6 Cost Accounting and Analysis

Cost accounting refers to the classification of financial information from a budget or financial reports into cost categories based on the agency’s cost structure analysis regarding the relationship of resources spent and major services provided. The Oregon Accounting Manual 2010 of the Department of Administrative Services defines cost accounting as follows.

A method of accounting which provides for assembling and recording all elements of cost incurred to accomplish a purpose, to carry on an activity or operation, or to complete a unit of work or specific job.

Cost analysis is the use of cost data to analyze the determinants of costs and evaluate changes in agency operation. It is the basis for setting user fees for public services and is a decision tool for service contraction or expansion. This chapter covers aspects of cost accounting and analysis. There are slides as well as three YouTube videos associated with this chapter:

Note that the latter two videos are linked again in the respective sections below. We also cover break-even analysis using garbage collection as an example.

Before diving into the topics, let us define some terminology first:

  • Obligation: An obligation is the responsibility to meet the terms of a contract. For example, road salt purchases in June for delivery in October
  • Outlay: Outlays are the physical outflow of cash. For example, the payment for road salt in September.
  • Cost: Actual use and consumption of the resource. For example, road salt consumption in December and January as cost in two different calendar years

Usually, there are small dollar amount differences between obligations, outlays, and cost.