1.32.3  Managerial Cost Accounting

Manual Transmittal

October 02, 2012

Purpose

(1) This transmits the revised IRM 1.32.3, Servicewide Financial Policies and Procedures, Managerial Cost Accounting.

Material Changes

(1) Deleted section 1.32.3., Introduction.

(2) Added new Section 1.32.3.1, Overview.

(3) Deleted section 1.32.3.1.1, Purpose.

(4) Section 1.32.3.1.2, Key Terms, moved to new Section 1.32.3.5, Definitions.

(5) Deleted section 1.32.3.1.3, Applicability.

(6) Moved section 1.32.3.1.4, Background, to new section 1.32.3.2 and expanded text to include complete background information.

(7) Moved section 1.32.3.1.4.1, Authorities, to new section 1.32.3.3. Removed related resources from the information.

(8) Added new section 1.32.3.4, Related Resources.

(9) Deleted section 1.32.3.1.4.2, Core Financial Systems for Managerial Cost Accounting.

(10) Added new section 1.32.3.6, Acronyms.

(11) Moved section 1.32.3.1.4.3, Roles and Responsibilities, to new section 1.32.3.7. The text was reorganized and the section was renamed Responsibilities.

(12) Moved section 1.32.3.1.4.3.1, Chief Financial Officer, to new section 1.32.3.7.1 and reorganized the text.

(13) Moved section 1.32.3.1.4.3.3, IRS Business Units, to new section 1.32.3.7.8. The text was reorganized and the section was renamed Business Units.

(14) Added new section 1.32.3.7.2, Associate CFO for Financial Management (FM).

(15) Added new section 1.32.3.7.3, Director, Office of Financial Management Policy (FMP).

(16) Added new section 1.32.3.7.4, Director, Office of Cost Accounting (OCA).

(17) Added new section 1.32.3.7.5, Director, Office of Financial Management Systems (FMS).

(18) Added new section 1.32.3.7.6, Director, Office of Financial Reports (OFR).

(19) Added new section 1.32.3.7.7, Director, Beckley Finance Center (BFC).

(20) Renumbered section 1.32.3.2, Cost Recognition to new section 1.32.3.8. Edited text to include active voice.

(21) Renumbered section 1.32.3.2.1, Capturing Costs by Responsibility Segment, to 1.32.3.8.1. Added new Sustaining Business Unit, Privacy, Governmental Liaison and Disclosure (PLDG).

(22) Renumbered section 1.32.3.2.2, Accumulating and Reporting Costs on a Regular Bases, to 1.32.3.8.2.

(23) Renumbered section 1.32.3.2.3, Recognizing the Full Cost of Outputs, to 1.32.3.8.3.

(24) Renumbered section 1.32.3.2.3.1, Accumulation of Costs, to 1.32.3.8.3.1.

(25) Renumbered section 1.32.3.2.3.2, Direct Costs/Tracing of Costs to Activities, to 1.32.3.8.3.3.1.

(26) Renumbered section 1.32.3.2.3.3, Indirect Costs, to 1.32.3.8.3.3.

(27) Renumbered section 1.32.3.2.3.3.1, Sustaining Costs, to 1.32.3.8.3.3.1.

(28) Renumbered section 1.32.3.2.3.3.2, Support Costs, to 1.32.3.8.3.3.2.

(29) Renumbered section 1.32.3.2.4, Recognizing Inter-Entity/Imputed Costs and Other Costs, to 1.32.8.4.1.

(30) Renumbered section 1.32.3.2.4.1, Inter-Entity/Imputed Costs, to 1.32.3.8.4.1.

(31) Renumbered section 1.32.3.2.4.2, Costs Not Assigned to Programs, to 1.32.3.8.4.2.

(32) Renumbered section 1.32.3.2.4.3, Non-Production Costs, to 1.32.3.8.4.3.

(33) Renumbered section 1.32.3.2.5, Cost Allocation Methodologies, to 1.32.3.8.5.

(34) Renumbered section 1.32.3.2.5.1, Selection of a Costing Assignment Technique, to 1.32.3.8.5.1. Added new paragraph (5).

(35) Renumbered section 1.32.3.2.5.2, Changes in Allocations and Methodologies, to 1.32.3.8.5.2.

(36) Renumbered section 1.32.3.2.5.3, Cost Drivers, to 1.32.3.8.5.3.

(37) Renumbered section 1.32.3.2.5.4, Allocation Cycles in IFS, to 1.32.3.8.5.4.

(38) Renumbered section 1.32.3.3, Cost Reporting, to 1.32.3.9

(39) Renumbered section 1.32.3.3.1, Internal Users, to 1.32.3.9.1.

(40) Renumbered section 1.32.3.3.2, External Reports, to 1.32.3.9.2.

(41) Renumbered section 1.32.3.3.3, Cost versus Budget Reports, to 1.32.3.9.3. Renumbered old paragraphs (6) and (7) to (7) and (8) respectively. Added new paragraph (6).

(42) Added new section 1.32.3.9.1.1, Preparation of Internal Cost Reports.

Effect on Other Documents

Information in this IRM replaces IRM 1.32.3, Managerial Cost Accounting Policy, issued June 6, 2010.

Audience

Business unit finance offices and employees responsible for management of program activities and cost activities.

Effective Date

(10-02-2012)

Pamela J. LaRue
Chief Financial Officer

1.32.3.1  (10-02-2012)
Overview

  1. This Internal Revenue Manual (IRM) provides policies, and procedures for Managerial Cost Accounting (MCA) methodologies and reporting.

  2. The Chief Financial Officer (CFO), Financial Management (FM), Office of Financial Management Policy (FMP) develops and maintains this IRM.

1.32.3.2  (10-02-2012)
Background

  1. The CFO Act of 1990 requires agency officers to develop and maintain an integrated agency accounting and financial management system, including financial reporting and internal controls, which provides for the development and reporting cost information.

