1.35.16 Managerial Cost Accounting

Manual Transmittal

July 18, 2019

Purpose

(1) This transmits revised IRM 1.35.16, Financial Accounting, Managerial Cost Accounting.

Material Changes

(1) Office names and acronyms were updated throughout the IRM to correspond with the newly realigned office structure within CFO Financial Management.

(2) Editorial changes were made throughout the IRM to improve writing and to comply with updates in the IRS Style Guide and IRM 1.11.2, IRM Process.

(3) Updated IRM content to include internal controls. Subsequent sections were renumbered.

(4) IRM 1.35.16.1, Program Scope and Objectives, added per IRM 1.11.2, IRM Process.

(5) IRM 1.35.16.1.1(5), Background, added to include SFFAS 55, Amending Inter-entity Cost Provisions.

(6) IRM 1.35.16.1.2(1)(b), Authorities, added to include Government Management Reform Act of 1994, Pub. L. No. 103-356.

(7) IRM 1.35.16.1.2(1)(d), Authorities, updated to include the Government Performance and Results Modernization Act of 2010, Pub. L. No. 111-352.

(8) IRM 1.35.16.1.3, Responsibilities, Director, Financial Management Policy Office, deleted.

(9) IRM 1.35.16.1.3.2, Associate CFO for FM and Deputy ACFO for Administrative FM, updated to include the deputy ACFO for Administrative FM and added responsibilities.

(10) IRM 1.35.16.1.3, Director, Beckley Finance Center, deleted and responsibilities were moved to IRM 1.35.16.1.3.3, Director, Cost Accounting and User Fees.

(11) IRM 1.35.16.1.4, Program Management and Review, added per IRM 1.11.2, IRM Process.

(12) IRM 1.35.16.1.5, Program Controls, added per IRM 1.11.2, IRM Process.

(13) IRM 1.35.16.1.9, Cost versus Budget, edited and moved from IRM 1.35.16.9.3.

(14) IRM 1.35.16.2.1, Requirements for Cost Accounting, added.

(15) IRM 1.35.16.8.2, Responsibility Segments, table 1, IRS Business Units Classification, deleted. Content is included in IRM 1.35.16.2.2(5).

(16) 1.35.16.8.2, Accumulating and Reporting Costs On A Regular Basis, deleted. Information is included in IRM 1.35.16.2.1, Requirements for Cost Accounting.

(17) 1.35.16.8.3.1, Accumulation of Costs, deleted. Information is included in IRM 1.35.16.2.1, Requirements for Cost Accounting

(18) IRM 1.35.16.2.5.2, Changes in Allocations and Costing Methods, deleted table 2, Allocation Change Matrix, and updated text to include high-level guidance information without the matrix instructions, which are typically found in desk procedures.

(19) IRM 1.35.16.8.5.3, Cost drives, deleted. Information is included in IRM 1.35.16.1.6(h), Definitions.

Effect on Other Documents

IRM 1.35.16, Financial Accounting, Managerial Cost Accounting, dated December 14, 2016, is superseded.

Audience

Business unit finance offices and employees responsible for managing programs and cost activities.

Effective Date

(07-18-2019)

Ursula S. Gillis
Chief Financial Officer

Program Scope and Objectives

  1. Purpose: This IRM provides policies and procedures for managerial cost accounting (MCA), costing methods, cost recognition and reporting.

  2. Audience: The IRS finance community, program managers, business unit finance offices responsible for MCA activities, and employees reporting on the costs of IRS activities, products and services.

  3. Policy Owner: Deputy Associate CFO (ACFO) for Financial Management (FM).

  4. Program Owner: Cost Accounting and User Fees office (CA/UF), CFO.

  5. Primary Stakeholders: The IRS finance community.

  6. Program Goals: To assist the IRS finance community in applying MCA policies and procedures.

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 for reporting cost information. 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 a memorandum of understanding (MOU). The FASAB is responsible for promulgating the government’s accounting standards. These standards are recognized as generally accepted accounting principles (GAAP) for the federal government.

