DEFENSE WORKING CAPITAL FUND PRESENTED BY: PAUL J. DOMINICK, CDFM GRADUATE SCHOOL INSTRUCTOR PDI PJDOMINICK@COMCAST.NET

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1 DEFENSE WORKING CAPITAL FUND PRESENTED BY: PAUL J. DOMINICK, CDFM GRADUATE SCHOOL INSTRUCTOR PDI PJDOMINICK@COMCAST.NET

2 DEFENSE WORKING CAPITAL FUND HOOVER COMMISSION RECOMMENDATIONS Passing Of The National Security Act Established The Office Of The Secretary Of Defense And The Department Of The Air Force Created Comptroller Positions With Overall Responsibility For Financial Systems Business /Commercial Type Activities Of The Military Departments Be Financed By Revolving Or Working Capital Funds 2

3 DEFENSE WORKING CAPITAL FUND AUTHORIZING LEGISLATION Public Law st Congress 10 USC 2208 DOD Directive FMR R The law authorized working capital funds to provide financing of industrial-commercial type activities, and to effectively control cost of programs and work performed 3

4 DEFENSE WORKING CAPITAL FUND DEFINITION Working Capital Used To Finance Operations From Time Specific Work Is Begun To The Time That Payment Is Received From The Customer DEFENSE WORKING CAPITAL FUND ELIGIBILITY Buyer-seller Relationship Exists Produce Goods Or Services For More Than One Customer 4

5 DEFENSE WORKING CAPITAL FUND CHARTER REQUIREMENTS Signed By The Secretary Of Each Service With Approval By Assistant Secretary Of Defense (Comptroller) Name And Location Of The Activity Operating Agency Responsible For Managing The Activity it Description Of Function And Type Of Products/Services Offered Statement Of Exceptions Estimated Working Capital Inventory Investments Estimated Volume Of Business Others Within DOD Agencies Authorized To Provide Services To The Activity 5

6 DEFENSE WORKING CAPITAL FUND CRITERIA 6 CRITERIA REQUIRED TO BE INCLUDED IN THE DWCF FINANCIAL STRUCTURE: Outputs (goods and services produced) can be identified Approved accounting system is available Customers identify products /services required Advantages/disadvantages of establishing buyer-seller can be evaluated

7 DEFENSE WORKING CAPITAL FUND HOW IT WORKS CONGRESS APPROPRIATED $ WORKING CAPITAL AT FUND INCEPTION CUSTOMERS OPERATING FORCES READINESS COMMANDS APPROPRIATES $ FUNDS PLACE PAY ORDERS REVOLVING FUNDS WORKING CAPITAL $$ FINANCES COST OF PERFORMING WORK BILL FOR COSTS/ SERVICES LABOR COSTS DIRECT MATERIAL PRODUCTION OVERHEAD GENERAL & ADMINISTRATIVE 7

8 DEFENSE WORKING CAPITAL FUND COMPOSITION Army Working Capital Fund Navy Working Capital Fund Air Force Working Capital Fund Defense Working Capital Fund Defense Commissary Agency (FY 1999) 8

9 DEFENSE WORKING CAPITAL FUND GOALS 9 Control Costs Of Goods And Services Produced Provide Effective And Flexible Means For Financing, Budgeting, And Accounting For Costs Provide Managers Financial Authority And Flexibility to Procure And Use Manpower, Materials, And Other Resources Effectively Facilitate Budget And Reporting For The Cost Of Products Encourage Managers And Employees To Provide Quality Products And Services At The Lowest Cost

10 DEFENSE WORKING CAPITAL FUND OBJECTIVES 10 Furnish Managers Modern Management Tools Comparable To Private Enterprise Improve Cost Estimating And Cost Control Encourage Providers To Coordinate Labor Forces And Inventories With Workload, Budgeting And Cost Control Customers Evaluate Purchase Prices And Quality Of Goods And Services Ordered Establish Standard Prices, Stabilized Rates And Unit Prices For Goods, And Services

11 DEFENSE WORKING CAPITAL FUND OPERATING LIKE A BUSINESS 11 MUST PRODUCE Quality product On Time At least possible cost BUYER-SELLER RELATIONSHIP Customers pay for what they receive Production dependent upon customer orders Must remain competitive OPERATES ON A PROFIT/LOSS HAS ITS OWN INVENTORY PURCHASES AND DEPRECIATES CAPITAL EQUIPMENT WORKING CAPITAL ORIGINALLY PROVIDED BY CONGRESS

12 DEFENSE WORKING CAPITAL FUND FINANCIAL STRUCTURE FY 2013 it is estimated The Five Funds Employ 185,400 Civilians And 16,500 Military Personnel Generate Approximately $128 Billion In FY 2013 Estimated Obligations Finance Operations Without Fiscal Year Limitation Sell Goods To Customers Use Income To Replace Or Buy Inventory And Finance The Production Of Goods And Services 12

13 DWCF BY THE NUMBERS FY 2013 PRESIDENT S BUDGET REQUEST DWCF Program Obligations (Dollars in Billions) FY 2011 ACTUAL FY 2012 EST. FY 2013 EST. Army Navy Air Force Defense-wide Defense Commissary Total DWCF OA