  2. In October 1990, the Secretary of the Treasury, the Director of the Office of Management and Budget (OMB), and the Comptroller General established the Federal Accounting Standards Advisory Board (FASAB) by Memorandum of Understanding (MOU). The FASAB is responsible for promulgating accounting standards of the United States Government. These standards are recognized as generally accepted accounting principles (GAAP) for the Federal Government.

  3. In July 1995, FASAB issued Statement of Federal Financial Accounting Standards (SFFAS) No. 4, Managerial Cost Accounting Standards and Concepts. This statement contains the concepts and standards for accumulating, calculating, and reporting internal cost data.

1.32.3.5  (10-02-2012)
Definitions

  1. In this IRM, the terms below have the following meanings:

    1. Allocation – The process of reassigning costs to cost centers that utilize resources from other cost centers that incurred the costs.

    2. Costs – Expenses incurred in acquiring or producing goods and services.

    3. Cost Assignment – The process of linking accumulated costs with cost objects in specific reporting periods. The three methods of cost assignment are direct tracing, cause-and-effect, and allocation.

    4. Cost Center – The lowest organizational unit within the IRS that can receive costs. This is usually an organization's subordinate office that is distinguished by area of responsibility or geographic region.

    5. Cost Element - A classification of the type of expense incurred.

    6. Cost Driver – The basis used to allocate the costs of resources consumed. Examples of cost drivers include square footage, number of full time equivalents (FTE), number of service calls, and labor dollars.

    7. Cost-Effectiveness – The degree to which a performance objective is met.

    8. Cost Object – An activity, output, or item whose cost is measured; the outputs and services where costs accumulate; or the persons or things that benefit from work activities.

    9. Direct Costs – costs incurred that are unique or distinctly traceable to a program, activity, or output. Such costs include salaries, benefits, materials, and supplies.

    10. Efficiency – A measurement that relates outputs to inputs, for example, the cost per unit of output.

    11. Financial Accounting System – A system used to record and report current and historical information relating to financial transactions, program costs, and program performance to stakeholders inside and outside the organization.

    12. Full Cost – All costs used in generating the outputs, including all direct and indirect costs.

    13. Functional Area – A group of activities within a common program area.

    14. Imputed Costs – Non-reimbursed inter-entity costs.

    15. Indirect Costs – Costs that cannot be directly linked to a program or activity. Indirect costs include support and sustaining costs.

    16. Inter-Departmental – Activities between reporting entities that are considered departments, which are defined as departments, agencies, etc., that are not part of the same agency or reporting entity.

    17. Inter-Entity Costs – Costs of goods and services received from other federal entities.

    18. Intra-Departmental – Activities between reporting entities that are part of the same department or the same bureau within a department.

    19. Intra-Entity Cost Assignments – Costs of supporting services and intermediate products assigned to business units that receive the products and services.

    20. Managerial Cost Accounting – The process of accumulating, measuring, analyzing, interpreting, and communicating cost information.

    21. Outputs – The products or services generated from the consumption of resources. Outputs are measured preferably in units, for example, services or products produced or delivered, missions or tasks performed, customers served.

    22. Primary Cost Element - An element assigned to expenses directly posted to a cost center as a result of their own budget activity.

    23. Program or Program Area – A group of homogeneous activities in support of IRS main strategic goals. Program areas include pre-filing, filing, and post-filing activities.

    24. Resources – The tangible inputs used to produce IRS outputs.

    25. Responsibility Segment – A significant component of an entity. The component has the following characteristics: (i) its management reports to top management; (ii) it carries out a mission, performs services, or produces products; and (iii) its resources and results can be clearly distinguished from other segments of the entity.

    26. Reporting Entity – An organization for which financial statements must be prepared.

    27. Secondary Cost Element - An element assigned to expenses that are allocated to a cost center using a predetermined allocation methodology. This cost element includes mostly indirect expenses; however, building expenses such as rent, security, and janitorial services and supplies are a direct expense allocated by square footage using the secondary cost element.

    28. Support Costs - Support business units primarily support the operation of the BOD’s. The IRS allocates support business unit costs to the BODs based on a predetermined allocation methodology.

    29. Sustaining Costs - Sustaining business units primarily support the operation of the IRS as a whole. The IRS allocates sustaining business unit costs to both support business unit cost centers and BOD cost centers based on a predetermined allocation methodology.

1.32.3.6  (10-02-2012)
Acronyms

  1. The following chart contains acronyms that are used throughout this IRM:

    Acronym Description
    BOD Business Operating Division
    BW Business Warehouse
    CO Controlling Module
    ERIS Enforcement Revenue Information System
    FASAB Federal Accounting Standards Advisory Board
    FM Funds Management
    FTE Full Time Equivalent
    GAAP Generally Accepted Accounting Principles
    IFS Integrated Financial System
    MCA Managerial Cost Accounting
    MOU Memorandum of Understanding
    OMB Office of Management and Budget
    OPEB Other Post Employee Benefits
    SFFAS Statement of Federal Financial Accounting Standards
    SOAF Statement of Available Funds
    SNC Statement of Net Cost
    TIER Treasury Information Executive Repository
    UCR Unit Cost Rate

1.32.3.7  (10-02-2012)
Responsibilities

  1. This section provides responsibilities for:

    1. Chief Financial Officer.

    2. Associate Chief Financial Officer for Financial Management.

    3. Office of Financial Management Policy.

    4. Office of Cost Accounting.

    5. Office of Financial Management Systems.

    6. Office of Financial Reporting.

    7. Beckley Finance Center.

    8. Business Units.

1.32.3.7.1  (10-02-2012)
Chief Financial Officer (CFO)