  2. In July 1995, FASAB issued Statement of Federal Financial Accounting Standards (SFFAS) 4, Managerial Cost Accounting Standards and Concepts. This statement contains the concepts and standards for accumulating, calculating and reporting internal cost data.

  3. In April 1995, FASAB issued Statement of Federal Financial Accounting Concepts (SFFAC) 2, Entity and Display, which describes the items that should be included in federal financial reports. OMB Circular A-136, Financial Reporting Requirements, establishes federal financial reporting guidance for executive branch departments, agencies and entities required to submit audited financial statements, interim financial reports and performance and accountability reports (PAR) or agency financial reports (AFR).

  4. In May 2018, FASAB issued SFFAS 55, Amending Inter-Entity Cost Provisions. This statement revised Interpretation 6, Accounting for Imputed Intra-Departmental Costs: An Interpretation of SFFAS 4, and rescinded SFFAS 30, Inter-Entity Cost Implementation. Revised SFFAS 4 provides for the continued recognition of significant inter-entity costs by business-type activities.

Authorities

  1. The authorities for this IRM include:

    1. Chief Financial Officers Act of 1990, Pub. L. No. 101-576

    2. The Government Management Reform Act of 1994, Pub. L. No. 103-356

    3. Federal Financial Management Improvement Act of 1996 (FFMIA), Pub. L. No. 104-208

    4. Government Performance and Results Modernization Act of 2010, Pub. L. No. 111-352, which amended the Government Performance and Results Act of 1993 (GPRA), Pub. L. No. 103-62

Responsibilities

  1. This section provides responsibilities for the:

    1. CFO and deputy CFO

    2. ACFO for Financial Management (FM) and deputy ACFO for Administrative FM

    3. director, Cost Accounting and User Fees

    4. director, Financial Management Systems

    5. director, Financial Reporting

    6. Business units

CFO and Deputy CFO
  1. The CFO and deputy CFO are responsible for establishing policies and controls for managerial cost accounting processes, including compliance with applicable authorities, reviewing and reporting.

ACFO for Financial Management (FM) and Deputy ACFO for Administrative FM
  1. The ACFO for FM and deputy ACFO for Administrative FM are responsible for:

    1. Establishing, maintaining and overseeing compliance with policies and procedures for managerial cost accounting including the CFO Act, FASAB, Treasury, OMB, federal financial system requirements and other financial requirements.

    2. Overseeing the IRS financial management system operations and monitoring financial systems for compliance with managerial cost accounting standards and internal controls.

    3. Providing financial system modernization development support and ensuring system integrity for the IRS managerial cost accounting function.

Director, Cost Accounting and User Fees
  1. The director, Cost Accounting and User Fees (CA/UF) is responsible for:

    1. Managing the cost accounting program and compliance with applicable authorities for managerial cost accounting.

    2. Developing, communicating and updating policies and procedures.

    3. Providing agency overhead rates annually.

    4. Coordinating the development of MCA reporting requirements with the business units and reviewing their costing allocation methods.

    5. Developing and maintaining cost-based performance measures for major IRS programs, processes and new initiatives.

    6. Overseeing the Cost Section operations and internal controls, managing jointly with Financial Management Systems the Integrated Financial System (IFS) cost accounting module, and producing, reconciling and analyzing the statement of net cost (SNC).

    7. Developing procedures for internal controls including segregation of duties and documenting supervisory review.

Director, Financial Management Systems
  1. The director, Financial Management Systems, is responsible for managing administrative financial systems application security, providing quality assurance and supporting other critical IFS operations and maintenance activities.

Director, Financial Reporting
  1. The director, Financial Reporting (FR), is responsible for recording inter-entity costs, reconciling the SNC to the trial balance, compiling and formatting the SNC published in the audited financial statements and approving the entries in IFS to allocate unassigned revenues to specific programs.

