Profitability accounting: A useful tool for the defense contractor;

              PMMBnJTYACCOlimG:
A Useful Tool for the Defense Contactor
by James V. Mitchell
Defense contractors probably have more requirements
and uses for efficient accounting systems than any other
industry. The complexity of the organizations and prod­ucts
of the large contractors presents a real challenge for
developing meaningful cost accumulation and internal
financial reporting. Many companies have the latest in
modern data processing equipment and techniques to
create information, yet have a mass of separate systems
for various purposes and an account structure and re­porting
system that is addressed to the requirements of
outsiders. There is a lack of integration between systems
and a subjugation of what should be the primary goal of
an information system — developing data for manage­ment
control.
The dependency of sales price on cost identification
through cost reimbursement contracts has placed the em­phasis
of these companies' accounting systems on contract
cost accumulation. Historically the accumulation of over­head,
research, marketing, and other indirect costs has
been pointed toward the method used to allocate or
apportion these costs to contracts. Usually these cate­gories
of accumulation have no alignment with cost re­sponsibility
nor have these distribution pools lent much
insight into die behavioral characteristics of the costs
involved.
Typically the members of this industry have looked
upon themselves as being in a unique situation, perhaps
more so than in most industries. This is probably caused
by the conditions that exist in dealing with a military
customer, even though many large contractors also have
a substantial portion of commercial business. Then too,
a number of companies have tried over a period of years
some of the widely used accounting techniques on a
separate system basis, but have experienced difficulties in
making them work under these conditions.
The influence of dealing with the government
The long-standing habit of having the military customer
look over your shoulder into your books has substantially
influenced the approach of these companies to their
accounting systems. Cost reimbursement contracts have
always been subject to government audit. Also, subcon­tracts
on prime cost reimbursement contracts are subject
to audit by the prime contractor who has the responsi-
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