The US government has strict accounting rules for those involved in defence contracts. This extract outlines the process and then sets out the rules for applying Standard Costing. Administratively a function located within OFPP is the Cost Accounting Standards Board (CASB), an independent legislatively established board consisting of five members, including the OFPP Administrator, who serves as chairman, and four members with experience in Government contract cost accounting, two from the Federal government, one from industry, and one from the accounting profession. The Board has the exclusive authority to make, promulgate, and amend cost accounting standards and interpretations designed to achieve uniformity and consistency in the cost accounting practices governing the measurement, assignment, and allocation of costs to contracts with the United States.

One of the standards set by this body is for the use of standard costs:

CAS 407 Use of Standard Costs for Direct Material and Direct Labor Purpose To improve cost measurement and cost assignment for contractors that choose to use a ‘standard’ type accounting system.

Requirement Standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor when:

Standard costs are entered into the books of the account; Standard costs and related variances are appropriately accounted for at the level of the production unit; and Practices regarding the setting and revising of standards, use of standard costs, and disposition of variances are stated in writing and are consistently followed.

Questions

1 Why are standard costs particularly important for use in defence contracts?

2 What does the extract indicate about

(a) the nature of the standard costs, and

(b) the recording of the standard costs?