cas - part ii the cost allocation standards€¢part ii - the cost allocation standards •part iii...

1© 2017 - Dixon Hughes Goodman, LLP

CAS - Part II

The Cost Allocation Standards


Agenda

• Session I – Administration:

– CAS Overview

– Applicability

– Types of Coverage

– CAS Administration

• Part II - The Cost Allocation Standards

• Part III - The Cost Assignment and

Measurement Standards

• Part IV - The CAS Disclosure Statement


A Quick Review

• Contracts, not contractors, are subject to

CAS!

Contract Subject to

CAS?

Modified vs. Full

Disclosure Statement

10 Exemptions listed in 9903.201-1(b)

$50 million threshold

Full – yes – Modified - maybe


The Cost Accounting Standards


The Format of the Standards

• Purpose (.20)

• Definitions (.30)

• Fundamental Requirement (.40)

• Techniques for Application (.50)

• Illustrations (.60)

• Interpretation (.61)

• Exemption (.62)

• Effective Date (.63)


The Basic Standards &

The Cost Allocation Standards


The BASIC Standards

• CAS 401 - Consistency

• CAS 402 - “Double counting”

• CAS 405 - Unallowable cost

• CAS 406 - Cost accounting period


CAS 401, Consistency in Estimating, Accumulating

and Reporting Costs

• Contractor’s practices in estimating costs

must be the same used to accumulate and

report costs

• Grouping of homogeneous costs for

estimating purposes is not a violation of

the standard provided that the actual costs

are accumulated at a greater level of detail

during performance


Interpretation No. 1 to CAS 401

• If a factor is used to estimate scrap or

yield on a cost estimate, the pool and the

base must be accounted for during

performance

• Amount of detail required is a matter for

negotiation with Government procurement

authorities


Question – CAS 401 Compliant?

A contractor's proposal shows the cost of

engineering labor by class, i.e., Engineer I,

Engineer II, etc. However, it is the

contractor's practice to accumulate

engineering labor by type, i.e., Electrical

Engineer, Design Engineer, etc.


CAS 402 – Consistency-Costs Incurred for Same Purpose

• Costs that are defined as a direct cost

must be a direct cost to all final cost

objectives in like circumstances

• Costs that are defined as an indirect cost

must be indirect with respect to all final

cost objectives in like circumstances

• The customer willingness or unwillingness

to treat a cost as direct or indirect is

irrelevant


Interpretation No. 1 CAS 402

• Bid and proposal costs that are required by a contract can be either direct or indirect

• Policy has to be consistently followed

• Examples of when the bid and proposal costs could be direct:

– Basic ordering agreements and ID IQ contracts

– Definitization of a letter contract

– Request for equitable adjustment


Question - CAS 402 Compliant?

A contractor has hundreds of cranes located

throughout a shipyard. Their maintenance,

taxes, and depreciation costs are recorded

in a general account and then allocated to

departmental overhead pools for distribution

to contracts. The Dry Dock has the cost of

eight cranes charged to its overhead pool

because their use is unique to the Dry Dock

operations.


CAS 405, Accounting for Unallowable Costs

• Requires exclusion of unallowable costs

(both expressly unallowable or mutually

agreed as being unallowable) from billings,

proposals, or cost submissions

• Requires identification of costs that are

unallowable as a result of a contracting

officers final decision if an appeal is being

made


CAS 406, Cost Accounting Period

• Contractor must use its fiscal year for its

cost accounting period

• Transitional cost accounting period must

be used if a contractor changes its fiscal

year

• A change in cost accounting period is a

change in a cost accounting practice


Cost Allocation Standards

• CAS 407 - Standard costs

• CAS 414 - Cost of Money

• CAS 410 - General & Administrative

• CAS 403 - Home office expenses

• CAS 418 - Direct and Indirect Costs

• CAS 420 - B&P and IR&D


CAS 407, Use of Standard Costs

• Covers direct labor and direct material costs

• Standard cost must be entered into the formal books of account

• Standard costs and variances must be accounted for at the level of the production unit

• Practices with respect to setting and revising standards, use of standards and disposition of variances are stated in writing and consistently followed

