Classifying Costs – How FAR Would You Go?
Interested in gaining a better understanding of when a cost should be charged to an intermediate or a final cost objective? How about pinpointing the difference between the two?
Just understanding how expenses fit into the definition of these two types of cost objectives can be confusing. Now throw in how to determine if the expense should be charged to overhead or G&A and how to select the correct general ledger account – and you’ve just doubled your workload in what has now become a potentially time consuming and confusing effort. Too often businesses jump into cost classification without understanding all the accounting intricacies and practices that it entails.
When looking at a cost to determine its classification (Direct vs. Indirect) there are several things that should be considered:
- Why did we incur the expense?
- Can I tell who benefited from the expense?
- What do I do if it benefits more that effort?
- How do I determine if this is an overhead or GA expense?
- How has the expense been classified in prior months?
Classifying costs in the proper pool or base is critical to being able to determine indirect rates and recovery all allowable indirect expenses. The Federal Acquisition Regulations (FAR) provide a great starting point for understanding the basics of direct and indirect expenses. Solid corporate policies and procedures will provide additional guidelines for your staff. The final piece of the puzzle is professional development for your staff through training initiatives on compliance and accounting topics.
For more information on classifying costs, register for our upcoming webinar, GovCon Accounting 101: Direct vs. Indirect Costs – April 10th, or contact our industry experts!