  1. The CFO is responsible for:

    1. Overseeing the process for managing and maintaining MCA within the IRS.

    2. Establishing policies, procedures, standards, and controls for MCA.

    3. Approving allocation methodology changes (see below IRM 1.32.3.8.5.2 Changes in Allocations and Methodologies).

1.32.3.7.2  (10-02-2012)
Associate CFO(ACFO) for Financial Management (FM)

  1. The ACFO for FM is responsible for:

    1. Ensuring compliance with policies and procedures for MCA.

    2. Approving changes to allocations (see below IRM 1.32.3.8.5.2 Changes in Allocations and Methodologies).

1.32.3.7.3  (10-02-2012)
Office of Financial Management Policy (FMP)

  1. The FMP is responsible for maintaining and publishing this IRM.

1.32.3.7.4  (10-02-2012)
Office of Cost Accounting (OCA)

  1. The OCA is responsible for:

    1. Managing the cost program for the IRS.

    2. Developing and communicating policies and standards.

    3. Recommending changes to allocation methodologies annually.

    4. Working with business units to identify the direct and indirect costs.

    5. Coordinating the development of MCA reporting requirements with the business units to standardize reports to the extent possible.

    6. Developing data standards and methods to assign sustaining and support services costs with the business units.

    7. Calculating and communicating the overhead percentage rate applied to direct costs.

1.32.3.7.5  (10-02-2012)
Office of Financial Management Systems (OFMS)

  1. The OFMS is responsible for:

    1. Managing, jointly with BFC, the cost accounting master data within the Controlling Module of Integrated Financial System (IFS).

    2. Developing and providing training to the business units jointly with BFC, for the IFS Cost module.

1.32.3.7.6  (10-02-2012)
Director, Office of Financial Reports (OFR)

  1. The OFR is responsible for:

    1. Recording significant inter-entity costs to ensure all imputed costs associated with producing an output are included.

    2. Performing a reconciliation of the Statement of Net Cost (SNC) reported costs and revenues to the total revenue and expense general ledger accounts on the trial balance.

    3. Compiling and formatting the SNC published in the IRS audited financial statements.

    4. Reviewing and approving the entry that allocates unassigned revenues to specific program areas.

1.32.3.7.7  (10-02-2012)
Director, Beckley Finance Center (BFC)

  1. The BFC is responsible for:

    1. Managing jointly with OFMS the IFS Cost Module.

    2. Creating, executing and reconciling monthly cost allocation cycles, and developing procedures incorporating appropriate internal controls including, but not limited to, proper segregation of duties and documented supervisory reviews.

    3. Reviewing proposed changes to existing allocation methodologies.

    4. Producing and reconciling the SNC.

    5. Preparing and analyzing quarterly cost variance analysis.

    6. Updating annual cost studies.

    7. Validating and updating cost allocation cycle run order methodology.

1.32.3.7.8  (10-02-2012)
Business Units

  1. The Business Units are responsible for:

    1. Implementing an MCA program in compliance with this IRM and providing cost information to support management decisions.

    2. Recognizing, accumulating, assigning, tracking, and reporting their costs in accordance with this policy.

    3. Utilizing cost information for decision making and program evaluations when appropriate.

    4. Identifying metrics and activities aligned with the business units' outputs for which costs are accumulated.

    5. Providing input on the scope, for example, the nature and frequency, of reporting cost accounting information applicable to their respective outputs/activities.

    6. Reviewing cost reports for their areas of responsibility to ensure reasonableness and accuracy.

    7. Working with OCA during the annual review of their allocation methodologies and obtaining management approval of proposed changes to those allocation methodologies, if necessary.

    8. Identifying programs, underlying activities, outputs and services for which full cost information would be beneficial, with guidance from and consultation with the CFO.

    9. Providing explanation of cost allocation methodology changes and obtaining approval from the ACFO for FM.

1.32.3.8  (10-02-2012)
Cost Recognition

  1. The IRS bases its cost accounting policy on the five key standards of MCA per SFFAS No. 4, which are:

    1. Capturing costs by responsibility segment, for example, program area and/or business unit, and matching costs with outputs.

    2. Accumulating and reporting costs on a regular basis.

    3. Recognizing the full cost of outputs, for example, goods and services it delivers.

    4. Recognizing the inter-entity costs for the goods and services provided by other federal entities.

    5. Using costing methodologies which are appropriate for the entity’s operations to assign costs to the entity’s outputs.

  2. Subsequent sections discuss these key standards.

1.32.3.8.1  (10-02-2012)
Capturing Costs by Responsibility Segment

  1. According to SFFAS No. 4, responsibility segments can be based on:

    1. Organization structure.

    2. Lines of responsibilities and mission.

    3. Outputs, for example, goods and services it delivers.

    4. Budget accounts and funding authorities.

  2. The responsibility segments of the IRS are the five business operating divisions (BODs) described below and presented in Table 1, IRS Business Units Classification. The BODs are organized to align with the agency’s primary customer groups:

    1. Criminal Investigation (CI).

    2. Large Business and International (LB&I).

    3. Small Business/Self Employed (SB/SE).

    4. Tax Exempt and Governmental Entities (TE/GE).

    5. Wage and Investment (W&I).

  3. For external reporting purposes, the IRS responsibility segment results are categorized by the three core program outputs/services delivered to its customers:

    1. Taxpayer Assistance and Education.

    2. Filing and Account Services.

    3. Compliance.

  4. For budget formulation and annual financial reporting, cost information must be identifiable for the three core program areas. Costs also are aligned with program goals and specific program outputs in the agency’s strategic and performance plans.

