The Chief Financial Officers Act (CFO Act), the Government Management Reform Act (GMRA), the Federal Financial Management Improvement Act (FFMIA), and the Government Performance and Results Act (GPRA) - when combined - require Federal government agencies to adopt cost accounting and performance measurement as part of the budget and operational management process of all Federal government agencies. The Federal government has embraced cost accounting on an accrual basis both in law and by regulation.

It is helpful to take a look at the new Federal government cost accounting requirements to understand the long-term impact and application of these requirements on future activities.

What is Cost Accounting?
We may define cost accounting as the process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to internal and external users. In a Federal government environment, cost accounting turns data into information, knowledge and wisdom about an organization's operations that is useful for:

• measuring performance
• reducing or managing costs
• determining the amount of reimbursement on interagency agreements
• deciding the fees or prices to charge for goods and services sold under a revolving fund or working capital fund
• deciding to authorize, modify, or discontinue a program or activity
• deciding to outsource work either under an Office of Management and Budget (OMB) Circular A-76 requirement or as a management initiative.

SFFAS No. 4, "Managerial Cost Accounting Concepts and Standards for the Federal Government," established five cost accounting standards that provide specific guidance for all Federal agencies. These standards require Federal agencies to:

• accumulate and report on a regular basis the cost of significant activities
• establish responsibility segments to match costs with outputs and outcomes
• determine the full cost of Federal government goods and services
• recognize the full cost of goods and services provided and received among Federal agencies, also known as inter-entity costs
• use appropriate costing methods to accumulate and assign costs to outputs

Accumulate and Report Costs on a Regular Basis
SFFAS No. 4 requires that accounting and program offices establish a process to accumulate and report the costs of operations on a continuous and consistent basis to provide useful and relevant management information. Federal agencies may use either a cost accounting system or cost finding techniques to obtain the cost information. The Federal agency must adopt appropriate procedures and practices to collect, measure, accumulate, analyze, interpret and communicate the cost information.

Establish Responsibility Segments
SFFAS No. 4 requires each entity to establish responsibility segments. A responsibility segment is a component of an organization responsible for carrying out a mission, conducting a major activity or producing one or a group of related products or services.

The management of each responsibility segment must define the outputs and outcomes, identify a process to measures these outputs and outcomes, and establish a cost accounting process to quantify and accumulate the costs and units of resources consumed in producing the outputs and outcomes. Management may then assign costs to output and outcomes to compute unit costs. The goal is to measure the cost per unit of output or outcome over time to provide useful information to management.

1. The resources consumed by the responsibility segment that directly and indirectly contributes to the output or outcome.

2. The cost of identifiable supporting services provided by other responsibility segments within the reporting entity and by other reporting entities.

Costs provided by other responsibility segments may include items such as post employment retirement and other benefits and unemployment compensation paid by another responsibility segment.

Recognize Inter-Entity Costs
SFFAS No. 4 requires the Federal reporting entity to recognize the full cost of goods or services received by another responsibility segment … whether they are charged the full cost or not. This concept is different from what one would find in the private sector. The entity providing the goods or services to another Federal entity has the responsibility to provide that entity with information on the full cost of the goods or services - whether charged or not.

However, the recognition of inter-entity costs that are not fully reimbursed is limited to material items that are significant to the receiving entity, form an integral or necessary part of the receiving entities output or outcome, and can be identified and matched with reasonable precision.

Using Appropriate Costing Methodology
SFFAS No. 4 allows each responsibility segment to use the costing methodology that is most appropriate for the situation. While the standard does not mandate a specific cost accounting system or cost methodology, it does identify the preferred cost assignment approaches in order of preference as:

1. directly tracing costs
2. assigning costs on a cause-and-effect basis
3. allocating costs on a reasonable and consistent basis