14 DEFENSE WORKING CAPITAL FUND FUNDED BUSINESS AREA ACTIVITIES Pre - WCF Stock Funds Industrial Funds Support Services DWCF COMMISSARIES (DECA) DEPOT MAINTENANCE (ARMY, NAVY, AF) DISTRIBUTION DEPOTS (DLA & NAVY) FINANCIAL OPERATIONS (DFAS) INDUSTRIAL PLANT EQUIPMENT (DLA) INFORMATION SERVICES (NAVY & DISA) LOGISTICS SUPPORT ACTIVITIES (NAVY) PRINTING & PUBLICATION SERVICES (DLA) PUBLIC WORKS (NAVY) REUTILIZATION & MARKETING SERVICE (DLA) RESEARCH & DEVELOPMENT (NAVY) SUPPLY MANAGEMENT (ARMY, NAVY, AF, DLA) 14 TRANSPORTATION (TRANSCOM, NAVY)

15 DEFENSE WORKING CAPITAL FUND ACTIVITY GROUPS 15 SUPPLY MANAGEMENT Buys and maintains assigned stocks of materiel for sale to its customers, primarily army operating units DEPOT MAINTENANCE * Maintains end items and depot-level reparables Provides organic industrial capability to repair, overhaul, and upgrade weapons systems and equipment INFORMATION SERVICES Provide for the development and operational sustainment of automated information and communications systems *ARMY WORKING CAPITAL FUND - INDUSTRIAL OPERATIONS Maintains end items and depot-level reparables and manufactures, renovates, stores and demilitarizes munitions for all services within DoD and for foreign military customers.

16 DEFENSE WORKING CAPITAL FUND EVOLUTION NATIONAL SECURITY ACT OF 1947 ESTABLISHED REVOLVING FUNDS 1950 S AND 1960 S Stock Fund Industrial Fund 1980 S - IMPROVED PRODUCT COST IDENTIFICATION NAVY CEASED FREE ISSUE OF DEPOT LEVEL REPARABLES (DLRS) Moved financing to the Stock Fund ASSET CAPITALIZATION PROGRAM (NOW THE CIP) ARMY/AIR FORCE MOVED DLR FINANCING TO THE STOCK FUND MILITARY PERSONNEL COSTS WERE ADDED DBOF ESTABLISHED DWCF ESTABLISHED

17 MISSION STATEMENT The mission i is readiness not profitability Achieve the readiness standards of the Service Keep the industrial base warm for when it s needed Cover the cost of operations So we are in a business but we have to do things no business would ever do Not Like a business Like a business You re setting your rates/prices Customer-Provider relationship months ahead of the year The provider MUST be aware of the they ll be used or sold operating costs involved The prices and rates are locked during the year of execution The provider has to cover those costs You can be told to return profit The provider must be responsive or it The politics and the political won t be competitive oversight are much more intense than the commercial counterpart In some cases, the customers CAN Congress go elsewhere Local Communities There s no guaranteed business The business depends on the customers funds for operating cash As the government s organic base, you can/sometimes must operate at far less than your capacity 17 17

18 WE HAVE A BUSINESS PLAN Our business plan is our Operating budget Implied Task: Better be involved when your RM builds your budget What s in a business plan? Past sales Past industrial orders Cost of your sales Cost of your industrial orders Anticipated sales Anticipated industrial orders The current and future environment You have these numbers and You should know them This is the business art. Work this hard & you can get close 18 18

19 THE GOALS OF THE BUSINESS PLAN Break even over time (non-profit) For every profit $ you make, you ve reduced the appropriated customer s buying power Profit P implies failure to properly cost requirements You return profit through lower rates For every loss $, you ve misjudged your costs Losses imply failure to understand costs You cover losses through higher rates O Full Cost Visibility Full Cost Recovery Revenues Expenses 19 19

20 BUSINESS PLAN Based on performance metrics Driven by readiness, not profit goal Budget is our business plan! We have two budgets Operating Capital Operating Budget Considerations What do your customers need? Are you in touch with them? Do you know missions and mission changes? You re building your POM on their needs Is the budget related to their requirements? Do you know how your enterprise is running? Capital Budget Considerations Does it strike a balance between refreshing your tech base and what it s going to cost in your rates? Is it related to your vision of the future? Can you quantify the efficiency that gives a payback on investment? e There ought to be a point where you can identify and realize your ROI Are your metrics budget related? Is your budget tied to where you re going? It takes active internal and external communications to succeed at both! If it ain t in your budget, it ain t! 20 20

21 STABILIZED PRICE AND RATE MANAGEMENT 21 DWCF business entities operate on a break-even basis Customer prices and rates are established on an end product basis Prices and rates are established during the budget process at levels estimated to recoup: - budgeted cost of goods and services provided - prior period gains and losses -as well as approved surcharges for capital asset acquisition Budget process is the mechanism use to ensure adequate resources are budgeted in the customer s appropriated fund accounts to pay the established prices and rates Stabilized rates protect the customer s buying power which ultimately, protects Service readiness

22 POLICY DOD FINANCIAL MANAGEMENT REGULATION R Volume 11B, Chapter 1 Rates are required to be established at levels estimated to -- Full Cost Recovery recover, over the long term, the cost of products or services to be provided, as well as approved surcharges. Gains or losses in operations may occur as a result of variations in program execution. Realized gains and losses generally are reflected in offsetting adjustments to stabilized rates established in subsequent fiscal years --Current year gains/losses will be accommodated through the rate process 2 years out! Volume 2B, Chapter 9 Managers of activity groups within the Fund are required to set their prices based upon full cost recovery, including all general and administrative support provided by others. Prices are established through the budget process and (except for the Depot Maintenance, Central Design Agent Activity Groups, and United States Transportation Command) remain fixed during the year of execution. --Within an installation s rate will be expenses beyond its control. --Stabilized rates can be adjusted during year of execution, if activity group is +/- $10M NOR 22 22

