The Cost Principle and How to Use It

cost principle definition

Initial outfitting of the unit is completed when the unit is ready and available for normal operations. Indirect cost pools means (except for subparts  31.3 and 31.6) groupings of incurred costs identified with two or more cost objectives but not identified specifically with any final cost objective. Immediate-gain actuarial cost bookkeeping for startups method means any of the several actuarial cost methods under which actuarial gains and losses are included as part of the unfunded actuarial liability of the pension plan, rather than as part of the normal cost of the plan. Allocate means to assign an item of cost, or a group of items of cost, to one or more cost objectives.

  • This means that adjustments may need to be made to the financial statements to reflect the lower cost or market value of inventory for tax purposes.
  • (2) Fringe benefits in the form of tuition or remission of tuition for individual employees not employed by IHEs are limited to the tax-free amount allowed per section 127 of the Internal Revenue Code as amended.
  • (2) Reimbursement to the employee is in accordance with an established written policy consistently followed by the employer.
  • (5) Whether the proportion of Federal work to the non-Federal entity’s total business is such as to influence the non-Federal entity in favor of incurring the cost, particularly where the services rendered are not of a continuing nature and have little relationship to work under Federal awards.
  • One argument in support of historical cost is that its conservative nature paints the most financially solvent picture.

Labor-rate standard means a preestablished measure, expressed in monetary terms, of the price of labor. Labor cost at standard means a preestablished measure of the labor element of cost, computed by multiplying labor-rate standard by labor-time standard. Home office means an office responsible for directing or managing two or more, but not necessarily all, segments of an organization.

What is Historical Cost?

Guidelines for determining direct and indirect (F&A) costs charged to Federal awards are provided in this subpart. The historical cost principle is one of the basic concepts of accounting and bookkeeping. It states that businesses must record and account for assets and liabilities at their historical cost or original cost at the time of their purchase or acquisition by a company.

cost principle definition

The principle was further developed and codified in the 20th century with the emergence of accounting standards and principles, including the Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). The historical cost principle has been used for centuries and can be traced back to the earliest accounting practices. One of the earliest known records of the use of historical cost accounting is from the ancient civilization of Mesopotamia, where merchants used clay tablets to record transactions and keep track of their assets and liabilities. The cost concept of accounting can be characterized best by saying that for accounting purposes, all transactions are recorded at their monetary cost of acquisition (i.e., the price paid for acquiring an asset or receiving services). To elaborate on this concept, if an asset does not cost anything (i.e., no money is paid for its acquisition), it would not be recorded in the company’s books. Some business equipment – like computers – are never worth more than what you paid for it.

Special Considerations for States, Local Governments and Indian Tribes

The cost of fixed assets includes invoice price, freight charges, delivery cost, installation charges and all those charges that are required to bring assets to their intended use. Thus, all such charges make up a cost of an asset and this cost shall be reported on the balance sheet as a historical cost and shall not be affected by any increase/ decrease in its current value. Bid and proposal (B&P) costs means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract. Funded pension cost means the portion of pension cost for a current or prior cost accounting period that has been paid to a funding agency.

What is the best definition of principle?

: a comprehensive and fundamental law, doctrine, or assumption. b(1) : a rule or code of conduct. (2) : habitual devotion to right principles.

Except as provided elsewhere in these principles, the costs of fringe benefits are allowable provided that the benefits are reasonable and are required by law, non-Federal entity-employee agreement, or an established policy of the non-Federal entity. (g) Any non-Federal entity that has a current federally-negotiated indirect cost rate may apply for a one-time extension of the rates in that agreement for a period of up to four years. This extension will be subject to the review and approval of the cognizant agency for indirect costs. If an extension is granted the non-Federal entity may not request a rate review until the extension period ends.