Full Cost Accounting (FCA) Principles
Note: EPA no longer updates this information, but it may be useful as a reference or resource.
Generally Accepted Accounting Principles (GAAP) consist of the rules, procedures, and conventions that define accepted practices at a given time. GAAP includes broad guidelines as well as detailed procedures. Much of GAAP is issued in codified form by the Government Accounting Standards Board (GASB).
The Government Accounting Standards Board, in its GAAP, endorses the use of accrual accounting practices like FCA. Many cities and counties are required to conform to GAAP. Unfortunately, accrual accounting is not fully implemented or used in day-to-day solid waste management. Most local government accounting, even under GAAP, still focuses on the use of financial resources. FCA is a better measure of the costs of Municipal Solid Waste (MSW) management because it recognizes the full costs of all resources used or committed in support of operations.
Five FCA Principles
FCA embodies several key concepts that distinguish it from standard accounting techniques. The following list highlights the five basic tenets of FCA.
- Accounting for costs rather than outlays
- Accounting for hidden costs
- Accounting for overhead and indirect costs
- Accounting for past and future outlays
- Accounting for costs according to activities or paths
- Accounting for costs rather than outlays. An outlay is an expenditure of cash to acquire or use a resource. A cost is the dollar value of the resource as it is used. For example, an outlay is made when a collection truck is purchased, but the cost of the truck is incurred over its active life (e.g., 10 years). The cost of the truck must be allocated over a period of time because every year of its use contributes to the deterioration of the truck's value.
- Accounting for hidden costs. With FCA, the value of goods and services is reflected as a cost even if no cash outlay is involved. One community might receive a grant from a state, for example, to purchase solid waste equipment. This equipment has value, even though the community did not pay for it in cash. The equipment, therefore, should be valued in an FCA analysis.
- Accounting for overhead and indirect costs to individual solid waste services. FCA accounts for all overhead and indirect costs, including those that are shared with other public agencies. Overhead and indirect costs might include legal services, administrative support, data processing, billing, and purchasing.
- Accounting for past and future outlays. Past and future cash outlays often do not appear on annual budgets under cash accounting systems. Past (or upfront) costs are initial investments necessary to implement MSW services such as the acquisition of vehicles, equipment, or facilities. Future (or back-end) outlays are costs incurred to complete MSW operations such as landfill closure and postclosure care and post-employment health and retirement benefits.
- Accounting for costs according to activities or paths. Integrated solid waste management systems consist of a variety of MSW activities and paths. Activities are the building blocks of the system, which may include waste collection, operation of transfer stations, transport to waste management facilities, waste processing and disposal, and sale of byproducts. Paths are the directions that MSW follows in the course of integrated solid waste management (i.e., the point of generation through processing and ultimate disposition) and include recycling, composting, waste-to-energy, and land disposal. The cost of some activities is shared between paths. Understanding the costs of MSW activities is often necessary for compiling the costs of the entire solid waste system, and helps you evaluate whether to provide a service yourself or contract out for it. However, in considering changes that affect how much MSW ends up being recycled, composted, converted to energy, or landfilled, you should focus the costs of the different paths. Understanding the full costs of each MSW path is an essential first step in discussing whether to shift the flows of MSW one way or another.