Business Units
  1. The business units are responsible for:

    1. Implementing and maintaining their managerial costing program.

    2. Recording and reporting costs timely and properly in IFS.

    3. Identifying cost benefit analysis activities that can be aligned with business unit’s outputs.

    4. Reviewing cost information for accuracy.

    5. Keeping the CA/UF office informed of any significant organizational changes that may affect the IRS’s SNC.

    6. Working with the CA/UF office annually to review allocation methodologies, obtain management approval of changes and develop cost products.

Program Management and Review

  1. Program reports: The program prepares, reconciles and analyzes the SNC published in the audited financial statements.

  2. The CA/UF office:

    1. Collaborates with the business units to allocate and assign indirect (secondary) costs to IRS programs monthly in IFS.

    2. Conducts monthly reviews of IFS cost data and a comprehensive variance analysis of the SNC in the second, third and fourth quarters.

    3. Provides data to the ACFO for Internal Controls for the financial assurance controls testing when requested.

  3. Program effectiveness is measured monthly after assessment cycles are completed and cost and exchange revenue are fully allocated to the operational divisions and classified to the four major IRS’s programs.

Program Controls

  1. Business units propose allocation methodology changes to the CA/UF office and obtain the necessary levels of approval per IRM 1.35.16.2.5.2, Changes in Allocations and Costing Methods.

  2. The CA/UF office validates that allocation and organizational changes are accurately entered into IFS and reviews the results. A reconciliation between the SNC and the trial balance is completed and verifies that cost and exchange revenue allocations were successfully executed.

  3. Accountants use a password protected report that is reviewed and approved as a mechanism to control the monthly cost allocation process and ensure the accuracy of cycle execution.

  4. Separate roles and responsibilities are established for preparers, reviewers and approvers. Reports are saved on a shared-drive with access limited to users with the appropriate job requirements.

Definitions

  1. List of terms includes:

    1. Allocation - A process that reassigns costs to cost centers that use resources from other cost centers that incurred the costs.

    2. Assessment cycles - The order of execution in which certain costs are allocated to programs. Assignment cycles follow a step process and some cycles use the results of previous assessment cycles.

    3. Causal relationship - A connection between two activities where the cost of one activity changes or affects the cost of another activity.

    4. Costs - The monetary value of resources used in performing activities, or in acquiring or producing goods and services.

    5. Cost assignment - A process that associates costs with activities, products or services. Costs can be assigned to processes, programs and business units using direct tracing, cause-and-effect and allocation methods.

    6. Cost center - An IFS data element used to represent a clearly defined location where costs are incurred. A cost center represents the lowest level in the organizational hierarchy. Cost centers are usually linked to Treasury Integrated Management Information System (TIMIS) codes for labor expenses and can also be established for non-labor expenses.

    7. Cost element - A classification of the type of expense incurred.

    8. Cost driver - The basis used to allocate the costs of financial resources. Examples of cost drivers include square footage, number of full-time equivalents (FTEs), service calls answered, tax cases closed and labor dollars.

    9. Cost-effectiveness - The economic benefit of producing good results without spending a lot of financial resources.

    10. Cost object - A product, service or activity where costs are accumulated or measured. A cost object can be a customer, product or a group of employees that benefit from work activities.

    11. Direct costs - Costs incurred directly by programs due to their budget execution. These include salaries, benefits, consulting, materials, supplies, etc.

    12. Efficiency - A performance measure that associates outputs to inputs and is often expressed by the output cost per unit.

    13. Fiscal year - A twelve-month period used by an organization for budgeting, accounting and financial reporting. The federal government’s fiscal year begins on October 1 and ends on September 30.

    14. Full cost - All costs used in generating activities, products and services, including direct, indirect and imputed costs.

    15. Functional area - An IFS data element that represents an activity, such as submission processing or field examination.