23 STABILIZED RATE CONCEPT EXCLUSIONS 23 Exclusions: FMS Non-federal Customers Base Closures Inventory Sales-tenants/satellites Army RESET

24 IMPACT OF PBD* 406, DTD 1 DEC Army RESET program - Repair of war-damaged equipment, will be performed on a cost reimbursable basis, to include a portion of overhead, are recovered (assumption- asset condition i is unknown) * Now called Resource Management Decision (RMD)

25 THREE COMPONENTS OF RESET 25 Replacement - The purchase of new equipment to replace battle losses, worn out or obsolete equipment, and critical equipment deployed and left in theater, but needed for homeland defense, homeland security and other critical missions Recapitalization- A rebuild effort that extends the equipment s useful life by returning it to a near zero mile/zero hour condition with either the original performance specifications or with upgraded performance specifications Repair - A repair or overhaul effort that returns the equipment s condition to the Army standard. It includes the Special Technical Inspection and Repair Program of aircraft.

26 COST REIMBURSEMENT PROJECT ORDERS 26 Performing activity will notify the ordering activity promptly upon learning of any significant change in costs If it becomes evident that goods or services to be provided will exceed the estimated costs, the performing activity will immediately notify the ordering activity and curtail or cease performance, as necessary, to avoid exceeding the estimated cost. May result in violation of 31 USC 1301 and 1341

27 DEFENSE WORKING CAPITAL FUND CUSTOMER 27 THE PURCHASER OF SUPPORT SERVICES: Determines requirements Requests funding through the budget process Balances readiness requirements and available resources

28 DEFENSE WORKING CAPITAL FUND PROVIDER 28 The Provider Is The Support Activity That Produces Goods Or Provides Services: Satisfy customer requirements Provides best performance at lowest cost Use unit cost as a tool Ensures a READY - to - FIGHT Force

29 DWCF BUSINESS AREA CUSTOMERS DOD Organizations Non-DOD Federal Government Agencies Private Parties And Concerns: Foreign Governments State And Local Governments Us Manufacturers, Assemblers, Or Developers Authorized By DOD Customer Orders Finance The DWCF 29

30 CUSTOMER RELATED BUDGETING Customers Determine And Justify Anticipated Requirements From The DWCF Business Area Financial Resources To Purchase Business Area Products Are Identified In Budget Requests Budget Documents Developed Using Projected DWCF Rates And Prices Customer Orders Provide The Resources To Finance DWCF Business Areas Customers Need To Submit Accurate Budget Requests Inaccurate Budgets Result In Insufficient Appropriated Resources Results In Oversized DWCF Business Areas (Personnel, Overhead, Material, Operating And Capital Budgets) Inaccurate Customer Forecasts Can Affect More Than One Business Area 30

31 CUSTOMER S S WORKLOAD PROJECTIONS Customer s Workload Projections Affect More Than One Business Area: Turns in reparable and orders new stock Supply Management Ships Depot Level Reparable (DLR) to Depot Maintenance 1 2 Customer 4 Transportation 3 Depot Maintenance Stores DLR for eventual delivery to customer Distribution Depot Repairs DLR and ships to Distribution Depot 31

32 THE DEFENSE WORKING CAPITAL FUND PARADOX FIXED PRICE WORKLOAD O (DLH) 32

33 WORKLOAD DRIVES THE BUSINESS CYCLE & ESTABLISHES RATES Theory: Workload Drives Everything Direct Labor Hours (New Orders The Operating Budget Estimate of revenue & expenses Direct Labor Hour Rate Submitted as the + Carry in Budget Estimate Submission (BES) The WCF Cash Balance The Rate Process (Submits for a DL rate) Rate Approved in PBD/RMD 426 Billing And Collections The Pricing Process Individual items/projects Prices published for customers Execution Process Customer Produce Products Revenues & Expenses 33 33

34 WHAT S IN THE RATES YOU CHARGE YOUR CUSTOMERS? (DEPOT MAINTENANCE) A rate has three components: Direct Costs Direct Labor welder Direct Materiel engines Direct Other TDY, Contract Services Indirect (Overhead) Mission (Production Overhead) Within Shop supervisor Above Shop director Non Mission BOCIE janitor G&A activity commander AOR Recovery 34 34

35 WHAT IS (AOR)? HOW YOU RETURN PROFIT OR LOSS Remember the DWCF goal is to break even? Why break even? Because you want just enough spending authority to operate Any excess takes away from the readiness money for operations The mechanism for controlling profit and loss is Accumulated Operating This is used to Result (AOR). calculate your rate What s NOR and What s AOR? NOR = Revenue Expenses Net Operating Result (NOR) is your profit loss statement. Every business has one. It s your operating target for the current year (year of execution) AOR Basis for AOR Recovery NOR AOR is cumulative gains or losses from operations for all years NOR In private business, AOR would be considered retained earnings NOR It s a running total of NORs NOR NOR This is used for Execution! How are you doing This Year? Cum mulative NOR Rs 35

