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Full cost accounting

Full cost accounting (FCA) generally refers to the process of collecting and presenting information (costs as well as advantages) for each proposed alternative when a decision is necessary. Costs and advantages may be considered in terms of environmental, economical and social impacts. Full cost accounting information may be used by decision-makers.

Full-cost accounting is sometimes used in a variety of settings, and may be a new way of thinking about infrastructure management and finance for some communities. For others, it can be simply an extension of current management practices. Understanding the benefits of FCA can help ease its implementation.

Table of contents
1 Concepts
2 Accounting for costs rather than outlays
3 Accounting for hidden costs
4 Accounting for overhead and indirect costs
5 Accounting for past and future outlays.
6 Example full-cost accounting: municipal solid waste (MSW) management
7 Benefits of FCA
8 See also
9 External links

Concepts

Full cost accounting embodies several key concepts that distinguish it from standard accounting techniques. The following list highlights the basic tenets of FCA.

  1. Accounting for costs rather than outlays
  2. Accounting for hidden costs and externalities
  3. Accounting for overhead and indirect costs
  4. Accounting for past and future outlays
  5. Accounting for costs according to lifecycle of the product

Accounting for costs rather than outlays

An outlay is an expenditure of cash to acquire or use a resource. A cost is the dollar value of the resource as it is used. For example, an outlay is made when a truck is purchased, but the cost of the truck is incurred over its active life (e.g., 10 years). The cost of the truck must be allocated over a period of time because every year of its use contributes to the depreciation of the truck's value.

Accounting for hidden costs

With FCA, the value of goods and services is reflected as a cost even if no cash outlay is involved. One community might receive a grant from a state, for example, to purchase equipment. This equipment has value, even though the community did not pay for it in cash. The equipment, therefore, should be valued in an FCA analysis.

Accounting for overhead and indirect costs

FCA accounts for all overhead and indirect costs, including those that are shared with other public agencies. Overhead and indirect costs might include legal services, administrative support, data processing, billing, and purchasing.

Accounting for past and future outlays.

Past and future cash outlays often do not appear on annual budgets under cash accounting systems. Past (or upfront) costs are initial investments necessary to implement services such as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlays are costs incurred to complete operations such as facility closure and postclosure care, equipment retirement, and post-employment health and retirement benefits.

Example full-cost accounting: municipal solid waste (MSW) management

For example the State of Florida use the term full cost accounting for its solid waste management. In this acceptance, FCA is a systematic approach for identifying, summing, and reporting the actual costs of solid waste management. It takes into account past and future outlays, overhead (oversight and support services) costs, and operating costs.

Integrated solid waste management systems consist of a variety of MSW activities and paths. Activities are the building blocks of the system, which may include waste collection, operation of transfer stations, transport to waste management facilities, waste processing and disposal, and sale of byproducts. Paths are the directions that MSW follows in the course of integrated solid waste management (i.e., the point of generation through processing and ultimate disposition) and include recycling, composting, waste-to-energy, and land disposal. The cost of some activities is shared between paths. Understanding the costs of MSW activities is often necessary for compiling the costs of the entire solid waste system, and helps municipalities evaluate whether to provide a service itself or contract out for it. However, in considering changes that affect how much MSW ends up being recycled, composted, converted to energy, or landfilled, the analyst should focus the costs of the different paths. Understanding the full costs of each MSW path is an essential first step in discussing whether to shift the flows of MSW one way or another.

Benefits of FCA

When municipalities handle MSW services through general tax funds, the costs of MSW management can get lost among other expenditures. With FCA, managers can have more control over MSW costs because they know what the costs are.

Using techniques such as depreciation and amortization, FCA produces a more accurate picture of the costs of MSW programs, without the distortions that can result from focusing solely on a given year's cash expenditures.

FCA helps you collect and compile the information needed to explain to citizens what solid waste management actually costs. Although some people might think that solid waste management is free (because they are not billed specifically for MSW services), others might overestimate its cost. FCA can result in "bottom line" numbers that speak directly to residents. In addition, public officials can use FCA results to respond to specific public concerns.

By focusing attention on costs, FCA fosters a more businesslike approach to MSW management. Consumers of goods and services increasingly expect value, which means an appropriate balance between quality and cost of service. FCA can help identify opportunities for streamlining services, eliminating inefficiencies, and facilitating cost-saving efforts through informed planning and decision-making.

When considering privatization of MSW services, solid waste managers can use FCA to learn what it costs (or would cost) to do the work. As a result, FCA better positions public agencies for negotiations and decision-making. FCA also can help communities with publicly run operations determine whether their costs are competitive with the private sector.

FCA gives managers the ability to evaluate the cost of each element of their solid waste system, such as recycling, composting, waste-to-energy, and landfilling. FCA can help managers avoid common mistakes in thinking about solid waste management, notably the error of treating avoided costs as revenues.

As more communities use FCA and report the results, managers might be able to "benchmark" their operations to similar communities or norms. This comparison can suggest options for "re-engineering" current operations. Furthermore, when cities, counties, and towns know what it costs to manage MSW independently, they can better identify any savings that might come from working together.

See also

External links