    16. Imputed costs - Unreimbursed costs required to be recognized by accounting standards.

    17. Indirect costs - Costs of resources that are jointly or commonly used and cannot be reasonably identified and charged to a specific activity.

    18. Inter-entity costs - Cost of benefits, goods and services received by the IRS from other federal agencies, bureaus or departments.

    19. Integrated Financial System (IFS) - The IRS’s administrative accounting system. IFS has four modules: budget control system (BCS), materials management (MM), financial accounting (FI) and controlling (CO).

    20. Integrated Financial System Procurement for Public Sector (IFS/PPS) - The IRS’s procurement system that provides a way to create, input and track requisitions. This includes requesting, funding, awarding orders, performing receipt and acceptance, accruing liabilities and processing payments.

    21. Internal order code (IOC) - An IFS data element used to collect and monitor expenditures and, occasionally, revenue for specific projects.

    22. Intra-entity cost assignments - The cost of supporting services and intermediate products assigned among IRS business units.

    23. Managerial cost accounting - The process of recording, recognizing, measuring, analyzing, interpreting and communicating cost information.

    24. Outputs - The products or services generated from the use of resources. Outputs are measured in units. Examples include tax returns processed, phone calls answered, IT tickets processed and cases closed.

    25. Primary cost element - An account in the IFS CO module that has a corresponding general ledger account for expenses posted to a cost center for its operating budget.

    26. Program or program area - A group of similar activities in support of the IRS’s main strategic goals.

    27. Responsibility segment - A significant IRS component that carries out a mission, performs services or produces goods, and can be clearly distinguished from other segments.

    28. Secondary cost element - Elements used only in the IFS CO module for internal costing allocation of indirect expenses. They represent categories of expenses that are independent from external or financial reporting requirements.

    29. Support costs - The costs incurred by Appeals, Chief Counsel and TAS that are applied to operational units that work directly with taxpayers.

    30. Sustaining costs - The costs incurred by business units that support IRS Servicewide operations.

Acronyms

  1. Acronyms used for this IRM:

    Acronyms
    CA/UF Cost Accounting and User Fees Office
    FASAB Federal Accounting Standards Advisory Board
    FM Funds Management
    FTE Full Time Equivalent
    GAAP Generally Accepted Accounting Principles
    GAO The Government Accountability Office
    IFS Integrated Financial System
    MCA Managerial Cost Accounting
    OMB Office of Management and Budget
    SFFAC Statement of Federal Financial Accounting Concepts
    SFFAS Statement of Federal Financial Accounting Standards
    SNC Statement of Net Cost

Related Resources

  1. The related resources for this IRM include:

    1. FASAB, SFFAC 1, Objectives of Federal Financial Reporting

    2. FASAB, SFFAC 2, Entity and Display

    3. FASAB, SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal Government

    4. FASAB, SFFAS 55, Amending Inter-Entity Cost Provisions

    5. OMB Circular A-11, Preparation, Submission and Execution of the Budget

    6. OMB Circular A-136, Financial Reporting Requirements

Cost versus Budget

  1. The IRS uses cost information, as required by SFFAS 4, Managerial Cost Accounting Standards and Concepts, to report the cost of activities, programs and services to internal and external stakeholders. It is also used in analyzing and evaluating operating performance, supporting decision-making when allocating resources and modifying programs.

  2. Managerial cost accounting follows GAAP and records costs using the accrual method of accounting.

  3. The IFS integrates several modules to collect financial transactions. Cost data is recorded under the IFS CO module. Costs are recorded when expenses are paid or accrued without regard to the fiscal year when the obligations, commitments and disbursements happened. The CO module also includes imputed costs, depreciation, amortization and costs allocated to programs using costing methods.

  4. The CO module is used for:

    • Preparing the SNC for the audited financial statements.

    • Reporting cost analysis of programs and services to report to internal management, Congress, Treasury, OMB, TIGTA and GAO.

