Understanding Government’s Cost Terminology

Understanding Government’s Cost Terminology:
Budget Authority, Obligation, Outlay, and Cost
All definitions taken from Starling, 2011, pp 494-5.

Let’s start with outlay, the concept most of us use to purchase things in our daily lives. When we talk about how much something cost us, we usually mean the price of the item at the time we paid for it. In other words, when we paid the bill. The government calls this “outlay.” It is when things are actually paid for with real money.

The term cost, however, refers to when the resources are used up. Students of accounting will understand this idea from accrual-basis methods. The government may have one million ink pens in a closet somewhere, but until the pen has been put to use, the cost has not been incurred. “Cost” happens when materials get used.

When we speak of how much the government spends, therefore, we cannot simply look at how many checks they write. That might be their outlay, but they are going to calculate cost differently. And, when their costs are restricted by mandate, they can easily “cut costs” by not putting into use materials they pay for. Therefore, the government could theoretically be spending more money but claim to cut costs – by buying two million ink pens and saving them in the closet to not be used until next year, for example.

This idea leads to budget authority. When the funding comes to the agency, that defines their budget authority. This is where public funds are allotted and issued to an agency. In some ways, this is where the government spends money. It tells the agency, here, you can spend this much, as a parent giving a child an allowance. Although the agency may not have bought anything (outlay) or used anything (cost), they have the money in their pocket now.

Significantly, budget authority sets an upper limit on how much an agency can spend in terms of their current obligations. Accountants might call this Accounts Payable: outstanding obligations of debt and open orders that the agency must pay. As Starling points out, this year’s budget authority may not really equal the outlays of cash. Some outlays can be made based on unspent amounts of authority from future years (p. 495). It’s as if a parent gave a child not an allowance, but a spending limit. Any time the child doesn’t spend part of his allowed limit, he could carry that over to the next allowance period.

Reference

Starling, G. (2011). Managing the public sector. Boston, MA: Wadsworth, Cengage Learning.

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