Dissecting page two of the SF 1408, we begin with Generally Accepted Accounting Principles (GAAP). Most importantly, this means a General Ledger based on accrual basis – not cash basis – accounting. What’s the difference? The organization buys a $120,000 computer server, expected to last five years with a residual value of zero dollars (because five-year-old technology will have no market value). With cash basis accounting, the entire cash outlay is expensed when made. With accrual basis accounting, the computer server is recorded as a long-term (fixed/capital) asset, when cash is reduced. In our example, using straight-line (evenly expensed) depreciation, the $120,000 is expensed over time, while reducing the value of the asset. $120,000 divided by five years equals $24,000 per year; depreciation expense of $2,000 is recorded before each month-end closing of the General Ledger. GAAP requires implementation of several other tasks, disclosures, and internal controls to yield a fair representation of the financial picture.

The list under number two of the SF 1408 seeks a fair representation of costs on jobs funded by the U.S. Government. Direct costs belong in the Cost of Goods and Services Sold. These related to costs paid by the company for deliverable products and labor. Indirect costs are not significant components of deliverables, and are captured in accounts outside of the Cost of Goods and Services Sold. Next, the direct costs are recorded, and viewable, separately for each sales contract. Job cost accounting, sometimes called project accounting, facilitates customer invoicing; all direct costs on the invoice mirror the Cost of Goods and Services Sold for that job. One contract (or subcontract) number might require more than one job, especially if a modification (or change order) adds a follow-on phase or separate Scope of Work. Preproduction costs require a separate job. Each sales contract has at least one job; one job might be only part of one contract, especially if requiring separate invoices. As number four of the SF 1408 implies, recording costs by contract (or job) forms a helpful basis for estimating future jobs.

The “logical and consistent” allocation of indirect costs imposes the GAAP requirement that each indirect pool be allocated on a causal or beneficial basis. Distributing the employer-paid premiums for Workers’ Compensation via Direct Labor, because labor caused the need for Workers’ Compensation, makes sense. Distributing Workers’ Compensation via Subcontract dollars defies logic. If the indirect Shipping account includes postage and messenger-delivery services, all such expenses are recorded in the indirect Shipping account, regardless of applicable job. Indirect pools may be allocated to lower-tier indirect pools. The focus targets existence of a causal/beneficial relationship between each pool and the base for distribution plus the consistency of allocations – not on the complexity of structure (how many pools).

The General Ledger captures all costs; every amount on each customer invoice is easily traceable to the General Ledger. The frequently updated General Ledger (plus any outside calculations, such as reports from “add on” software or spreadsheets) forms the basis for customer invoices.