What principle of cost accounting states that costs must meet specific standards?

The principle that costs must meet specific standards is known as allowability. Allowability establishes criteria that dictate whether costs incurred in a grant or contractual agreement can be charged to the grant or contract. This principle is foundational in grants management, ensuring that only costs that are reasonable, allocable, and compliant with applicable regulations and policies are deemed lawful for reimbursement.

Understanding allowability is crucial for grant recipients, as it helps to establish financial accountability and ensures that funds are used effectively according to the terms and conditions of the grant agreement. This principle serves to protect both the grantor and the recipient by providing a clear framework for what expenses are permissible, reducing the risk of misallocation of funds and potential audits or penalties.

The other concepts, while relevant to general financial management and funding, do not specifically focus on the standards for costs in the same way allowability does. Cost allocation deals with distributing costs among various programs or functions, cost effectiveness measures the economic efficiency of different cost options, and compliance refers to adherence to laws and regulations but does not specifically address cost standards.