6.2 Cost Accounting Steps
The cost accounting involves the following steps to assign costs to specific services or mission centers:
- Identification of mission centers
- Identification of activity and output units
- Identification of expenditure categories
- Identification of allocation factors
- Linking cost to mission centers
In the following, we are going to describe each of those steps in detail.
Identification of Mission Centers: This first step involves categorizing the parts, i.e., mission centers, of the organization that provide direct services to the public. These mission centers represent separate services for which unit costs need to be developed. For example, a water department may have the mission centers “water distribution” and “water treatment.” Other examples would be “fire suppression” and “fire prevention” for a fire department or “garbage collection” and “garbage disposal” for a sanitation Department. By identifying these mission centers, organizations can better assess the cost of providing each service and appropriately allocate resources or set rates for users.
Identification of Activity and Output Units: This entails defining measurable units of service or output (e.g., miles of road maintained, number of public safety incidents handled) to calculate per-unit cost of services. Each mission center needs to have clearly defined, measurable units of activity or output to allow for accurate cost analysis. These units should directly reflect the service provided by the mission center. Identifying these measurable activity or output units allows organizations to allocate costs effectively and calculate the cost per unit of service provided. For example:
- In a nursing home, the output unit might be the number of resident days.
- For garbage collection, it could be the number of tons of waste collected or the number of pickups.
- In a water department, the unit might be the volume of water treated or distributed, measured in gallons or liters.
- For a police department, the unit could be the number of incidents responded to or cases handled.
Identification of Expenditure Categories: Costs are categorized into groups such as labor, materials, or overhead to facilitate better tracking and analysis. Usually, we differentiate between personnel and non-personnel expenditures. Personnel expenditures are usually composed of salaries and fringe benefits (e.g., health insurance, Social Security). Non-personnel expenditures include items such supplies, equipment, utilities, or facilities
Identification of Allocation Factors: Allocation factors are determined to fairly distribute indirect costs (like administrative expenses) across different mission centers based on relevant drivers, such as hours worked or resources used. Requirement of using allocation factors to link indirect cost to mission centers
| Indirect Cost | Allocation Factor |
|---|---|
| Facilities | Square footage |
| Overhead | Direct personnel or direct cost |
| Liability insurance | Direct personnel or output |
| Computer usage | Direct personnel or output |
| Printing services | Output |
Linking Costs to Mission Centers: In a fifth step, costs are linked to the mission centers based on direct and allocated expenses, providing a clear picture of how resources are consumed by each service or function. In the previous section, we differentiated between direct cost (i.e., expenses that are directly assigned to a specific mission center) and indirect costs (i.e., expenses that cannot be directly assigned to a specific mission center). There is also overhead which refers to costs associated with providing administrative services to all mission centers. This includes the salaries of management, as well as insurance, utilities, and facilities costs, particularly when usage cannot be directly linked to a specific mission center.