36 BUDGETING WHY BUDGET? Allows customer accounts to be sufficiently resourced to pay for what they need from you (& replenish the DWCF) Allows DWCF to obtain the resources to: Match projected business operations and workload to recoverable customer rates Obtain capital investments to refresh technology and infrastructure Plan for long-lead items or new initiatives to support projected customer requirements Supports Service readiness by resourcing logistics tail to support operations (tooth to tail) It documents your business plan and resources the forecasted requirements

37 INTERNAL OPERATING BUDGET (IOB) 37 COST CENTER BUDGET PROVIDING AN APPROVED OPERATING PLAN FOR EACH ACTIVITY ORGANIZATION IDENTIFIES: Direct/indirect Labor Hours Expenses - salaries & wages, materials & other PURPOSE: Control Expenses Facilitates Comparison Between Projected And Actual Performance Develop Cost Application Rates

38 38 DWCF BUDGET - IOB DEVELOPMENT IOB DEVELOPMENT - DIRECT COST Direct cost for labor and material are projected by considering both historical costs and the projected workload for each productive cost center Consider other direct costs for contractual support and TDY for depot field teams Total direct costs for each productive cost center are rolled p up to a total depot budget

39 39 DWCF BUDGET - OVERHEAD COSTS IOB DEVELOPMENT - OVERHEAD COSTS Developed by element of expense Distributed to the productive cost centers based on anticipated direct labor hours for each productive cost center Two basic types of overhead cost: Production overhead - overhead identifiable to the productive cost center General & Administrative (G&A) - not reasonably identified to a productive cost center

40 DWCF BUDGET - HISTORICAL COSTS 40 ADJUST HISTORICAL COSTS FOR: Work Content Changes Material Consumption Rate Changes Material Inflation Workload Mix Changes Pay Raises (OSD/OMB Directed) Step Increases Bonus Pay Overtime Changes Shift Differential Changes

41 41 RATE DEVELOPMENT AVERAGE LABOR RATE Base Labor Fringe Benefits Leave OVERHEAD APPLIED RATES Production Overhead (Army - Within and Above Shop) General And Administrative Expense (Army - Base Operations Identifiable Expense & General & Administrative)

42 ACCELERATION CHART Annual Leave Account Sick Leave Account Other Leave Account CSRS/FERS Account *Other Fringe Benefit Accounts PAID TO EMPLOYEES ON LEAVE PAID TO GOVERNMENT AGENCIES Liability accounts for fringe benefits increase from acceleration and ddecrease from payments. Eventual balance equals zero *Includes FICA, health insurance, life insurance, and Medicare portion of FICA for CSRS employees 42 Cost Accumulation and Cost Recovery Fringe Benefit Cycle

43 ANNUAL OPERATING BUDGET (AOB) 43 Funding Document Which Provides The Basis For Earning Budget Authority Includes An Operating And Capital Budget Operating Budget Identifies Unit Cost Output And Associated Unit Cost Goal Capital Budget Provides Obligation Authority For Investments

44 BUDGET EXECUTION Rates approved & Annual Cost Authority received Monitor budget execution & results on monthly schedule Start Sa Receive funded orders from customers Bill customers & manage receivables Fiscal Year Distribute cost authority to departments Product Centers produce work & deliver services Compute customer charges Capture revenue, costs & workload 44

45 PROJECT ORDERS 45 SAME AS A COMMERCIAL CONTRACT TO THE CUSTOMERS APPROPRIATION Extends beyond the life of the appropriation. Up to five years after the appropriation expires for new obligations Over-billing may create a 31 USC 1517 violation NORMALLY ISSUED FOR THE OVERHAUL OR MANUFACTURING OF A SPECIFIC NUMBER OF ITEMS WITHIN A SPECIFIC TIME FRAME FOR A SPECIFIC PRICE DWCF ACTIVITY SHOULD INCUR COSTS OF NOT LESS THAN 51% OF THE TOTAL COSTS TO PERFORMING THE WORK THE WCF MUST NOT ACCEPT THE PROJECT ORDER IF THE REQUIREMENTS OF THE PROJECT ORDER REGULATIONS ARE NOT MET

46 PROJECT ORDER CHARACTERISTICS 46 Specific Regarding Work To Be Done Single Purpose With Identification To A Final Product Or End Item Includes A Production Schedule Includes Funded Cost Per Item Usually Mission Oriented Be Performed In House Bona Fide Need In The Year Executed Commence Work Within A Reasonable Time (90 Days) R t O d F C ll ti If W k Fi d B A E i i Return Orders For Cancellation If Work Financed By An Expiring Appropriation Is Not Started By 1 January

47 ECONOMY ACT ORDER CHARACTERISTICS 47 Order Not Meeting Project Order Criteria Expires With Appropriation Cited Limited To Service In Current Fiscal Year Involves Routine Maintenance Or Day-to-day y Operation May Cover Education, Training, Storage, Welfare Or Travel DWCF Activities Who Incur Costs Against Expired Economy Act Orders May Violate 31 USC 1517

48 COMMANDER S ORDERS 48 WORK OF AN EMERGENCY NATURE CONDITIONS: Wi Written assurance or equivalent documented d communication i that an order will be issued promptly Bona fide need Expires not later than 30 days from date of issuance Signed by the commander or his authorized representative