  5. For MCA purposes, the IRS is organized into 15 business units, which correspond to budgetary financial plans. These business units are categorized into three major sectors:

    1. BODs.

    2. Sustaining Business Units.

    3. Support Business Units.

    To achieve the segmentation of costs by core program areas by BOD and to facilitate the linkage of such costs to program goals, IRS business units are responsible for recognizing, accumulating, assigning, tracking, and reporting its costs in accordance with this policy. The business units of the IRS are categorized as follows:

    Table 1: IRS Business Units Classification
    Category/Business Unit IFS Financial Plan Designator
    Sustaining Business Units  
    Agency-Wide Shared Services AWSS
    Communication and Liaison CALC
    Chief Financial Officer CFOB
    Human Capital Office HCOH
    Privacy, Governmental Liaison and Disclosure PLDG
    Information Technology MITQ
    National Headquarters NHQM
    Support Business Units  
    Appeals APPZ
    Chief Counsel ATTY
    Taxpayer Advocate TPAX
    Business Operating Divisions  
    Criminal Investigation CIDV
    Large Business and International LB&I
    Small Business/Self Employed SBSE
    Tax Exempt and Government Entities TEGE
    Wage and Investment WAGE

  6. The purposes of accumulating and tracking costs by business unit are to enhance managers’ abilities to measure the costs of activities within their areas of control and to identify operational trends and variances. Requiring such cost information to be compiled and segmented for each of the IRS core program/service areas assists leadership to:

    1. Compare costs of producing outputs across different responsibility segments.

    2. Optimize the use of the agency’s resources.

    3. Evaluate program performance.

    4. Enhance decision making.

  7. For external reporting purposes, each BOD's management defines its respective outputs for which cost information is accumulated and reported. The OCA then collaborates with the BOD management to identify and provide cost data for the key products and services from a program area standpoint.

  8. Additionally, the BODs may accumulate costs according to policy guidelines and calculate its products and services costs using the full cost method described under IRM 1.32.3.8.3. Each BOD performs the following steps:

    1. Define key products and services.

    2. Identify metrics and provide data.

    3. Accumulate costs and quantitative units of resources consumed in producing the products and services.

    4. Assign costs to the products and services and calculate unit costs of selected metrics.

    5. Aggregate costs by program area.

1.32.3.8.2  (10-02-2012)
Accumulating and Reporting Costs On A Regular Basis

  1. IRS policy is to accumulate costs for its programs and to assign or link such costs to the related cost centers. IRS accumulates and reports such cost information on a regular basis and uses this information to analyze operating performance, support internal decision making or satisfy external stakeholders interests.

  2. The systematic accumulation and reporting of cost information is a fundamental part of IRS operating environment and, to the extent possible, should be integrated. An integrated data source requires the use of cost data within the agency’s accounting system and a mapping or crosswalk of such cost data to program output/workload information residing in the agency’s feeder systems. The BODs work with the OCA to develop an integrated data source.

  3. Cost information developed for external and internal reporting purposes, to the extent possible, is drawn from a standard data source and data should be consistent with other reports developed.

1.32.3.8.3  (10-02-2012)
Recognizing the Full Cost of Outputs

  1. One of the five standards for Federal MCA as stated in SFFAS No. 4 is "determining [the] full costs of Government goods and services." The full cost of an output produced by a BOD is the sum of:

    1. The cost of resources consumed by the BOD that directly or indirectly contributes to the output.

    2. The cost of identifiable supporting services provided by Support and Sustaining Units within the IRS, and by other reporting entities, for example, the Office of Personnel Management (OPM), which are external to the IRS.

  2. The resources consumed by the BOD that directly or indirectly contribute to the BOD's products and services include:

    1. Direct costs.

    2. Support costs.

    3. Sustaining costs.

  3. Full cost for the IRS means that costs are assigned to those BODs who provide products and services to external customers. To ensure recognition of the full cost of IRS outputs, adequate and reliable cost information must be accumulated and classified within the cost accounting system. It is critical that the business units ensure that the data is reliable and work in concert with the OCA to ensure that effective reviews are performed routinely.

  4. Full cost data is captured and classified by type of resource, such as salaries, rent, utilities, etc. When it is possible and/or cost-effective to do so, quantitative workload data should also be accumulated and matched with such costs. Cost accumulation methods and processes facilitate internal and external reporting needs, and link program costs with products and services by program area and by BOD.

1.32.3.8.3.1  (10-02-2012)
Accumulation of Costs

  1. IRS business units use the Treasury Integrated Management Information System to update their organizational structure. This data is then passed to IFS and used to accumulate labor cost at the business unit’s divisional levels. A business unit’s divisional levels at which costs are captured include:

    1. Cost Center.

    2. Spending Office.

    3. Allotment Office.

    4. Financial Plan.

1.32.3.8.3.2  (10-02-2012)
Direct Costs/Tracing of Costs to Activities

  1. Direct costs are costs that can be specifically identified with a single program area, activity, product, or service. Typical direct costs for the IRS include the following:

    1. Salaries, benefits, and other employee compensation.

    2. Accrued annual leave, compensatory time, etc.

    3. Materials and supplies.

    4. Travel and relocation costs.

    5. Contractual services.

    6. Various costs associated with equipment and facilities.

    7. Costs of goods or services received from other entities outside of the IRS.

  2. Each BOD accumulates and records costs as direct costs when it is feasible and cost-effective to do so. The tracing or "one-to-one" mapping of direct costs to cost objects is the most accurate and preferred method of cost assignment and results from the process of identifying the costs of resources that are used directly in the production of outputs. "One-to-one" mapping of direct costs to cost center typically relies on such methods as counting, observation, or recording consumption of resource units, for example, staff hours or days that are spent on a project or assignment. Direct tracing also is used when resources are dedicated to specific outputs.

  3. Direct labor, direct travel, and the cost of equipment and facilities used in producing specific products and services are treated as direct costs when the benefiting cost object can be identified. However, they should not be used in cases where obtaining direct cost information is not cost-effective for the IRS. If the direct cost is an insignificant portion of total output cost, or if resources and efforts necessary to accumulate the costs are excessive, other methods of cost assignment are used.

