Factoring Costs to Cover Costs
When you run a business, you need to ensure the revenues from your products at least cover your cost of providing them. Pretty basic business principle. But for the U.S. Postal Service, it’s much more than that — it’s a legal requirement. Specifically, the Postal Accountability and Enhancement Act of 2006 requires every postal product to earn enough to cover its costs.
Sometimes, though, it’s not easy to determine if a business is factoring in the right data or correctly attributing expenses to make accurate calculations. That’s why our auditors recently looked at how well USPS has been capturing the costs of its Contract Delivery Service (CDS) and reliably attributing them to mail products and services. CDS is a major operation. USPS uses CDS suppliers, who are independent contractors, to deliver on the routes not serviced by USPS carriers. In fiscal year (FY) 2020, the Postal Service had more than 7,900 active CDS contracts, costing about $447 million.
Our auditors found the Postal Service overestimated its total CDS costs by an average of about 7 percent from FY 2016 to FY 2020. Also, when it came to determining which CDS costs should be attributed to products, we found USPS overestimated or underestimated these costs in any given year, over the past five fiscal years. As we note in our recent audit report, deriving the most precise cost estimates possible would help ensure revenue for each product and service covers costs and regulatory reports accurately reflect costs.
We think a reevaluation of the current cost-allocation methodology would help the Postal Service determine if there is an opportunity to improve the reliability and precision of cost estimates.
Are you familiar with USPS cost-allocation methodology? What do you think of it?