April 2014 Author: Document Version: Product: Product Version: SAP Version: Localization: Enprise Solutions 1.5.0 Enprise Job Costing All versions All current versions North America
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Table of Contents Chapter 1 Introduction 4 Chapter 2 System Requirements 5 2. 1 Proper segregation of direct costs from indirect costs 5 2. 2 Identify and accumulate direct costs by contract 6 2. 3 A logical and consistent method for the allocation of indirect costs to 7 intermediate and final cost objectives 2. 4 Accumulation of costs under general ledger control 7 2. 5 A timekeeping system that identifies employee's labor by intermediate or 7 final cost objectives 2. 6 A labor distribution system that charges direct and indirect labor to the 8 appropriate cost objectives 2. 7 Interim (at least monthly) determination of costs charged to a contract 9 through routine posting to books of account 2. 8 Exclusion from costs charged to Government contracts of amounts that are 9 not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions 2. 9 Identification of costs by contract line item and units ( as if each unit or line 10 item was a seperate contract ) if required by the proposed contract. 2. 10 Segregation of pre-production costs from production costs 11 Chapter 3 Conclusion 12 3
1 Introduction The Defense Contract Audit Agency (DCAA) is an agency that was established to audit and monitor contracts that have been entered into with the Department of Defense. The DCAA has outlined a number of criteria that the systems run by contractors involved in contracts with the Department of Defense, must comply with. The intention behind this document is to outline those criteria and to provide recommendations as to how, through the use of Enprise Job Costing, these criteria can be met. A word of caution must be provided in that, the ability to meet these criteria is dependent on how you setup and configure, both SAP Business One and Enprise Job Costing. Whilst we can provide recommendations as to how the criteria can be met, the recommendations outlined are not an exhaustive list of how the system must be configured. Our recommendations must be weighed up in the light of customer requirements and other aspects of the implementation at the same time. The information that this document is based upon is drawn from the "Information for Contractors" guide (DCAA Manual 7641.90) dated June 2012, and the "FAR Cost Principles Guide" dated January 2013. 4
System Requirements 2 System Requirements Outlined inside the FAR Cost Principles Guide (January 2013) are ten provisions that must be complied with if a contractor is, or is wanting to, undertake contracts associated to the Department of Defense. Below is a discussion about each of the provisions along with, where necessary, recommendations on how to comply and meet the requirements. 2.1 Proper segregation of direct costs from indirect costs The DCAA requires that a segregation is maintained between direct and indirect costs. Direct costs, according to FAR 31.202, are any costs that can be specifically and directly attributed to an aspect of the contract / job that is being undertaken by the contractor. An example of such would be any timesheet information, materials or expenses which were incurred in carrying out a job. Indirect costs, according to FAR 31.203, are costs that cannot be specifically allocated to a job, or, costs that are incurred which apply to multiple jobs, but with no specific manner to directly apply the cost to the jobs. Examples of a pure indirect cost could be general admin overheads that are incurred by the company which do not have a direct relationship to a particular job. An example of the costs incurred that apply to multiple jobs with no direct allocation, could be the rent / electricity incurred in a warehouse / manufacturing area where work is done on several contracts. All the contracts benefit from the costs incurred, but there is no specific manner in which you can allocate them directly. 2.1.1 Recommendations Being able to achieve this segregation is not difficult. By default, any timesheets / materials / expenses that are processed to a job should in effect be direct expenses. Indirect expenses would generally be processed outside of Job Costing as standard journal entries / A/P transactions to the profit and loss. 5
The DCAA requirements do however allow for the apportionment of indirect costs through to a contract / job, although there is a requirement to ensure that the allocation method used to allocate these costs to the job is logical and consistent. If indirect costs are going to be allocated out of the P&L onto a job, then inside Job Costing you have the option of processing these transactions as Job journal entries, or else as a direct material entry using a non-inventory item. These transactions will need to be flagged as an apportionment of indirect costs in order to meet the criteria. This can be obtained in the following manner: 1. Using a specific non-inventory item code, or a property on the item code, to identify that the item code(s) used relate to indirect expenditure. 2. Using either the Analysis 1 or Analysis 2 field to identify the transaction as indirect. 3. Using a UDF on the job line to identify the transaction as indirect. 4. Using a separate subjob to hold the indirect costs, with an appropriate distinguishing category. In light of the next requirement to hold an accumulation of direct costs, this method would be the preferred option. The option that you choose will need to be based on other configuration requirements for the overall solution. 2.2 Identify and accumulate direct costs by contract The DCAA requirement is that the accounting system must be able to accumulate direct costs per contract. 2.2.1 Recommendations It goes without saying that this is exactly what Enprise Job Costing does. T he system allows you to accumulate costs per contract (a contract would be the equivalent to a Job inside Job Costing). Based on the requirement to segregate direct costs and indirect costs, we would recommend the use of separate subjob(s) to hold the indirect costs, in this way you can clearly see, by opening the 6
System Requirements transactions tab of the direct subjob(s), exactly what the accumulated costs are. 2.3 A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives This requirement deals with the manner in which the company goes about determining how to apportion to jobs the indirect costs that are incurred. The underlying requirement is to ensure that the portion of indirect cost that is allocated to a project, is related to the benefits that the project has obtained from the costs being incurred. An indirect cost may not be allocated to a project if that project has not benefited by the cost being incurred. It is outside the scope of this document to outline how costs should be allocated as the method will change for every company and for every cost type. We have discussed in the segregation of costs, how these costs can be transacted against the job, but it is up to the company to determine the quantity and value. 2.4 Accumulation of costs under general ledger control This DCAA requirement deals with the integration between the Job Costing / Project Management system and the general ledger. The DCAA wants to ensure that the costs incurred against a contract can be reconciled to the general ledger. Being that Enprise Job Costing is completely integrated into SAP Business One at all levels, including the General Ledger, standard functionality of the system meets this requirement. Included within the standard Enprise Job Costing reports are reconciliation reports for the main Enprise Job Costing control accounts. 2.5 A timekeeping system that identifies employee's labor by intermediate or final cost objectives T he tracking and recording of timesheets is discussed in a fair amount of detail within the DCAA requirements because of the fact that it generally forms a large part of the cost of any contract and there is no supporting external documentation. Therefore, the DCAA has a number of recommendations around how to control timecards, especially in an environment where they are manually generated. 7