1.32.3.8.3.3  (10-02-2012)
Indirect Costs

  1. Indirect costs are the costs of resources that are jointly or commonly consumed by two or more BODs' activities but are not specifically identifiable to a single product or service. The IRS has two categories of indirect costs: sustaining business unit costs and support business unit costs. Examples of services for which there may be indirect costs include:

    1. General management and administrative services.

    2. Facilities management and ground maintenance services (security, rent, utilities, and building maintenance).

    3. Procurement and contracting services.

    4. Financial management and accounting services.

    5. Information technology services.

    6. Services to acquire and operate property, plant and equipment.

    7. Publication, reproduction, graphics and video services.

    8. Research, analytical, and statistical services.

    9. Human resources/personnel services.

    10. Library and legal services.

  2. Indirect costs can be incurred within a business unit as a result of its own activities or when the business unit receives products or services generated by other business units. The business unit indirect costs are assigned internally in accordance with cost allocation methodologies as outlined in IRM 1.32.3.8.5, Cost Allocation Methodologies.

  3. The majority of indirect costs accumulate within identifiable business units. However, some costs such as depreciation and facilities costs cannot be linked to an identifiable business unit. In those instances, such costs are allocated based on cost allocation methodologies.

1.32.3.8.3.3.1  (10-02-2012)
Sustaining Costs

  1. Sustaining costs are derived from the costs of products and services received from the business units that provide support services to all business units. Examples of the types of costs which the IRS considers sustaining costs are the costs of services provided by:

    1. Agency-Wide Shared Services.

    2. Communications and Liaison.

    3. Chief Financial Officer.

    4. Human Capital Office.

    5. Information Technology.

    6. National Headquarters.

    7. Privacy, Governmental Liaison and Disclosure.

  2. The IRS links sustaining costs to intermediate activities or services when they cannot be directly assigned or allocated to BODs. Whenever possible and economically feasible the IRS uses causal relationships to assign costs to these intermediate activities or services. Assigning costs based on causal relationships involves two steps:

    1. Assign resource costs to the sustaining unit’s cost center that provides the activities and/or services.

    2. Assign these costs to the business units cost centers that consume these services.

  3. An example of this process is given in SFFAS No. 4, which describes the assignment of costs of a computer technology department. In this example, costs are first assigned to such activities as hardware installation and maintenance, and then the costs of these activities are assigned to the "using" department based on the technical services it receives.

  4. If establishing a causal relationship is not cost-effective, sustaining costs can be allocated to products and services using a prorated allocation method. The allocation of costs on a prorated basis involves two steps:

    1. Allocate resource costs to the sustaining unit's cost centers.

    2. Allocate these costs to the business units cost centers.

    The allocation cost drivers may include number of FTE, square footage, or direct costs of the business unit. Costs can be grouped into pools with similar characteristics and then allocated to the business units. The allocation method is used consistently throughout the year to allow cost comparison from one period to another.

1.32.3.8.3.3.2  (10-02-2012)
Support Costs

  1. Support costs are indirect costs closely related to the delivery of BOD products and services. The distinction between sustaining and support costs is that Sustaining Business Units provide services to Support Business Units and BODs, while Support Business Units provide services primarily to BODs. Examples of the types of costs which the IRS considers support costs are the costs of services provided by:

    1. Appeals.

    2. Chief Counsel.

    3. National Taxpayer Advocate.

  2. Whenever possible and economically feasible, the IRS uses causal relationships to assign support costs to the BOD's products and services. Assigning costs based on causal relationships involves two steps:

    1. Assign resource costs to the support unit’s cost centers that provide products and services.

    2. Assign these costs to the BODs cost centers that consume these services.

  3. If establishing a causal relationship is not cost-effective, these costs can be allocated to products and services using a prorated allocation method. The allocation of costs on a prorated basis involves two steps:

    1. Allocate resource costs to the support unit's cost centers.

    2. Allocate these costs to the BODs cost centers.

    The allocation cost drivers may include the number of FTE, or number of cases worked in the BOD. Costs can be grouped into pools with similar characteristics and then allocated to the BODs. The allocation method is used consistently to allow for a cost comparison from one period to another.

1.32.3.8.4  (10-02-2012)
Recognizing Inter-Entity/Imputed Costs and Other Costs

  1. This section discusses the treatment of inter-entity/imputed costs and costs not assigned to programs.

1.32.3.8.4.1  (10-02-2012)
Inter-Entity/Imputed Costs

  1. Each business unit's full cost incorporates the full cost of goods and services that it receives from other Federal agencies regardless of the source of funding. When inter-entity costs are reimbursed in full, IRS accounts for these costs in the same manner as direct and indirect costs. However, when inter-entity costs are only partially reimbursed, or not reimbursed at all, the IRS must recognize an imputed cost and an imputed financing source for the difference between the full cost of goods received and the total reimbursement. Imputed inter-entity costs are limited to material items that:

    1. Are significant to the IRS.

    2. Form an integral or necessary part of the IRS’s outputs.

    3. Can be identified or matched to the IRS with reasonable precision.

  2. To account for inter-entity/imputed costs, the IRS obtains information from the providing entity for the entity’s full costs of the services provided to the IRS. If the IRS cannot obtain documentation to support actual costs of goods and services received from other entities, IRS can use a reasonable estimate.

  3. Inter-entity/imputed costs are divided into two categories - "intra-departmental" and "inter-departmental" costs. An example of an intra-departmental cost for the IRS is the check writing cost incurred by the Department of the Treasury, Financial Management Service, on behalf of the IRS. Inter-departmental costs for the IRS are Other Post Employment Benefits (OPEB) including employees’ pension and health and life insurance benefits for retired, terminated, or inactive employees, which are costs paid by OPM.

  4. Inter-entity/imputed costs are used to calculate full costs in accordance with SFFAS No. 4. However, the IRS does not include such costs in analyses used for making budget projections. A more detailed discussion of inter-entity costs appears under IRM 1.32.3.9.1, Internal Users.