49 49 MILITARY INTERDEPARTMENTAL PURCHASE REQUEST (MIPR) An order issued by one military service to another to procure service, supplies, or equipment for the requiring service. The MIPR may be accepted on a direct citation or reimbursable basis. MIPR can be used as a Project Order or an Economy Act Order

50 50 MIPR PROCESSING PROCEDURES Requesting activities send requirements to the performing activity using DD Form 448 MIPR is the performing activities authority to acquire/provide id the supplies or services on behalf of the requesting activity Changes that affect the contents of the MIPR must be processed as MIPR amendment regardless of the status of the MIPR

51 51 MIPR ACCEPTANCE Performing activities formally accept a MIPR by completing DD form 448-2, Acceptance of MIPR Prepared as soon as practicable, but no later than 5 days after receipt of the MIPR If the time limit cannot be met the requesting activity must be informed of the reason for the delay and the anticipated date the MIPR will be accepted The performing activity in accepting a MIPR will determine whether to use Category I (reimbursable funds citation) or Category II (direct funds citation) methods of funding

52 52 MIPR ACCEPTANCE (CONT D) Category I reimbursable funding is used under the following circumstances: - Delivery is from existing inventories of the performing activity - Production is through Government work orders in Government owned plants - The DD Form is the authority for the requesting activities to record the obligation of funds Category II direct funding results in the citation of the requesting activities funds in the resultant contract A f d f th t t i th ti - A conformed copy of the contract is the requesting activities authority to record the obligation

53 REIMBURSABLE SUMMARY Project Economy Direct Order Act Order Cite/RCP * (Reimb) (Reimb) Non-Reimb Task Non- Severable Either Severable How Funded? Expire or Carryover Full Funding (except R&D) Carryover Incremental Funding Expire at end of FY. No carryover Depends on Task Must obligate before funds expire Customer When work is When work is When obligation accepted accepted contract is signed 51% rule Applies per Applies N/A FMR (Navy) Work ceases When funds run out or work is complete, whichever comes first When funds expire or work is complete, whichever comes first Per contract terms *Request for Contract Proc.

54 MIPR IMPACT ON CUSTOMER/ PROVIDER BOOKS 54 Provider Books Orders Received Reimbursements Earned Collections Unfilled Orders MIPR ACCEPTANCE $ 1.3M FY Available To complete Work thru 30 Sept., 2017 Assumes O&M customer $ 1.216M Billed to Customer based on Cost In support of the Project (SF 1080 bill submitted) $ 1.216M $ 84 Should complete work by 30 Sept Customer Books Obligations Cost Payment / Liquidation Un-liquidated Obligations MIPR ACCEPTANCE $ 1.3M $ M $ M $ 84 Project Order (DD 448-2) Based on SF 1080 Bill Must be de-obligated if not Completely liquidated by 30 Sept. 2017

55 55 COST ACCOUNTING Collects Cost And Production Data Serves As A Subsidiary Ledger For The General Ledger Basis Of Billing For Work Performed Provides Data To Prepare Budgets Provides Unit Cost

56 KEY ELEMENTS IN A COST ACCOUNTING SYSTEM 56 JOB ORDER NUMBER All costs (direct/indirect) are identified to a job order COST CENTER Can be either direct or indirect Each employee belongs to one

57 DIRECT/INDIRECT COST CENTERS 57 DIRECT COST CENTER Majority of effort is associated with actual production of work INDIRECT COST CENTER People and resources generally do not come in contact with end items

58 ELEMENTS OF COST LABOR THESE ELEMENTS OF COST ARE DIRECT WHEN REQUIRED SOLELY FOR THE BENEFIT OF A SPECIFIC CUSTOMER ORDER (JOB ORDER) MATERIAL CONTRACT CLASSIFIED AS INDIRECT WHEN IDENTIFIED AS SUPPORT TO THE PRODUCTIVE ORDER i.e..prod. OVERHEAD OR G& A OTHER

59 TYPES OF RATES 59 COST APPLICATION RATE Cost Center Labor Rate For Salaries and Benefits Overhead Cost Applied to That Cost Center Excludes: Direct Material Other Direct Costs - Contracts, TDY,etc.

60 60 COST APPLICATION RATES USE TO APPLY COST TO INDIVIDUAL JOBS EXAMPLE: Average Labor Rate X DLH = Labor Cost Overhead Rates X DLH = Overhead Cost Applied Add: Direct Material Cost Other Direct Cost = Total Cost

61 61 DWCF COST ELEMENTS DEPRECIATION EXPENSE Depreciation Is The Expending Of Capital Assets Over The Useful Life Of The Asset Depreciation Expense Included In The Stabilized Rates Or Prices To Generate Cash Capital Surcharge Added To The Rates As Required Depreciation On A Straight Line Basis

62 DWCF COST ELEMENTS MAJOR REAL PROPERTY MAINTENANCE AND REPAIR (MRPM&R) 62 Costs Associated With Repair And Renovation Of Buildings, Structures, Warehouses And Other Real Property Owned/Operated By The DWCF Expensed In The Period When The Maintenance And Repair Occurs Included In The DWCF Operating Budget Passed On To Customers In The Stabilized Rates/Prices

63 DWCF COST ELEMENTS MILITARY PERSONNEL COSTS 63 Included in the total cost of operations of the DWCF activities at the Civilian equivalent rates shown in DOD FMR R, Volume 11A Stabilized customer rates and reimbursement to the MPA are not based on the civilian equivalent rates but on the absolute total t dollar amount specified in the President s budget