    • Reporting the cost of user fees, trust funds and reimbursable agreements.

    • Determining overhead rates.

    • Calculating cost benefit analyses and cost-based performance measures for products, services and activities.

    • Reporting on savings from discontinuing programs or activities.

  5. Budgetary accounting focuses on inputs and outlays for the year and expenditures are usually recorded using the cash method of accounting.

  6. Funds management data for budgeting purposes is recorded in the FM module. The FM module contains obligations, commitments and disbursements for the current budget period. It does not contain imputed costs, depreciation and amortization. The FM module also includes the unit cost rates (UCRs), the 3-Year Rolling Forecast (3YRF) and the status of available funds (SOAF). The budget expenditures are aligned by funding responsibilities.

  7. Refer to IRM 1.33.4, Strategic Planning, Budgeting and Performance Management Process, Financial Operating Guidelines, for the use of budget data and authorities.

Cost Recognition

  1. The IRS follows the standards established in SFFAS 4, Managerial Cost Accounting Concepts and Standards for the Federal Government, for recording and reporting costs, including:

    1. Requirement for cost accounting

    2. Responsibility segments

    3. Full cost

    4. Inter-entity costs

    5. Costing methodology

Requirement for Cost Accounting

  1. This standard requires the IRS to establish accounting procedures and processes to accumulate and report costs regularly and consistently.

  2. Business units are required to use the Treasury Integrated Management Information System (TIMIS) to update their organizational structure to record labor costs properly using the following hierarchy:

    • Cost center

    • Spending office

    • Allotment office

    • Financial plan

  3. Business units are also required to:

    • Use the same hierarchy to record non-labor costs.

    • Coordinate with their finance offices to determine the correct accounting string to be used in the travel system, SETR, PPS or any other financial system that interfaces with IFS.

    • Follow guidelines issued by Corporate Budget to track project costs and use the appropriate internal order codes (IOC) in recording expenses to ensure full cost is recognized for programs, projects and activities.

    • Record costs of activities timely, accurately and systematically to the correct budget resources, organizational and expense structures, and other IFS codes, as outlined in the Financial Management Codes Handbook maintained by Corporate Budget.

    • Implement periodic reviews of cost accounting reports and ensure that cost information aligns with organizational changes.

    • Work with the CA/UF office to obtain financial data from IFS and combine cost data with non-financial data for program outputs or workloads used to produce cost information.

Responsibility Segments

  1. This standard requires the IRS to define and establish responsibility segments. The IRS records costs by organizational structure, lines of responsibilities and mission, products and services delivered, budget accounts and funding authorities.

  2. The purpose of segmentation is to:

    • Determine and report the costs of products, services and activities that each segment delivers.

    • Facilitate cost control and management.

    • Compare costs across different responsibility segments.

    • Optimize the use of IRS’s resources

    • Facilitate comparison of financial and non-financial data for performance measures.

  3. A responsibility segment represents a group of business unit functional areas responsible for providing a specific category of services to taxpayers.

  4. The IRS’s responsibility segments are categorized by four main programs reported in the audited financial statements’ SNC.

    • Taxpayer Assistance and Education - Assists taxpayers with tax return preparation.

    • Filing and Account Services - Provides resources and support to taxpayers for filing returns, paying taxes, issuing refunds and maintaining accounts.

    • Compliance - Administers compliance activities after a return is filed to identify or correct possible errors or underpayments.

    • Administration of Tax Credits Programs - Administers the EITC program and other credits.

  5. Cost segmentation is based on the business units’ financial plans. For purpose of managing, allocating and reporting costs, the business units are organized under three major cost categories.

    1. Operational: Units that provide taxpayer assistance and education, filing and accounting service, and compliance activities, and that administer tax credit programs. These units CI, LB&I, SB/SE, TE/GE and W&I.