1.32.3.8.4.2  (10-02-2012)
Non-Production Costs

  1. Managerial costs are usually recorded, accumulated, and allocated on an accrual basis of accounting. Non-production costs are costs allocated to the current accounting period; but incurred in a previous period or by another entity. Some examples of such costs include:

    1. OPEB, which is an inter-entity/imputed cost.

    2. Property acquisition costs.

    3. Reorganization costs.

    4. Certain non-recurring cleanup costs.

1.32.3.8.5  (10-02-2012)
Cost Allocation Methodologies

  1. The order of preference of costing methods per SFFAS No. 4 is as follows - direct tracing of costs, assigning costs on a cause and effect basis, and prorated allocation. The cause-and-effect method is preferred over the prorated allocation method because it has a clear basis in the consumption of resources. Where costs cannot be directly traced to products or services nor assigned using an accepted cause and effect basis, they are allocated using a methodology that is both reasonable and consistent. The guidelines are outlined in this IRM 1.32.3.8.5.1, Selection of a Costing Assignment Technique.

1.32.3.8.5.1  (10-02-2012)
Selection of a Costing Assignment Technique

  1. The OCA works with the business units to select the cost accounting methodology or methodologies most appropriate for the respective business unit, choosing from one of the following three methods:

    1. Direct tracing of costs.

    2. Assigning costs on a cause-and-effect basis.

    3. Prorated allocation of costs based on specific cost drivers when a causal relationship cannot be clearly established or when it is not cost-effective to do so.

    The method or combination of methods used depends on the characteristics of the business unit’s activities and the types of resources used in producing its outputs. The costs of some business units may ultimately be assigned or allocated to other business units.

  2. Cost allocation methodologies used to allocate costs within the IRS include, but are not limited to:

    1. Allocation by number of FTE.

    2. Allocation by head count.

    3. Allocation by a calculated percentage allocation.

    4. Allocation by a specifically defined data element, for example, hours, cases handled, calls answered, etc.

    The methodology chosen should be reasonable, consistently applied, and based on the best data available for the particular cost category being allocated.

  3. Allocation methodologies can only be revised at the beginning of a fiscal year and must be approved by the CFO or his/her designated representative prior to implementation.

  4. Allocation methodologies requiring data to be interfaced to IFS are not implemented until such interfaces have been designed, tested, and approved by all appropriate offices. If the interface is implemented during a fiscal year, it may not be used for new allocation methodologies until the beginning of the next fiscal year.

  5. Where material extenuating circumstances occur during the fiscal year, such as organizational changes, new or deleted programs, or other business unit changes, and where continuation of the existing allocation methodology would provide misleading or erroneous cost data, it may be possible to change or revise an allocation methodology prior to the beginning of a fiscal year. Both the CFO and the senior business unit executive must approve any such change, prior to implementation. Supporting documentation shows the factors precipitating the change, the effects of the change, and the appropriate approvals.

1.32.3.8.5.2  (10-02-2012)
Changes in Allocations and Methodologies

  1. The CFO must approve the following changes:

    1. Any change to the business units or program areas contained in the receiver cost objects.

    2. Any change to a cost driver used to allocate costs.

    3. Any changes to the business units or program areas contained in the sender cost objects.

    4. Any material change, as determined by CFO, to the percentages or portions used to allocate costs.

  2. The ACFO/FM must approve:

    1. Any change in percentage or portion allocated to receiver cost centers.

    2. Any change in receiver cost centers that result in no changes to the mix of functional areas or business units.

    3. Any change in a cost element used to label or describe an allocation.

    4. Any correction of an error, for example, cycles that were built incorrectly.

    5. Any change in accounting string that would cause the current methodology to be misleading.

  3. This framework is illustrated in Table 2, Allocation Change Matrix, below. A change to an allocation cycle may be either a simple change in allocation or a complete change in methodology. Changes in methodology have a higher standard for justification and approval over changes in allocations. To determine whether a proposed change is a change in allocation or a change in methodology, refer to the Matrix. Where the proposed change fits within the Matrix determines the approval process and how to proceed.

    Table 2: Allocation Change Matrix
    Situation Type of Change Approval Path Action
      Allocation Methodology    
    Change in receiver cost centers that results in changes to the mix of functional areas or business units.   X
    OFMS
    OCA
    ACFO/FM
    CFO
    Document the change, provide estimates of impact, and notify business unit cost liaisons.
    Change in the cost driver used to allocate costs, for example, FTE to square-footage, percentage to statistical key figure.   X
    OFMS
    OCA
    ACFO/FM
    CFO
    Document the change, provide estimates of impact, and notify business unit cost liaisons.
    Change in sender cost centers that results in changes to the mix of functional areas with no corresponding change in cost element describing the allocation.   X
    OFMS
    OCA
    ACFO/FM
    CFO
    Document the change, provide estimates of impact, and notify business unit cost liaisons.
    Change only in percentages or portions allocated to receiver cost centers. X  
    OFMS
    OCA
    ACFO/FM
    Document the change, provide estimates of impact.
    Change in receiver cost centers that results in no changes to the mix of functional areas or business units. X  
    OFMS
    OCA
    ACFO/FM
    Document the change, provide estimates of impact.
    Change in a cost element used to label or describe an allocation. X  
    OFMS
    OCA
    ACFO/FM
    Document the change, provide estimates of impact, and notify business unit cost liaisons.
    Correction of errors, for example, cycles that were built incorrectly. X  
    OFMS
    OCA
    ACFO/FM
    Document the change, provide estimates of impact, and notify business unit cost liaisons.

