Applying full-cost accounting to solid-waste management operations.

• Author: Gauthier, Stephen J.

Nine steps for implementing full-cost accounting focus on details of how to convert modified accrual data to the accrual basis.

Local governments often are responsible for the effective and efficient management of solid waste generated by residents and businesses in their community. Government officials need reliable and relevant cost information to fulfill this important responsibility. Such cost information is needed for a variety of purposes, including planning, goal-setting, and the selection among alternative waste-treatment options (e.g., recycling vs. land disposal). Likewise, government officials need reliable cost information to set proper rates and to make informed decisions concerning the advisability of contracting all or a portion of their solid-waste management operations to private-sector service providers.

The Government Finance Officers Association (GFOA) formally recognized the importance to government finance officials of obtaining good cost information on solid-waste management operations in March 1998, when it adopted a recommended practice specifically devoted to the topic. This article will review the key provisions of the GFOA's new guidance, as well as outline the key steps to implementing this guidance in practice.

As noted previously, governments need relevant and reliable cost information to make informed decisions regarding their solid-waste management operations. Unfortunately, the cost information currently available on solid-waste management operations often tells only part of the story. Governments need to know the full cost of providing solid-waste management services. By definition, "full-cost accounting" (FCA) comprises two elements:

* identification of all costs, both direct and indirect, associated with providing a service and

* allocation of all of the costs so identified over the life cycle of the service provided.

Consequently, applying FCA to solid-waste management operations means identifying all of the direct and indirect costs associated with solid-waste management and allocating those costs to the appropriate (i.e., benefitting) periods.

GFOA Recommended Practice

At its February 1998 meeting, the GFOA's Committee on Accounting, Auditing and Financial Reporting passed a draft recommendation, "Application of Full-Cost Accounting to Municipal Solid Waste Management Activities," which was referred to the GFOA's Executive Board and subsequently issued as a recommended practice.

There are two key components to the GFOA's recommended practice on applying full-cost accounting to municipal solid-waste management operations, which are described in the paragraphs that follow.

FCA and Accrual Accounting. Under current generally accepted accounting principles, governments enjoy considerable flexibility in how they account for a given operation. Some operations are reported in governmental funds (e.g., general fund, special revenue funds), where the focus is on inflows and outflows of spendable resources and where transactions are recognized using the modified accrual basis of accounting. A government may report other operations in proprietary funds (i.e., enterprise funds, internal service funds), where the focus is on the cost of providing goods and services and where transactions are recognized using the accrual basis of accounting. In current practice, solid-waste management operations are commonly accounted for in either or both types of funds.

FCA requires that all costs be reported and that they be allocated to the periods in which service is provided. Modified accrual accounting is unable to meet this requirement because it is designed to focus on the inflows and outflows of spendable resources associated with a given operation, rather than on the actual cost of the operation. Such a focus is incompatible with full-cost accounting, which, as its name implies, is primarily concerned with the cost of providing solid-waste management services.

For example, under modified accrual accounting, certain expenditures (e.g., upfront costs) are recognized before the period in which service is provided, while other expenditures (e.g., closure and postclosure care costs) are only recognized after service has been provided. FCA, however, requires that costs be appropriately allocated to all benefitting periods. Also, modified accrual accounting does not recognize a charge each period for the cost of consuming capital assets (i.e., depreciation), but instead reports expenditures based upon capital outlay and debt service principal payments. This approach is inadequate from an FCA perspective because it counts some costs twice (i.e., both the original capital outlay and the subsequent related debt service principal payments), and neither expenditure is matched to the benefitting period.

The GFOA's recommended practice recognizes that FCA requires the gathering of cost information for solid-waste management operations on an accrual basis. This goal can be achieved in one of two ways:

* a government can use one or more proprietary funds (which use accrual accounting) to account for all or a portion of the government's solid-waste management operations, or

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