Working Capital Fund Pricing Policies: Lessons from Defense Finance and Accounting Service Expenditure and Workload Data

This article analyzes how service-providing government agencies should set the prices they charge to other governmental customers. Current Defense Working Capital Fund (DWCF) rules generally prescribe use of expected average cost transfer pricing. However, analysis of the Defense Finance and Accounting Service (DFAS), as an example, suggests DFAS has considerable fixed costs. These fixed costs are problematic under present DWCF pricing rules. If customer demand levels fall short of expectations, DFAS revenues fall commensurably, but costs almost certainly do not. It would be more consistent with DFAS's cost structure if DFAS could utilize nonlinear pricing. Such a pricing approach would give DFAS customers more appropriate incentives with respect to how much workload to give DFAS (versus trying to do it themselves or turning it over to contractors). We hypothesize that insights from DFAS may be applicable to other governmental working capital fund entities as well.