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Appendix B
Techniques for Allocating and Identifying Costs

1. Introduction

(a) This appendix describes some techniques for deferring or redistributing expenditures to achieve more accurate cost identification. It should be emphasized that considerations of parliamentary control limit a department's freedom to redistribute costs among votes, and when funds are provided for a purpose in a vote, such costs cannot be reallocated to other votes except on a memorandum basis.

(b) Within a vote, departments can achieve more accurate costing by using suspense and contra accounts or memorandum allocation systems to pick up costs chargeable to other votes or fiscal years. These two alternatives are discussed first, and then techniques of standing percentage cost allocations and standard costing are described.

2. Suspense and Contra Accounts

(a) Through the use of these accounts actual costs can be recorded in the accounting system at the normal time of cheque issue, and a redistribution of these costs in a more meaningful way can be achieved through supplementary accounting entries. The difference between suspense and contra accounts is illustrated as follows:

(b) The main advantages of these alternatives are that the accounting office has full control over the amounts charged to the expense accounts, which are reported to a manager as his costs; the allocation of costs is fully integrated with the principal accounting and reporting system; and the cash basis of accounting is not significantly disrupted.

(c) A further advantage of using contra accounts is that the gross amounts of the transactions entered into the contra accounts remain intact for subsequent reference or serve as control accounts for subsidiary ledgers.

(d) The use of a suspense account emphasizes variances, as any amount that remains in a suspense account represents the difference between the actual costs and the computed cost allocation. If this difference is significant, there may be a major error in either the actual costs or the computed cost allocation. If the amount is not significant, the balance in the suspense account may be carried forward and eventually be disposed of at the end of the fiscal year.

(e) The operation of suspense and contra accounts does not alter the total costs charged to responsibility centres, because the costs allocated are the same as the actual expenditures made. It is normally desirable to record the suspense and contra accounts on a separate report, used only by the accounting office, so as not to involve line management in accounting details with which they need not be concerned.

(f) The examples that follow show the variety of uses to which suspense and contra accounts can be put in allocating costs.

2.1 Stores and materiel

A central stores responsibility centre is charged initially with the costs of materiel purchased. Other responsibility centres are charged with the cost of materiel when it is issued to them, and the stores responsibility centre is credited In this case, the net amount in the materiel account, which in effect has become a suspense account of the responsibility centre, will represent the value of stock levels, and each responsibility centre will be charged only with the cost of materiel consumed.

2.2 Personnel costs

A suspense account in the accounting office is charged with the cost of payrolls; the account is credited when responsibility centres are charged with a computed allocation of personnel costs. The salary rates used in the cost allocation could be based on standards, averages, or estimates. The allocation could be based on time, production, or any other acceptable basis. The practice could be adopted for the department as a whole, for a group of responsibility centres, or for any individual responsibility centre that wanted to allocate pay costs.

2.3 Common services

The responsibility centre providing the service is charged with the actual costs of operating the service; other responsibility centres are charged with the computed value of services provided, and the centre providing the service is credited with the same amounts. In this instance, using a contra account would be more appropriate than using a suspense account, because both the gross costs and the allocated costs are significant information on the management reports of the service organization.

2.4 Objects of expenditure

A suspense account is charged for actual amounts paid with respect to an object of expenditure that is paid irregularly, whereas responsibility centres are charged and the suspense account is credited with a regular monthly cost allocation. This application can be used to allocate evenly costs that may be subject to uneven and uncertain periodic payments.

3. Memorandum Cost Allocation

(a) Memorandum cost allocation enables an organization to achieve full costing by including in reports such items as accommodation costs, depreciation of equipment or buildings, and common service costs financed by other votes or departments. Memorandum entries are not input to the principal system for accounting for appropriations and allotments but are supplied for entry on the internal management reports or for analytical procedures, as required.

(b) The following situations may be appropriate for the use of memorandum allocations:

4. Standing Percentage Cost Allocation

(a) This is a useful technique, particularly when precise allocation of costs for activities, projects, and objects is not feasible. Selected costs are identified manually or by computer as they are processed by the accounting system and are automatically allocated on the basis of predetermined percentages. When this takes place there must be established procedures for ensuring that the standing percentages are realistic and have received management approval at the time of implementation, and that the reliability of the percentages is tested at least annually. Care should be taken to allocate in this way only those costs which cannot be specifically identified.

(b) In coding economic objects whose amounts are not significant and for which analysis by detailed economic object is impractical, expenditures can be charged to one line object and reallocated by a predetermined percentage to detailed economic objects. Food purchased for cafeterias is an example of an object that may be appropriate for allocating costs on the basis of percentages to the many component economic objects.

5. Standard Costing

(a) The basic idea behind standard costing is that the accounting system will measure costs on the basis of predetermined standards and on actual costs incurred. By measuring what should be, as well as what is, more useful information is provided to management. Standard costing is particularly useful for measuring high-volume, repetitive operations in a labour-intensive organization where a significant proportion of the costs are controllable. However, the principles can frequently be applied simply, effectively, and with significant benefits in other organizations.

(b) Standard costs should be computed by building up what the cost should be, based on a study of the individual operations, materiel components, and overhead costs. Standard costs should be realistically established so that deviations from the standard have significance; they should not be based on optimum performance under unrealistic working conditions.

(c) If certain costs of goods and services are of particular importance to a responsibility centre and are also subject to significant price fluctuations, it may be beneficial to identify the effect of these price variances at the time of input to the accounting system. This can be done without difficulty by establishing separate accounts to record the standard cost and any variances.

(d) The price variance is identified on the source document; the standard price is allocated to one account; and the price differential is coded to the variance account. An illustration might be a stores location whose inventory records are being maintained on a standard cost basis. The cumulative price variances are useful information for materiel management, and better financial control is achieved if the physical inventory records and the principal accounting records are both maintained on a standard cost basis, because significant differences between these records can only represent physical shortages or overages, once the price variance has been eliminated.