T he controls around a manually created timecard fall outside the scope of this document, however, the fundamental requirements of being able to track labor against a specific cost objective (being a job or activity within the job) can be achieved through the standard timesheeting functions within Enprise Job Costing. 2.5.1 Recommendations If the company is intending on having each employee record their own timesheets directly into the system, then we would recommend the use of our web based time entry application which has builtin approval management for timesheets and expenses. Direct timesheet entry into core Enprise Job Costing currently provides no approval process and the job is updated directly. This would then require a supervisor to review the timesheets and make adjustments accordingly to the job. With the approval procedures inside the web based system, the staff member can record all their timesheets, but before the job can be updated a supervisor, being either a staff manager or the project manager(s), must review and approve the timesheets. 2.6 A labor distribution system that charges direct and indirect labor to the appropriate cost objectives This DCAA requirement ties closely back to the first requirement of being able to separate out direct and indirect costs, along with the requirements for the timekeeping system. Essentially, the DCAA requires that staff account for all their time at work, whether they are working on a contract or not. This results in an issue whereby any down time, such as tea breaks, non-contract related meetings etc, need to be tracked but not mixed up with contract or direct work. 8
System Requirements 2.6.1 Recommendations In order to achieve this an internal non-productive job will need to be created within Enprise Job Costing, assigned to a category for indirect costs (this category can be the same as the category mentioned in the first requirement for segregation of costs) which the staff can use for recording timesheets for indirect, non-productive time. This structure gives the company greater visibility on how much time is being allocated to non-productive work, as well as meeting the necessary DCAA requirements. 2.7 Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account The essence of this requirement is that the Job Costing system should post through to the general ledger on a frequent basis (at least monthly ) to ensure that performance and cost related reports can be extracted to establish the status of the contract. Enprise Job Costing has a live integration into the general ledger and as such performance and status reporting can be obtained at any stage. 2.8 Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions Within this requirement, the DCAA are ensuring that costs which have either been agreed within the contract to be excluded from the contract, or costs that are expressly disallowed in the FAR Cost Principle Guide, can be separated from the costs that are allocated and recovered from the contract. An example of a cost that is expressly disallowed would be the cost of bad debts under FAR 31.205-3. In relation to Job Management within Enprise Job Costing, we cannot prevent someone from allocating costs directly to a job, however, the ability to separate out costs that are allocated to a job, and costs that are allocated directly to overhead expenses is a relatively simple process. When a user needs to enter a 9
cost that is disallowed, which may arise from A/P transactions or from some other source, by not allocating the transaction to a job and subjob within the data entry screen, the expense will, through standard SAP Business One processing, not be allocated to the contract expenses. 2.9 Identification of costs by contract line item and units ( as if each unit or line item was a seperate contract ) if required by the proposed contract. This requirement stipulates that costs that are associated to certain items, which will be outlined in the negotiated contract, must be readily identifiable. 2.9.1 Recommendations T here are a couple of manners in which you can achieve this through the way in which you structure your project. In essence, all that is required is to relate the costs incurred through to a specific cost group, which represents the cost item that is being tracked. The could be done in the following manner: 1. T he use of an analysis code on the job line which allows you to allocate the cost to a cost group (item). However, the analysis codes are system wide and as such would be available throughout all jobs within Enprise Job Costing. 2. The use of a user defined field on the job line to hold the cost group. The downside to this however, is that it may be fairly labor intensive to manage. 3. Possibly the best and most efficient option would be through the use of subjobs, where each subjob represents a specific cost item. In this manner a more clean and efficient method is available to hold all the costs associated to your contract items. If you are making use of the Enprise Job Costing contract module to carry out the invoice processing for the related job, please note that you are able to link a billing phase within the contract through to a subjob or to multiple subjobs. This can be achieved by right clicking on the contract line and choosing the option to link to subjob. In this manner, you are able to more accurately carry out billing from the contract phase, incur costs at the subjob level, and have greater transparency on the overall 10
System Requirements profitability and cost accumulation per item. 2.10 Segregation of pre-production costs from production costs The DCAA requires that pre-production costs can be easily and clearly separated from production costs. 2.10.1 Recommendations This requirement would most likely only come into play with Enprise Job Costing when you are using the module in a make-to-stock scenario. In which case, the need to separate out the pre-production costs, such as the setup and configuration of equipment in order to do the production, can easily be obtained through the use of a separate subjob for pre-production costs, or, although less preferred, through the use of analysis codes on the job line. 11
3 Conclusion In order to be compliant with DCAA requirements, there are combined system requirements as well as configuration requirements. We certainly believe that a combined SAP Business One and Enprise Job Costing solution can meet all the DCAA requirements, so long as the systems have been configured and setup in the correct manner. Within this document our intention has been to outline the various audit requirements that have been laid out by the DCAA, as well as to provide recommendations as to various options that are available to meet these requirements. We would however recommend that if you are undertaking contracts that need to comply with DCAA regulations, that you make yourself aware of these regulations to ensure that system is configured in the correct manner. Additional information relating to DCAA requirements can be found at www.dcaa.mil 12