    2. Support: Top level units that mainly support operational units in providing goods and services to the public. These units are Appeals, Chief Counsel and TAS.

    3. Agency sustaining: Units that provide Servicewide products, services and activities for the benefit of the entire IRS. These units are FMSS, C&L, CFO, HCO, Privacy Governmental Liaison and Disclosure, IT, and Executive Leadership and Direction.

  6. Business units are responsible for defining, measuring and quantifying outputs for their segments. The CA/UF office collaborates with the business units to identify and provide cost analyses for program areas, products and services.

Recognizing Full Cost

  1. This standard requires the IRS to recognize the full costs, direct and indirect, of responsibly segments, products, services and activities.

  2. Full cost reporting is required for managing and establishing reimbursable activities, implementing user fees, and developing internal reports or cost studies.

  3. The CA/UF office maintains a detailed flow chart of the IRS methodology used to allocate direct and indirect costs to responsibility segments.

Direct Costs
  1. Direct costs are expenses that can be directly traced to a program, activity, product or service. Direct expenses generally result from the business units executing their budgets and include:

    1. Salaries and other benefits for employees that work directly on products, services and activities.

    2. Materials, and supplies used in outputs including postage and printing.

    3. Travel, relocation and training.

    4. Consulting.

    5. Enforcement expenses.

    6. Automated data processing (ADP) or IT.

    7. Equipment and facilities.

    8. Imputed costs for goods or services received from other government agencies.

  2. Business unit are responsible for recording their direct costs when expenses are paid or in the accounting period when expenses are incurred as required by the accrual method. This process identifies costs of resources used directly in producing outputs.

  3. Costs for specific products and services are treated as direct costs when the cost object can be readily identified.

  4. Direct costs must be recorded to general ledger accounts that correspond to budget and commitment line items. Rent, even though it is allocated as a secondary cost, can be traced directly to the business units or activities.

Indirect Costs
  1. Indirect costs are resources used by two or more business units or a cross-functional process and include:.

    1. Sustaining and support costs allocated to other business units.

    2. Indirect costs within the support and operational units and allocated within each unit.

  2. Indirect costs are recorded and allocated periodically in IFS by the CA/UF Cost Section in collaboration with the business units. Secondary costs are allocated in IFS through cost assessment cycles to secondary costs elements that represent expense categories that do not correspond to general ledger accounts, including:

    1. General management and administrative

    2. Rent, security, utilities and maintenance

    3. Procurement and contracting

    4. Financial management and accounting

    5. Information technology

    6. Research, analytical and statistical

    7. Human resources and personnel

    Note:

    Refer to the Financial Management Codes Handbook table CO-1 for a listing of secondary cost elements

Agency Sustaining Costs
  1. Agency sustaining costs represent the costs of intermediate activities and services provided by business units that support IRS’s operations. These include labor, ADP operations, rent, training, traveling, moving, services and supplies’ expenses incurred by:

    1. FMSS

    2. C&L

    3. CFO

    4. HCO

    5. IT

    6. Executive Leadership and Direction

    7. Privacy, Governmental Liaison and Disclosure

  2. The IRS links sustaining costs to intermediate activities or services when they cannot directly be assigned or allocated to operational divisions. The IRS uses a causal relationship to assign the costs of intermediate activities or services in two steps:

    1. To the sustaining business unit’s cost center that provides the activity or service.

    2. To the business unit’s cost center that uses the service.

  3. When establishing a causal relationship is not possible, sustaining costs are allocated to products and services using a pro-rata allocation method by allocating costs to the sustaining units and then allocating sustaining units’ costs to the operational units.

  4. The IRS’s cost allocation drivers for allocating sustaining costs include FTEs, square footage, on-rolls head counts or business unit direct costs. For allocation purposes, business units’ finance offices can group costs into pools with similar characteristics. Business units are required to use cost drivers and costing methods consistently throughout the year to facilitate cost comparisons.

