Academic journal article Journal of the International Academy for Case Studies

Pegasus Research Institute-The Development of a Cost Accounting and Project Management System for a Small Defense contractor.(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

Pegasus Research Institute-The Development of a Cost Accounting and Project Management System for a Small Defense contractor.(Instructor's Note)

Article excerpt

CASE DESCRIPTION

This case addresses cost accounting for contractors, a topic neglected in many cost accounting courses. It focuses specifically on contractors who work within the defense industry. The defense industry was chosen for its rich array of incentive-based contracts, which provide unique challenges to management accountants.

The case is based on an actual firm, although names and places have been changed for the purpose of confidentiality. Although the firm explored is a defense contractor, most principles taught are applicable to contractors in other industries. The case is written in an easygoing style with language and humor intended to appeal to college students, and is designed to be covered in three one-hour class periods. Student preparation time should be approximately two hours for each hour of class. The difficulty level is five to six and is best suited for advanced or graduate cost accounting courses. The case is best worked in groups of three to five students. An appendix provides definitions of terms unique to the defense industry.

CASE SYNOPSIS

Evan Elmore, a graduate of a master =s program in accountancy, has recently married and accepted a job as a chief accountant of a small defense contractor. After spending his savings to move himself and his new bride to a distant town, he discovers that his employer is on the verge of bankruptcy. Reasons for the firm =s marginal performance include: (1) a lack of understanding of how to bid and later bill the various forms of incentive payment contracts awarded by the Department of Defense (DOD), and (2) an inability to produce cost reports that provide the information needed for managers to control costs. The survival of Evan =s employer, and the possible viability of his own career, is dependent upon his ability to fix these problems.

INSTRUCTORS= NOTES

CASE STUDY OBJECTIVES:

To help students understand the fundamental differences between manufacturing cost accounting and contractor cost accounting.

To introduce students to the unique problems faced by the Department of Defense in contracting for state-of-the-art weapon systems.

To introduce students to the various types of incentive payment contracts used by the Department of Defense to encourage responsible cost control.

To illustrate some tools that can be used to track progress on incentive payment projects.

To illustrate the design of a Defense Contract Audit Agency (DCAA) cost accounting system for a small government contractor.

RECOMMENDED TEACHING APPROACH

The instructor may wish to begin by reviewing some of the differences between cost accounting for manufacturers and cost accounting for contractors. For example, the profitability of a contractor is highly dependent on effective project management. While many manufacturers work in continuous production environments, contractors work with discrete projects that must begin and end on time. Project managers must monitor not only >labor spent= but >labor earned,= a surrogate for work performed.

The instructor may wish to discuss the special challenges facing contractors who work within the defense industry. The Department of Defense (DOD) is unique in that many of the products it buys involve either state of the art technology, or technology yet to be developed.

This makes it difficult or impossible to estimate in advance the cost of many new weapon systems.

Although the DOD is interested in buying weapons systems at the lowest price possible, it is not to their advantage to bankrupt highly specialized defense contractors. For this reason, the DOD often uses cost reimbursement for new weapon systems. Cost reimbursement contracts, however, provide few incentives for cost control.

The Department of Defense attempts to protect itself through incentive payment systems designed to shift the risk of excessive spending from the government to the contractor. …

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