64 DWCF COST ELEMENTS MINOR CONSTRUCTION FUNDING PROCEDURES 64 Projects Costing $100,000 Or More But Less Than $750,000 Are Funded Through The Capital Investment Program (CIP) Depreciation The Upper Limit Is Increased To $1,500,000 Or Less For Projects Impacting Health, Safety Or Environment Projects In Excess Of $750,000 Are Funded With The Military Construction Appropriation (MCA)

65 DEFENSE WORKING CAPITAL FUND 65 Overhead Expense Classes 21 Supervision 62 Purch Of Office Furniture & Equip 93 Environmental 22 Other Salaries And Wages 63 Purchase Of Shop Equip 94 Awards 31 Time Waiting Parts/Equip 64 Equipment Rental 95 Labor Distribution Variance 32 Standby Time 65 Depreciation 96 Labor Acceleration Variance 34 O/H Work By Prod Workers 71 Maint & Repairs To Bldgs 97 Station Support Costs 36 Allowed Time 72 Maint & Repair To Grounds 98 ADP Support Costs 37 Traumatic Injury 73 Repair Office Furniture & Equip 99 Military Labor 41 Telephone Services 74 Maint & Repair Shop Equip 100 FECA (Workman's Comp) 42 Electricity 75 Rearranging Of Facilities 101 DFAS Acctg Svcs (DFAS & DCPS) 43 Steam 76 Emergency/Service Work 103 HQs Support ( 44 Gas 81 Defective Work & Spoilage 104 HRO Support 45 Water 82 Travel/Mileage Claims 105 CA Participation 46 Sewage 83 Training 106 Union Business-ST 51 Janitorial Services 84 Printing & Reproduction 107 Internal ADP Services 52 Pest/Weed Control Service 85 Unallocable Cost 108 ABC Distribution 53 Use Of PWC Transport Equipment 86 Safety Costs 109 Contracted Support 54 Refuse & Garbage Services 91 Inventory Adjustments 61 Materials And Supplies 92 Excess Material & Material Losses

66 COSTS REQUIRING SPECIAL ATTENTION 66 Quality Assurance - Cost incurred in direct support of a customer order shall be directly charged to those orders - Costs not identifiable to specific job orders shall be charged to an operating support indirect cost center and allocated to the benefitting direct cost centers Inspections and Tests - Preshop analysis, initial evaluation and inspection, and preinspection and operational inspections and tests to determine condition of the item shall be recorded as direct labor Reparables - Reclamation of unserviceable reparables is performed at the direction of the NICP manager. Items produced as a result of reclamation shall be returned to the Supply system - Separate job order established for each reclamation project

67 COSTS REQUIRING SPECIAL ATTENTION 67 Backrobbing The current acquisition cost of the assembly, subassembly, component, or part that was borrowed and the cost of installing the borrowed item shall be charged to the benefitting job order Costs incurred in removing the borrowed item and reinstalling the replacement item shall be charged to the overhead of the cost center requiring the part

68 COSTS REQUIRING SPECIAL ATTENTION 68 Cannibalization Taking of an assembly, subassembly, component, or part from a serviceable or unserviceable item that has not been inducted for maintenance for use on an item which h has been inducted d for maintenance The current acquisition cost of the cannibalized part and the cost of installing it shall be charged to the benefitting job order Cost incurred in removing the cannibalized item and reinstalling Cost incurred in removing the cannibalized item and reinstalling the replacement item shall be charge to or the operations overhead of the cost center requiring the part

69 COSTS REQUIRING SPECIAL ATTENTION 69 Calibration Calibration of an assembly, subassembly, component, part, or other equipment from an item that has been inducted for maintenance shall be charged to the benefitting job order Calibration of equipment used in the performance of its work shall be charged as an indirect expense of the cost center that uses the item being calibrated

70 COSTS REQUIRING SPECIAL ATTENTION 70 Machine Set-Up Costs Cost of programming effort for automatic test and numerically controlled machines and machine tool set-up time shall be charged to the benefitting job order(s) () If cost is significant and benefits more that one job order, cost shall be allocated to all benefitting job orders Nonproductive labor hours of employees waiting for programming to be completed in an indirect expense of the worker s cost center

71 COSTS REQUIRING SPECIAL ATTENTION 71 Defective Work and Spoilage Costs Examples of corrective work that should be directly charged to a job order include: 1. Acceptable reject rates for castings, welds, and brazing. 2. Minor realignment or refitting of units that are improperly finished or aligned. 3. Resoldering of connections broken in transit.

72 COSTS REQUIRING SPECIAL ATTENTION 72 Defective Work and Spoilage Costs (Cont d) Defective work and spoilage that is chargeable to indirect costs includes the following: 1. Cost of additional material and labor necessary to remedy or rework end products when defects beyond acceptable levels are detected during the normal production and inspection processes. 2. Costs related to work on items with defects so severe that the item must be removed from the production process and sold as scrap or returned in part to raw materials.