Support Costs
  1. Support costs are indirect costs for delivering IRS’s programs. Support business units provide services that mainly benefit taxpayers. Support costs are allocated only to operational business units using a causal relationship or pro-rata distribution and include labor, ADP operations, rent, training, traveling, moving, services and supplies’ expenses incurred by:

    1. Appeals

    2. Chief Counsel

    3. TAS

  2. The cost allocation drivers for allocating support costs are determined by the business units and can be like the drivers used for allocation of agency sustaining costs.

Recognizing Inter-entity Costs

  1. This standard requires the IRS to recognize the full cost of services from other federal agencies even if the IRS is not require to reimburse the other agency for the cost of the services.

  2. The FR office, in collaboration with the business units, works with other agencies to obtain the necessary information for the IRS to record imputed costs.

  3. Each business unit's full cost includes the full cost of goods and services received from other federal agencies regardless of the source of funding.

  4. The IRS records imputed costs using the financial data provided by the agency providing the services or by reasonable estimates when data is not available.

  5. The IRS recognizes intra-departmental and inter-entity costs. Intra-departmental costs are for financial services received from Treasury including payments and collections made by the Bureau of the Fiscal Service on behalf of the IRS. Inter-entity costs are for post employee benefits received from OPM including employees’ pensions, and health and life insurance benefits for separated employees.

  6. The IRS limits the recognition of imputed inter-entity costs to costs that are material, form an integral or necessary part of the IRS’s outputs, and can reasonable be identified or matched to IRS activities.

Costing Methodology

  1. The SFFAS 4, Managerial Cost Accounting Standards and Concepts, does not recommend that agencies use a particular costing allocation method or cost system. The purpose of SFFAS 4 is to establish a principle for assigning costs. Costs should be assigned to products, services and activities in the following order:

    1. Tracing costs directly wherever economically feasible.

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

    3. Allocating costs on a reasonable and consistent basis.

Selection of a Costing Assignment Technique
  1. The CA/UF office works with the business units to select the most appropriate cost accounting method for them and based on the unit’s activities and the types of resources used in producing its products and services, the costs may be assigned or allocated to other business units using one of the following methods:

    1. Direct tracing

    2. Cause-and-effect

    3. Pro-rata

  2. Business units must select techniques that are reasonable. Techniques should be applied consistently based on the best data available for the cost categories being allocated. Business units are required to consider and select cost allocation methods using the following costs drivers:

    1. Square footage

    2. Statistical figures

    3. Labor dollars

    4. Number of FTE

    5. Employee head count

    6. Calculated percentages

    7. Hours charged

    8. Cases closed

    9. Calls answered

    10. Returns processed

  3. Allocation methods may be revised during the fiscal year if a change to a major program occurs that would significantly affect the SNC presentation.

  4. The appropriate level of approval must be obtained when revising a costing method and when it is justifiable because continuing the use of the existing method may result in misleading or erroneous cost data.

Changes in Allocations and Costing Methods
  1. The deputy CFO must approve changes to functional areas attributed to lines of business in the SNC and cost drivers that may significantly change costs allocated to programs.

  2. The deputy ACFO for Administrative FM must approve corrections of material errors that affect the SNC.

  3. The director, CA/UF office must approve changes to:

    1. Program areas that receive or send costs within a business unit when costs are allocated by percentage.

    2. Cost centers receiving or sending costs that may result in changes to the mix of functional areas or business units grouped under a program in the SNC.

    3. Cost element used to label or describe allocated costs.

  4. The following must be documented and are not considered changes:

    1. Master data sender or receiver cost centers that do not change program areas.

    2. Percentage of costs received or sent by cost centers because of annual recalculation of cost drivers.

    3. Realignment, creation or collapse of employee groups to accommodate new hires or to eliminate vacancies.

Assessment Cycles in the Integrated Financial System
  1. IFS cost assessment cycles allocate sustaining and support costs that have not been assigned by direct tracing methods. An assessment cycle run identifies the type of expense, allocation method and cost drivers. The main assessment cycles are:

    1. Rent, building costs, high level finance, and technology to all business units.

    2. Shared services support and other agency sustaining costs to support and operational units.

    3. Support costs to operational units.

    4. Administrative costs within each support and operational unit.

  2. Transfer of costs occurs at the lowest cost center level and the IFS CO module uses primary and secondary cost elements to reclassify costs among units.

