25R5001 - Attachment 0074 - Accounting System Checklist.pdf

Accounting System Review

Contractor Name:

The major objective of an accounting system review is to determine if the contractor’s current accounting system is adequate for accumulating and billing costs on Government contracts required in order to be awarded a cost-reimbursable or firm-fixed price with progress payments type contract.

Instructions:

1. Mark “X” in the appropriate column in Table 1.

2. In Table 2, provide a narrative describing how your current accounting system supports the response you provided to each item in Table 1.

Table 1 Accounting System Requirement Yes No N/A Note

1. Is your accounting system in accord with generally accepted accounting principles?

2. Does your accounting system provide for:

a. Proper segregation of direct costs from indirect costs? This is necessary determine if direct costs are segregated from indirect costs. Direct costs are defined in FAR 31.202 as any cost that can be identified specifically with a particular final cost objective (e.g., a contract). An example would be labor specifically identified to the contract or materials purchased specifically for the contract. At times, contractors may find it impractical to identify costs specifically to a contract. FAR

31.202 states that a direct cost can be treated as an indirect cost if the dollar amount is minor, it is treated the same way for all contracts in a contractor's accounting system, and that treatment produces substantially the same results as treating the cost as a direct cost. Indirect costs are defined in FAR

31.203 as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. An example of an indirect cost would be the lighting in a manufacturing area that houses the work of several contracts. The lighting benefits all contracts, but cannot practically be identified to a specific contract. These types of costs are normally placed in an overhead or General and Administrative (G&A) expense pool and allocated to contracts on some equitable basis. The cost accounting system must identify what costs are considered direct and what costs are considered indirect. Once these criteria are defined, they must be consistently applied.

b. Identification and accumulation of direct costs by contract?

This is commonly referred to as a job order cost accounting system.

c. A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives? (A contract is final cost objective.) Indirect costs shall be allocated to cost objectives based upon relative benefits received or other equitable relationship, as required by FAR 31-201-4, "Determining allocability," and FAR 31-203, "Indirect costs."

Fundamentally, this means that a cost may not be allocated as an indirect cost to a final cost objective if other costs incurred for the same purpose have been included as direct costs of that or any other cost objective. For example, if a contractor wishes to perform a contract that requires three firemen on 24-hour duty at a fixed-post to provide protection against damage to highly flammable materials used on the contract, but the contractor already has a firefighting force for general protection of the plant, which is treated as an indirect cost and allocated to all contracts, the contractor may charge the cost of three of the post firemen directly to the particular contract requiring them. In this example, the contractor may also allocate a portion of the remaining cost of the general firefighting force to the same contract only if the separate classes of firemen can be shown to serve different purposes consistently (that is: (a) costs charged directly to the contract are only costs of three contract-required firemen at a fixed post who are protecting contract materials, and (b) no costs of these firemen are ever included in the indirect cost pool).

d. Accumulation of costs under general ledger control? It is required that your job cost ledger and other books of account be reconciled with the general ledger, and is you accounting system is controlled by the general ledger.

e. A timekeeping system that identifies employees' labor by intermediate or final cost objectives? It is required that your timekeeping system to track employees' time spent on each work activity.

f. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives? This is interconnected with the discussion of timekeeping. Once an employee's time is segregated as described below, the costs must be allocated to the appropriate cost objective(s).

g. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account? It is necessary for your accounting system to produce appropriate reports that show the results of charges to contracts. These reports should be produced at least monthly.

h. Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31, Contract

Cost Principles and Procedures, or other contract provisions?

The FAR identifies some costs as expressly unallowable: e.g., bad debts (FAR 31.205-3); contingencies (FAR 31.205-7);

contributions or donations (FAR 31-205-8); and entertainment (FAR 31.205-14), and requires that they be excluded from proposals and billings. Costs mutually agreed to be unallowable between the contractor and the CO also may not be proposed or billed. It is required that your accounting system identifies these unallowable costs and segregates them in the books and records (or on some alternate acceptable informal basis that readily reconciles with the books and records). While these costs may be legitimate business expenses, they will not be accepted by the U.S. Government as allowable contract costs. FAR 42.709 authorizes CO to assess a penalty if a contractor claims an expressly unallowable cost in (1) the final indirect cost rate proposal or (2) the final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract.

i. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract) if required by the proposed contract? Some contracts require that the cost of certain items be readily identifiable. In such cases, your accounting system must be able to comply with such requirements.

j. Segregation of preproduction costs from production costs?

Your accounting system must be able to identify costs in this manner.

3. Does your accounting system provide financial information:

a. Required by contract clauses concerning limitation of cost

(FAR 52.232-20 and 21) or limitation on payments (FAR 52.216-16)?

b. Required to support requests for progress payments? N/A 13

4. Is your accounting system designed, and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions?

5. Is your accounting system currently in full operation? (If not, describe in Page 2 narrative which portions are (1) in operation, (2) set up, but not yet in operation, (3) anticipated, or (4) nonexistent.)

6. Timekeeping Procedures:

a. Is there a segregation of responsibilities for labor-related activities; for example, the responsibility for timekeeping and payroll accounting is separated?

b. Do supervisors who are accountable for meeting contract budgets have the opportunity to initiate employee time charges? It is recognized that, for a very small company, this type of segregation may not be possible, whereas for a larger company, this type of segregation would be required in order to have good internal controls over labor costs.

c. Do you have procedures in place which are clear-cut and reasonable so there is no confusion concerning the reason for controls or misunderstanding as to what is and what is not permissible?

d. Are maintenance of controls continually verified and violations remedied through prompt and effective action, which serves as a deterrent to prospective violations?

e. Are individual employees constantly, although unobtrusively, made aware of controls that act as an effective deterrent against violations? (Many businesses accomplish this by emphasizing the importance of timesheet preparation in staff meetings, employee orientation, and through the posting of signs throughout the workplace that remind employees of the importance of accurate and current timesheets.)

7. Timesheet Preparation: Do you have a timekeeping manual and/or company procedure which includes detailed instructions for timesheet preparation which indicate that the employee is personally responsible for:

a. Recording his/her time on a daily basis? 21

b. Recording time on the timesheet? 22

c. The correct distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment? To ensure accuracy, a listing of project numbers and their descriptions should be provided to the employee and maintained in the work authorization system electronically or in a hard copy for the employee to refer to it as needed.

d. Changes to the timesheet? Procedures should be in place that identify the original time charge, the corrected time charge, and documentation from the employee indicating his/her concurrence with the change.

e. Recording all hours worked whether they are paid or not? This is necessary because labor costs and associated overheads are affected by total hours worked, not just paid hours worked.

Therefore, labor rate computations and labor overhead costs should reflect all hours worked. Unpaid hours worked are termed "uncompensated overtime."

f. Certifying the hours on the timesheet reflect the hours worked and the appropriate cost objective at the end of each work period?

Contractor Name:

Instruction: You must explain in Table 2 how your current accounting system supports your response to each item in Table 1. If your response is N/A to any item that was not annotated as N/A by the Government, provide detailed explanation. Use as much space as needed. Provide references to current policies and procedures if applicable.

Table 2 Note Supporting Narrative to Table 1 Responses

13 N/A

Note Supporting Narrative to Table 1 Responses

If an outside CPA/Consultant/Non-DoD agency has reviewed your accounting system, please provide a copy of the report.