73 DWCF CAPITAL INVESTMENT PROGRAM 73 GOAL: To establish the capability for reinvestment to facilitate mid and long-term cost reduction

74 DWCF CAPITAL INVESTMENT PROGRAM OBJECTIVES 74 Improve Product/Service Quality And Timeliness Reduce Cost Foster Competitive Business Operations

75 75 DWCF CAPITAL INVESTMENT PROGRAM CIP POLICY MANAGERS SHALL: Identify Prioritize Justify Budget for Capital Assets Only Projects In President s Budget Financed Through CIP (Substitutes Authorized When Necessary) Capital Assets Funded Through DWCF Capital Budget Financed Through DWCF Reimbursement Rates Or Capital Surcharge

76 DWCF CAPITAL INVESTMENT PROGRAM ACQUISITION GUIDELINES 76 More Economical To Purchase Than Lease Meets Agency Long Range Objective Improved Efficiency/Effectiveness New Capability/Capacity Replacement Of Unsafe/Unusable Capital Assets Hazardous Waste Reduction Mandated State, Local, Federal Requirement Pre-investment Cost/Economic Analysis Post Investment Analysis Retained for 5 years

77 DWCF CAPITAL INVESTMENT PROGRAM EXCLUSIONS 77 Major Range And Test Facility Items Military And Tenant Support Functions Aircraft, Ships, General Passenger Vehicles, Etc. Equipment For Weapon Systems GFE Used In An End Product Minor Construction Projects For Non-DWCF Activities Construction/Facility Projects Exceeding Amounts Specified In 10 U.S.C (Funded By MCA) Environmental Projects Financed By DERA Capital Investments For Morale, Welfare And Recreation

78 NEW CAPITALIZATION THRESHOLD FOR BUDGET 78 Revised policy issued April 4, 2007 Effective immediately Threshold increased from $100,000 to $250,000 for Equipment, ADP Software and ADP Equipment. Threshold remains at $100,000 for Minor Construction. Accounting limits not changed

79 NEW CAPITALIZATION THRESHOLD FOR BUDGET 79 Budget rates are set to fully expense items between $100K and $250K. Accountants will Capitalize and Depreciate these items. Treat the gain as non-recoverable to avoid cash drain. New budget exhibit 9D will help in calculating this adjustment.

80 DWCF CAPITAL INVESTMENT PROGRAM CAPITALIZATION CRITERIA 80 ACQUISITION COST =TO OR > $20,000 - FOR REAL PROPERTY (LAND, BLDGS. & MINOR CONSTRUCTION) ACQUISITION COST = TO OR > $100,000 - FOR ALL OTHER CAPITAL ASSETS, INCLUDING DEPRECIABLE PLANT, EQUIPMENT AND SOFTWARE DEVELOPED, MANUFACTURED, TRANSFERRED OR ACQUIRED USEFUL LIFE = 2 YEARS OR MORE ACQUISITION COST INCLUDES: Purchase Cost Transportation Design Installation Other Related Costs COMPUTER SYSTEMS ON BASIS OF COMPLETE SYSTEM COMPUTER SOFTWARE CAPITALIZED AS HARDWARE

81 DWCF CAPITAL INVESTMENT PROGRAM DEPRECIATION CRITERIA 81 STRAIGHT LINE METHOD Less residual value if it exceeds 10% of the cost of the asset COMMENCES ON MONTH FOLLOWING: Date of Receipt Date Asset Installed/ Ready for Use EQUIPMENT AND MINOR CONSTRUCTION PROJECTS IN SUPPORT OF MOBILIZATION WILL NOT BE DEPRECIATED

82 82 CASH MANAGEMENT A MANAGEMENT TOOL DESIGNED TO IDENTIFY AND CONTROL PERIODS OF HIGH AND LOW CASH BALANCES HIGH CASH BALANCE: Bills Not Paid Rates/surcharges Set Too High LOW CASH BALANCE: Buying Inventory Excess of Needs Rates/surcharges Set Too Low

83 CASH MANAGEMENT 83 GENERATING CASH IS DEPENDENT ON: Rates That Recover Full Costs to Include Prior Year Losses Accurate Workload Projections Meeting Established Operational Goals

84 CASH MANAGEMENT 84 CASH LEVEL CRITERIA Dependent on accurate and timely data on cash levels and operational results Maintain 7 to 10 days operational cost and cash adequate to meet 6 months of capital disbursements

85 CASH MANAGEMENT 85 CASH MANAGEMENT PLAN Developed During the Budget Process, Takes Into Consideration: Collections, Disbursements, Appropriations, and Other Cash Transactions Monthly Phasing Required to Monitor Execution Increase Management Attention to: Reduce Costs Emphasize Timely Billing/collection Timely Disbursements

86 CASH MANAGEMENT NEGATIVE CASH BALANCE 86 CAUSED BY: Negative NOR Large CIP Cash Outlays Billing/Reimbursement Cycle Lag Inventory Increases

87 INVENTORY MANAGEMENT WHAT IS INVENTORY? 87 ITEMS WHICH SUPPORT PRODUCTION & CUSTOMER SERVICE: Raw Materials Work In Process Operating Supplies Finished Goods Spare Parts

88 INVENTORY MANAGEMENT WHAT IS INVENTORY? 88 Basically inventory is...

89 INVENTORY MANAGEMENT RETAIL INVENTORIES 89 INVENTORY: Financed with DWCF cash Owned by DWCF Purchased from Wholesale Stock Fund/Other