    Note:

    Refer to the Assessment Cycles Run-Order Methodology chart maintained by the CA/UF office.

Calculating Cost Outside of the Cost Module
  1. The CA/UF office calculates corporate overhead rates annually using the SNC. The rates reflect the ratio of indirect costs to direct costs for programs.

  2. When calculating the full cost for a program or activity, costs that are incurred by multiple business units are included by applying an overhead rate to identifiable direct costs.

Cost Reporting

  1. SFFAC No. 1, Objectives of Federal Financial Reporting, states that information about operating performance, including the costs of programs and outputs and outcomes achieved, is an essential element of financial reports. MCA provides information for internal users, including financial accounting, budgetary accounting, and operational/program management. MCA also provides information for external users, including financial auditors, OMB, Treasury and Congress.

Internal Users

  1. Cost information communicated outside of the IRS must be reviewed by the CA/UF office to ensure its accuracy and appropriate disclosures.

  2. Internal cost reporting should be tailored specifically to meet management's needs. The form and content of internal cost reports prepared for each business unit should provide full cost information to program managers.

  3. Business units are required to provide suggestions and comments regularly to the CA/UF office for cost reports needed. Units are required to collaborate with the design and content of internal reports and provide non-financial data.

  4. When cost accounting reports are used to justify budget requirements, imputed costs and inter-entity costs should be excluded. When preparing internal reports such as cost-based performance measurers, imputed costs should be included in the report to arrive at full cost, but it should be footnoted as a disclosure.

  5. The Enforcement Revenue Information System (ERIS) is the system of record when using enforcement revenue as a factor in performing calculations and analyses. The CA/UF office obtains the annual Total Enforcement Revenue Collected (TERC) file from Research, Applied Analytics & Statistics (RAAS) that includes revenue collection for major program categories. ERIS is the data source for the TERC file.

Preparation of Internal Cost Reports
  1. Custodial funds not related to the IRS appropriated budget or non-appropriated revenues are accounted for in IFS. However, the IRS excludes these funds from the SNC. These funds include the Highway Trust Fund, Health Insurance Reform Implementation Fund and the Judgment Fund. The CA/UF office maintains a fiscal year listing of trust fund exclusions.

    Note:

    Refer to the Financial Management Codes Handbook for a listing of trust funds or contact the CA/UF office for the listing of funds excluded from the SNC.

Cost Reporting
  1. Cost-based performance measures, commonly referred to as cost studies, are completed annually for the IRS’s major examination and collection enforcement programs in collaboration with frontline program management and RAAS. A cost study is a cost-benefit analysis that is part of the IRS programs’ accounting practices.

  2. A cost-benefit analysis considers only one program at a time and compares the monetary costs and benefits (enforcement revenue) of a program. The outcome measures of the studies are collections/cost ratio, cost per dollar of tax collected and cost per case worked by the program.

  3. A cost-benefit analysis will not determine if a program is having a significant net effect on desired outcomes. Tax compliance or economic values, other than cost, must be analyzed in determining program efficiencies and policy choices.

External Reports

  1. The OMB Circular A-136, Financial Reporting Requirements, details requirements on preparing the SNC. The circular requires that the IRS, and other federal agencies, 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 results in all costs being allocated to the business units.

  2. During the compilation of the SNC, costs are summarized by cost center and functional areas. Functional areas are assigned to the four core program areas reported on the SNC, as described in IRM 1.35.16.2.2, Responsibility Segments.