1.32.3.8.5.3  (10-02-2012)
Cost Drivers

  1. Cost drivers are the basis used to allocate costs using various cost allocation methodologies. The allocation methodology and cost drivers must be appropriate in order to provide the IRS with reasonableness or accuracy in reporting the full cost of its products and services. Examples of cost drivers used include square footage, number of FTE, labor dollars, and unit measures such as number of service calls.

  2. Cost drivers are reviewed, updated, and approved annually by management. The rationale for each cost allocation methodology is documented. The validity of a current allocation methodology should be considered if there are any changes that have occurred in the operating environment.

1.32.3.8.5.4  (10-02-2012)
Allocation Cycles in IFS

  1. Cost allocation cycles in IFS allocate sustaining and support costs that have not been assigned to the BODs. An allocation cycle run identifies the costs to be allocated, the destination of the allocated costs, and the allocation methodology and cost drivers used for the allocation. The two sequential steps of IFS allocation cycles are:

    1. Allocating sustaining costs to the Support Business Units and the BODs.

    2. Allocating support costs from the Support Business Units to the BODs.

  2. The transfer of costs occurs at the lowest level of transaction detail, which is the cost center.

  3. IFS CO module uses two cost elements to classify the types of costs accumulated to the BODs:

    1. Primary cost elements, which represent direct costs posted to an activity as a result of their own budget activity.

    2. Secondary cost elements, which represent both direct and indirect costs allocated to an activity.

1.32.3.9  (10-02-2012)
Cost Reporting

  1. SFFAC No. 1 states that information about operating performance, such as the costs of programs and outputs and outcomes achieved, is an essential element of financial reports. Overall, MCA provides information for use by both internal users, for example, financial accounting, budgetary accounting, and operational/program management, and external users, such as financial auditors, OMB, the Department of the Treasury, and Congress.

1.32.3.9.1  (10-02-2012)
Internal Users

  1. Internal cost reporting is specifically tailored to meet management's needs for cost information. The form and content of internal cost reports prepared for each business unit provide relevant information to managers responsible for programs and/or activities. This information should be used by managers for making operating decisions. Business unit managers receive and review their cost reports regularly.

  2. BODs and business units provide suggestions and comments on the information needed in cost reports to the OCA. The design and content of internal reports is critical to support the development of a robust managerial cost accounting system. Additionally, in order to quantify the full cost of IRS products and services, non-financial data such as workload and volume data should be integrated with financial cost reports.

  3. As discussed in IRM 1.32.3.8.4.1, Inter-Entity/Imputed Costs above, inter-entity/imputed costs must be included in order to calculate the full cost of products or services. However, there are times when this inclusion produces a misleading result. A key strategic goal is to use cost accounting as a means to justify and/or project budget requirements. To the extent that inter-entity costs are not reimbursed by the IRS, utilizing these costs as part of a budget justification or request may produce an inflated result. As a result, the use of any cost analysis and the audience for that analysis must be carefully evaluated. The following outlines areas where inter-entity/imputed costs are included and where it may be appropriate to exclude them.

  4. Inter-entity/imputed costs should be included in the SNC.

  5. Inter-entity/imputed costs may be excluded from:

    1. External reports detailing the costs of particular programs or services, however, all such reports must contain detailed disclosure related to the treatment of imputed costs.

    2. Reports calculating the internal cost of a product or service.

  6. Inter-entity/imputed costs must be excluded from:

    1. Reports justifying a particular budget request.

    2. Reports used to project future budget requirements.

  7. All cost information communicated outside of the IRS must be reviewed by OCA to ensure the consistency and reliability of cost data and appropriate disclosure of all applicable costs, for example, imputed costs.

1.32.3.9.1.1  (10-02-2012)
Preparation of Internal Cost Reports

  1. In order to be consistent with the SNC as described in IRM 1.32.3.9.2 below, certain parameters in IFS must be included in the report.

  2. Cost Element ranges are set to include the following General Ledger (G/L) Accounts:

    Cost Element (G/L Account) Range Inclusion Cost Element (G/L) Ranges Account Description
    5200.0000 - 5399.9999 5200.0000 - 5399.9999 Exchange Revenue
    5900.0000 - 5992.9999 5900.0000 - 5992.9999 Exchange Revenue
    6000.0000 - 6999.9999 6000.0000 - 6999.9999 Gross Costs
    7110.0000 - 7110.9999 7110.0000 - 7110.9999 Exchange Revenue
    7210.0000 - 7210.9999 7210.0000 - 7210.9999 Gross Costs
    7600.0000 - 7600.9999 7600.0000 - 7600.9999 Gross Costs
    9300.0000 - 9300.9999 9300.0000 - 9300.9999 Secondary Allocations

  3. Cost Elements related to inter-entity/imputed costs may or may not be included in the internal cost reports, refer to IRM 1.32.3.9.1 (3) above. Inter-entity/imputed costs are posted in the following accounts:

    Imputed Cost Element List Imputed Cost G/L Accounts Account Description
    9300.5204 9300.5204 Pension Accrual
    9300.5206 9300.5206 Finance and Imputed Cost

  4. Custodial funds not related to the IRS appropriated budget and/or non-appropriated revenues are accounted for in IFS. In order to properly reflect costs the IRS excludes these funds from the SNC. Examples of these funds include the Highway Trust Fund, Health Insurance Reform Implementation Fund, and the Judgement Fund. The OCA maintains a current list of trust fund exclusions.