90 INVENTORY MANAGEMENT INVENTORY CONTROL 90 EXCESSIVE INVENTORIES CREATE UNNECESSARY EXPENSES FOR: Handling Storage Spoilage Obsolescence And Theft INADEQUATE INVENTORIES CAUSE: Unsatisfactory Service Purchase Price Disadvantage Excessive Follow- Up Cost Additional Production Cost

91 FINANCIAL STATEMENT ANALYSIS BASIC FINANCIAL STATEMENTS 91 STATEMENT OF FINANCIAL CONDITION (Balance Sheet) STATEMENT OF NET COST (Income Statement) STATEMENT OF CHANGES IN NET POSITION

92 STATEMENT OF FINANCIAL POSITION Also referred to as the Balance Sheet assets dollar amount of future economic benefits owned and managed by the agency liabilities dollar amounts owed by the agency net position (equity) the difference between assets and liabilities

93 STATEMENT OF FINANCIAL POSITION Summarizes the net worth or liquidity of an entity at a particular time Changes from day to day Accounts on this statement t t are permanent accounts Is a summary of accounting equation Assets = Liabilities + Government Equity

94 STATEMENT OF NET COSTS Also Referred to as: Statement of Operations Income statement Purpose intended to provide revenue and expense details reports results (net profit or net loss) Prepared on basis of general ledger 5000 and 6000 account balances

95 STATEMENT OF CHANGES IN NET POSITION Reports the beginning net position effect of those transactions that caused the net position to change ending net position Prepared on the basis of the Statement of Net Costs and the Financing Sources

96 STATEMENT OF CHANGES IN NET POSITION ITEMS THAT INCREASE NET POSITION Excess of revenue over cost (net income) Legislative appropriations Property obtained from another govt. agency for which no reimbursed is required ITEMS THAT DECREASE NET POSITION Excess of cost over revenue (net loss or net cost of operations) Property provided to another agency for which no reimbursement e is expected ed Funds returned to the Treasury Appropriations returned 96

97 97

98 AREAS FOR MANAGEMENT REVIEW 98 End Strength Revenue Rate Total Expense Rate Net Operating Results Direct Labor Hours Productive Yield

99 MANAGEMENT REVIEW 99 NET OPERATING RESULT Measure of an activities revenues against expenses - equivalent to a commercial firms annual profit or loss MANHOUR EXECUTION MARK Measures planned direct labor hours to actual - man-hour execution impacts on the revenue rate, expensing rate and the NOR

100 MANAGEMENT REVIEW 100 DIRECT LABOR YIELD Based on 2080 available hours per employee per year Reduced by non-productive time, i.e. Holidays, leave, training DoD standard 1,615 hours Hi h di t l b i ld t l t i t t ffi i High direct labor yield translates into greater efficiency and productivity, and lower expenses

101 FINANCIAL BASICS REVENUE: Customer Price X Production EXPENSES: Direct Labor Direct Material Direct Other Overhead 101 Expense = LONG TERM OBJECTIVE BREAK EVEN + CAPITAL RESERVES S

102 ACTIONS IMPACTING NOR 102 HIRING POLICIES OVERTIME - CHANGES FROM PROGRAM PAY RAISES LEAVE - ADMINISTRATIVE LEAVE FOR INCLEMENT WEATHER - HIGH SICK LEAVE UTILIZATION INVENTORY ADJUSTMENTS, NON-CREDITABLE EXCESS FIXED PRICES - GAINS/LOSSES DIRECT MANHOURS VARIANCE FROM PROGRAM

103 DWCF SUBJECT TO ANTI-DEFICIENCY ACT 103 Significant areas of operations that, if miss-managed, could result in a statutory violation of 31 USC. Section 1517, Title 31 of the US Code states that if we overobligate or over-expend dollars associated with our Capital Investment t Program (CIP) approved budget, we violate this statute. We must effectively manage our CIP to ensure that the current Investment Capitalization criteria is complied with

104 DWCF SUBJECT TO ANTI-DEFICIENCY ACT USC Violations (continued): Per Section 1342, We cannot accept voluntary services. Per Section 1341: Cannot create cash disbursements that exceed the total cash available. Misappropriation, Use of incorrect fund type. Per Section 1301, Augmentation - Funding expenses from one organization with those from another organization. We need to have clear separation and agreements/issas

105 DWCF SUBJECT TO ANTI-DEFICIENCY ACT USC Violations i (continued): DOD R, Financial Management Regulation (FMR), Volume 14 also provides DOD Guidance wrt 31 USC violations. How Serious? COs and Comptrollers have been terminated for misappropriating funds.

106 106 DWCF SUMMARY - ADVANTAGES EFFECTIVELY RELATES RESOURCES AND WORKLOAD Identifies costs to do the job Customer pays for what they get HELPS CONTROL COST FINANCIALLY DEPENDENT ON: Obtaining customer orders Balancing expenses and reimbursements EFFECTIVE MEANS TO CONTROL OVERHEAD Move people to the workload Finance own inventory FREEDOM FROM APPROPRIATION CYCLE LIMITATIONS Ability to carryover work CRA impacts minimized

107 DWCF SUMMARY - DISADVANTAGES 107 Non-DWCF Managers Do Not Understand Perceived as too costly Rates Fixed 2+ years out (crystal ball) Continued Reliance On Appropriation Type Reports And Controls

108 QUESTIONS?????? 108

109 CONTACT INFORMATION: Paul J. Dominick, i CDFM pjdominick@comcast.net 109