• Effective Date: Next full fiscal year after receiving a covered contract


CAS 414, Cost of Money

• Contractors facility capital has to be

allocated to appropriate cost pools

• The cost of money rate is the Secretary of

the Treasury Rate

• The cost of capital committed to facilities

shall be computed for each contract using

the facilities capital cost of money factors

computed for each cost accounting period


Example of CAS 414 calculations

Total Engineering Manufacturing General and

Assets Overhead Overhead Administrative

Property 750,000$ 187,500$ 487,500$ 75,000$

Plant 1,750,250 437,562 1,225,175 87,513

Equipment 795,000 159,000 556,500 79,500

Total Assets 3,295,250$ 784,062$ 2,269,175$ 242,013$

Treasury Interest Rate 6.375%

Cost of Money Pool 49,984$ 144,660$ 15,428$

Cost Pool Allocation Base 750,425$ 1,275,400$ 5,275,975$

Cost of Money Factors 0.06661 0.11342 0.00292


Application of CAS 414 to a pricing action

FCCOM FCCOM

Factor Amount

Direct Material 275,000$

Manufacturing Direct Labor 375,000 0.11342 42,534$

Manufacturing Overhead 200% 750,000

Engineering Direct Labor 75,000 0.06661 4,996$

Engineering Overhead 60% 45,000

Total Cost Input 1,520,000$ 0.00292 4,445$

General & Administrative Expenses 9% 136,800

Total Cost 1,656,800$

Profit Objective 15% 248,520

FCCOM 51,974

Price 1,957,294$

Actual Mark-up 18%


CAS 410, Allocation of G&A Expenses

• Business unit

• Final cost objectives

• Requires the use of a cost input base

• Provides several options– Total cost input (total cost incurred - general and

administrative expenses)

– Value added (total cost input - direct material and subcontracts)

– Single element

• DCAA partial to total cost input

• Effective date: Full fiscal year after receiving a covered contract


Impact of Allocation Base on Cost Recovery

$ Amount % of Base $ Amount % of Base

Direct Labor 6,000,000$ 2,500,000$

Overhead @ 80% 4,800,000 2,000,000

Value Add Base 10,800,000$ 71% 4,500,000$ 29%

Materials & Subs 1,000,000 6,500,000

Total Cost Input Base 11,800,000$ 52% 11,000,000$ 48%

Non-Gov't Work Gov't Work


CAS 403, Allocation of Home Office Expenses

• Costs have to be allocated on a base that

reflects a causal or beneficial relationship

• Three steps to the allocation process:

– Specific identification

– Homogeneous cost pools

– Three factor formula

• Effective date: Next full fiscal year after

receipt of a covered contract


Application of the three factor formula

$459,000,750$25,000,250$5,745,00059.91%$275,000,00060.00%$15,000,00042.65%$2,450,000

27.23%125,000,00019.00%4,750,00021.76%1,250,000

0.53%2,450,0001.10%275,0007.83%450,000

0.70%3,230,0001.30%325,0008.70%500,000

11.62%53,320,75018.60%4,650,25019.06%1,095,000

54.19%

22.66%

3.16%

3.57%

16.43%

$3,660,263

$1,530,929

$213,158

$241,084

$1,109,567

$6,755,000

Percentage

Calculations

Segment A

Segment B

Segment C

Segment D

Segment E

Allocation

Percentage

Calculations

Segment A

Segment B

Segment C

Segment D

Segment E

Allocation of

Home Office

Expenses

Segment A

Segment B

Segment C

Segment D

Segment E

Amount to be

allocated

Detail by Segment

Payroll

$ %

Assets

$ %

Sales

$ %

Total Organization

Total

Payroll Total Assets Total Sales


Interpretation No. 1 to CAS 403

• Interpretation deals with the inclusion of

segment book income in the allocation

base for allocating state taxes

• Requires that the taxing agency must

expressly use segment book income to

determine tax liability before segment

book income can be used in the allocation

base


CAS 418, Allocation of Direct and Indirect Costs

• Requires written policy

• Indirect costs have to be grouped into

homogenous cost pools

• Categorizes two types of indirect costs:

– Those associated with the supervision and

management of direct labor and direct

material

– Those that are not associated with the

supervision and management of direct labor

and direct material


Allocation of each type of indirect cost

• Associated with direct

labor and material

– direct labor hour or

cost base

– machine hour base

– units of production

– direct material

• Not associated with

direct labor and

material

– first, a measure of

resource consumption,

then

– a measure of output,

finally

– a surrogate


CAS 418 requires that cost be allocated to:

• Final cost objectives

• Goods produced for inventory or stock

• Cost centers used to accumulate costs

identified with a process cost system

• Goods or services produced or acquired

for other segments of the contractor and

for other cost objectives of the business

unit

• Self constructed assets


Questions – CAS 418 Compliant?

A contractor proposes to establish an

allocation method for the central

reproduction cost center. The contractor

wants to use the number of personnel in

each department as the base for allocation

of the cost center?


CAS 420, Accounting for IR&D and B&P Costs

• IR&D and B&P costs shall be accumulated

in individual projects

• IR&D and B&P costs are to bear all

allocable expenses except for business

unit general and administrative expenses

• IR&D and B&P incurred at the home office

will be allocated to business units on a

causal or beneficial relationship


Questions & Answers


Contact information

Bill Walter, CPA

Executive DirectorGovernment Contract Advisory Practice

Dixon Hughes Goodman LLP1410 Spring Hill Road, Suite 500

Tysons, VA 22102

D. 703.970.0509

[email protected]

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