1.32.3.9.2  (10-02-2012)
External Reports

  1. Statement of Net Cost (SNC) - OMB Circular A-136 details requirements on the preparation of the SNC. This circular stipulates that entities should strive to articulate efficiency and effectiveness by developing and reporting objective measures that indicate results achieved and relate major goals and objectives in their strategic plan to responsibility segments presented in the entity’s SNC. The process of cost allocation as described in Cost Allocation Methodologies, IRM 1.32.3.8.5, is intended to result in all costs being allocated to the BODs. However, during the compilation of the SNC, all costs are summarized by cost center and business unit functional area. Costs are then assigned to four core program areas reported on the SNC:

    1. Taxpayer Assistance and Education.

    2. Filing and Account Services.

    3. Compliance.

    4. Administration of Tax Credit Programs.

  2. Treasury Information Executive Repository (TIER) - TIER is a Department of the Treasury data warehouse that receives monthly selected financial data from the Treasury bureaus from which both departmental and bureau users generate external and internal financial management reports. The BFC, with oversight from OFR, is responsible for creating, balancing, correcting, validating and submitting the IRS monthly TIER file.

1.32.3.9.3  (10-02-2012)
Cost versus Budget

  1. Managerial cost accounting usually records, accumulates, and allocates expenses on an accrual basis of accounting. Budgetary accounting focuses on inputs and outlays for the current year only; therefore, costs are usually recorded, accumulated, and allocated on a cash basis of accounting.

  2. The IFS utilizes several integrated modules to accomplish its mission of managing financial transactions. MCA is contained within the Controlling (CO) module. The CO module contains expenditure data without regards of when the obligations, commitment, and disbursement took place; therefore, the CO module will contain expenditures from prior periods and exclude some obligations created toward the end of the year. The CO Module provides full cost data which is ideal for understanding the full cost of a program or product and doing cost-benefit analyses. Reporting data are found in the R/3 environment of IFS and the Business Warehouse (BW) reports.

  3. Funds management data for budgeting purposes is contained within the Budget Funds Management (FM) Module. The FM module contains obligations, commitments, and disbursements data for the current period; therefore, it will not contain imputed costs and prior year costs such as depreciation and amortization. The FM module also includes the Unit Cost Rates (UCRs), the 3-Year Rolling Forecast (3YRF), and the Statement of Available Funds (SOAF) within the Business Warehouse (BW) Reports. The FM module data do not include allocated costs. The budget costs are aligned by funding responsibilities, and are appropriate for decisions about acquiring and distributing budget allocations.

  4. Frequently the question arises as to which module to use for financial analysis and reporting. There are two questions that must be considered when preparing a financial analysis of a program or activity:

    1. What is the purpose of the report?

    2. Who is the audience?

    The purpose of the report will determine whether budget or cost data is used.

  5. Table 3: Major Differences, outlines the major differences between the CO module and the FM module:

    Table 3: Major Differences
    FM Module CO Module
    Aligns resources to appropriated funds Aligns expenses to the cost goods or services
    Focuses on actual obligations, within fiscal year limits Focuses on actual expenditures, within fiscal year limits
    Records an obligation when goods or services are ordered Records an expenditure and posts the cost to the CO module when the goods and services are received
    Manages appropriated funding received, and controls obligations within those funding limits Links goods or services received to the costs incurred (expenditures)
    Classifies budget and obligations by Fund, Fund Center (identifying the Business Unit), Commitment Item and GL Accounts Classifies expenditures by GL Account and enables them to be related to benefitting business units to determine full cost
    Records obligations in the current year, using single year, multi-year, or no-year accounts Records costs when expended in the current year, using single year, multi-year, or no-year accounts
    Tracks obligations by Fund Center Tracks expenditures by Cost Center

  6. The CO Module should be the beginning point for any cost analysis. However, the CO Module cannot provide the appropriate data for every situation. It is important to clearly state in response to inquiries whether you are reporting cost or budget data to avoid misuse. As in all financial analyses, adequate disclosure is vital to ensure that users have a clear understanding of what is being presented. A couple of examples illustrate this.

    1. A report on the full cost of a program may differ significantly from a report on the available savings should a program be discontinued. There are variable and fixed components to both direct and indirect or overhead costs. Discontinuing a program will not necessarily eliminate the fixed cost component, particularly those related to indirect or overhead costs.

    2. Full costs require the inclusion of inter-entity costs, but such costs are excluded if the report is designed to reflect IRS budget requirements, since inter-entity costs are not funded by IRS appropriations.

  7. Many cases use cost data to calculate performance measures such as return of investment or cost benefit analysis. In those cases where revenue is used as a factor in the analysis, the Enforcement Revenue Information System (ERIS) shall be the system of record for such revenue data.

  8. Following is a list of uses of financial analyses and the most appropriate module from which data is obtained. This particular list does not describe the specific methodology to be used, but identifies the appropriate module. This list is not all-inclusive and may not address all situations that may arise. Use it as a guide for scenarios not listed.

  9. Use the FM Module for:

    1. Supporting decisions about acquiring and distributing budget allocations.

    2. Preparing budget initiatives.

    3. Analyzing periodic budget performance and/or progress.

    4. Requesting funds or returning surpluses.

    5. Calculating amount of funds to transfer between business units for reorganizations, or any transfer of programming authority.

    6. Responding to questions from outside parties such as Congress, Treasury, OMB, etc., where information is to be used in budget allocation decisions.

  10. Use the CO module for:

    1. Analyzing costs for a program, cost center, functional area, or business unit.

    2. Determining an appropriate overhead rate to apply to approximate full cost. Where full costs cannot be determined directly from IFS, CFO will utilize the CO module to determine an appropriate overhead rate to be applied to identified costs to estimate full costs.

    3. Calculating cost benefit analyses or return on investment for individual goods, services, or activities.

    4. Preparing the SNC for the financial statements.

    5. Reporting the full costs of programs or services to an outside party, such as Congress, Treasury, OMB, etc., especially when tying the costs to performance.

    6. Reporting the full costs of User Fees and Trust Fund or other reimbursable services to another entity or to an outside party, such as Congress, Treasury, OMB, etc.

    7. Reporting on the projected savings to be realized from discontinuing programs or activities, understanding that additional analysis is required to identify fixed and variable components of the program or activity costs being analyzed.

    8. Calculating business/management performance measures that are based on cost.


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