however, if one contract spans more than one fund, a consistently applied method of combining contract cost information must correlate to the cost elements proposed and invoiced. Process costing uses a starting and a stopping point/date for AIC on each award (and customer invoice). Standard costing and fund accounting segregate all standard costs (using Bills of Material, etc.) or all jobs within all funds for each award (and customer invoice). The majority of organizations selling on contract to the federal government do not use process, standard, or fund accounting; cost is recorded for the company as a whole. Initially segregating recorded costs into jobs allows project cost analysis. The goal is not to determine net profit or loss for the organization, but for each job (or project or contract). GovCon DCAA accounting requires some reasonable way to differentiate costs by contract, recorded in the General Ledger. Building a budget for each job, by month, promotes comparison to AIC by month. Contractual milestones are planned and tracked during contract performance; likewise, costs to accomplish each milestone are budgeted and evaluated for variances. Project cost analysis determines the causes of variances.
Chart of Accounts
The Chart of Accounts for job cost accounting separates Cost of Goods and Services Sold as direct-charged accounts. Typically, these are Direct Labor, Direct Material, and Other Direct Costs (ODC). ODC accounts contain Subcontracts (which are purchases, not Direct Labor from employees) and Travel. After Cost of Goods and Services Sold the Expenses section follows. Expenses are organized by indirect rate. Generally, Labor Overhead pool accounts (for employer portion of payroll taxes, employer paid fringe benefits, etc.) top the Expenses. Facilities followed by General and Administrative (G&A) accounts might suffice. If the company proposes and invoices Material Overhead, the accounts comprising that pool follow Labor Overhead accounts; between Facilities and G&A, additional “pool” accounts can be added. Large organizations have many pools. Job cost accounting separately records all costs of the project, including AIC for indirect pools. Project cost analysis considers overheads and other indirect costs when calculating net profit or loss on a job or contract. Facility rent or mortgage principle represents cash money out the door; achievements on the project required an allocable share of that cost. Source documents (timesheets, Purchase Orders, etc.) with the correct job, as well as account number or name (from the Chart of Accounts), foster a DCAA-approved Accounting System.