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not have been incurred had the other costed in an indirect-cost pool that will be allonot been incurred.

cated over a base containing the unallowa(2) Expressly unallowable cost. A particu- ble cost with which it is associated, such a lar item or type of cost which, under the ex- directly associated cost shall be retained in press provisions of an applicable law, regula the indirect-cost pool and be allocated tion, or contract, is specifically named and through the regular allocation process. stated to be unallowable.

(f) Where the total of the allocable and (3) Indirect cost. Any cost not directly otherwise allowable costs exceeds a limitaidentified with a single final cost objective tion-of-cost or ceiling-price provision in a but identified with two or more final cost contract, full direct and indirect cost allocaobjectives or with at least one intermediate tion shall be made to the contract cost obcost objective.

jective in accordance with established cost (4) Unallowable cost. Any cost which, accounting practices and standards which under the provisions of any pertinent law, regularly govern a given entity's allocations regulation, or contract, cannot be included to Government contract cost objectives. In in prices, cost reimbursements, or settle- any determination of unallowable cost overments under a Government contract to run, the amount thereof shall be identified which it is allocable.

in terms of the excess of allowable costs (b) The following modifications of defini over the ceiling amount, rather than tions set forth in Part 400 of this chapter through specific identification of particular are applicable to this standard:

cost items or cost elements. None.

§ 405.50 Techniques for application. $ 405.40 Fundamental requirements.

(a) The detail and depth of records re(a) Costs expressly unallowable or mutual quired as backup support for proposals, billly agreed to be unallowable, including costs ings, or claims shall be that which is ademutually agreed to be unallowable directly quate to establish and maintain visibility of associated costs, shall be identified and ex identified unallowable costs (including dicluded from any billing, claim, or proposal rectly associated costs), their accounting applicable to a Government contract.

status in terms of their allocability to con. (b) Costs which specifically become desig tract cost objectives, and the cost accountnated as unallowable as a result of a written ing treatment which has been accorded such decision furnished by a contracting officer costs. Adherence to this cost accounting pursuant to contract disputes procedures principle does not require that allocation of shall be identified if included in or used in unallowable costs to final cost objectives be the computation of any billing, claim, or made in the detailed cost accounting recproposal applicable to a Government con ords. It does require that unallowable costs tract. This identification requirement ap be given appropriate consideration in any plies also to any costs incurred for the same cost accounting determinations governing purpose under like circumstances as the the content of allocation bases used for discosts specifically identified as unallowable tributing indirect costs to cost objectives. under either this paragraph or paragraph Unallowable costs involved in the determi(a) above.

nation of rates used for standard costs, or (c) Costs which, in a contracting officer's for indirect-cost bidding or billing, need be written decision furnished pursuant to con identified only at the time rates are protract disputes procedures, are designated as posed, established, revised, or adjusted. unallowable directly associated costs of un (b) The visibility requirement of paraallowable costs covered by either (a) or (b) graph (a) above may be satisfied by any above shall be accorded the identification form of cost identification which is aderequired by paragraph (b) above.

quate for purposes of contract cost determi(d) The costs of any work project not con- nation and verification. The standard does tractually authorized, whether or not relat- not require such cost identification for pur. ed to performance of a proposed or existing poses which are not relevent to the determicontract, shall be accounted for, to the nation of Government contract cost. Thus, extent appropriate, in a manner which per- to provide visibility for incurred costs, acmits ready separation from the costs of au ceptable alternative practices would include thorized work projects.

(1) the segregation of unallowable costs in (e) All unallowable costs covered by para separate accounts maintained for this purgraphs (a) through (d) above shall be sub pose in the regular books of account, (2) the ject to the same cost accounting principles development and maintenance of separate governing cost allocability as allowable accounting records or work papers, or (3) costs. In circumstances where these un the use of any less formal cost accounting allowable costs normally would be part of a techniques which establishes and maintains regular indirect-cost allocation base or adequate cost identification to permit audit bases, they shall remain in such base or verification of the accounting recognition bases. Where a directly associated cost is given unallowable costs. Contractors may part of a category of costs normally includ- satisfy the visibility requirements for esti.

mated costs either (1) by designation and description (in backup data, workpapers, etc.) of the amounts and types of any unallowable costs which have specifically been identified and recognized in making the estimates, or (2) by description of any other estimating technique employed to provide appropriate recognition of any unallowable costs pertinent to the estimates.

(c) Specific identification of unallowable costs is not required in circumstances where, based upon considerations of materiality, the Government and the contractor reach agreement on an alternate method that satisfies the purpose of the standard. $405.60 Ilustrations.

(a) An auditor recommends disallowance of certain direct labor and direct material costs, for which a billing has been submitted under a contract, on the basis that these particular costs were not required for performance and were not authorized by the contract. The contracting officer issues a written decision which supports the auditor's position that the questioned costs are unallowable. Following receipt of the contracting officer's decision, the contractor must clearly identify the disallowed direct labor and direct material costs in his accounting records and reports covering any subsequent submission which includes such costs. Also, if the contractor's base for allocation of any indirect cost pool relevant to the subject contract consists of direct labor, direct material, total prime cost, total cost input, etc., he must include the disallowed direct labor and material costs in his allocation base for such pool. Had the contracting officer's decision been against the auditor, the contractor would not, of course, have been required to account separately for the costs questioned by the auditor.

(b) A contractor incurs, and separately identifies, as a part of his manufacturing overhead, certain costs which are expressly unallowable under the existing and currently effective regulations. If manufacturing overhead is regularly a part of the contractor's base for allocation of general and administrative (G&A) or other indirect expenses, the contractor must allocate the G&A or other indirect expenses to contracts and other final cost objectives by means of a base which includes the identified unallowa ble manufacturing overhead costs.

(c) An auditor recommends disallowance of the total direct indirect costs attributable to an organizational planning activity. The contractor claims that the total of these activity costs are allowable under the Armed Services Procurement Regulation as "Economic Planning Costs" (ASPR 15-205.47) (FPR Note: Comparable section in the FPR is 1-15.205.47); the auditor contends that they constitute "Organization Costs" (ASPR 15-205.23) (FPR Note: Comparable

section in the FPR is 1-15.205.23) and therefore are unallowable. The issue is referred to the contracting officer for resolution pursuant to the contract disputes clause. The contracting officer issues a written decision supporting the auditor's position that the total costs questioned are unallowable under the regulation. Following receipt of the contracting officer's decision, the contractor must identify the disallowed costs and specific other costs incurred for the same purpose in like circumstances in any subsequent estimating, cost accumulation or reporting for Government contracts, in which such costs are included. If the contracting officer's decision had supported the contractor's contention, the costs questioned by the auditor would have been allowable “Economic Planning Costs," and the contractor would not have been required to provide special identification.

(d) A defense contractor was engaged in a program of expansion and diversification of corporate activities. This involved internal corporate reorganization, as well as mergers and acquisitions. All costs of this activity were charged by the contractor as corporate or segment general and administrative (G&A) expense. In the contractor's proposals for final segment G&A rates (including corporate home office allocations) to be applied in determining allowable costs of its defense contracts subject to section XV, Part 2, of the Armed Services Procurements Regulation (FPR Note: Comparable reference in the FPR is Subpart 1-15.2), the contractor identified and excluded the expressly unallowable costs (as listed in ASPR 15205.23) (FPR Note: Comparable section in the FPR is 1-15.205.23) incurred for incorporation fees and for charges for special services of outside attorneys, accountants, promoters, and consultants. In addition, during the course of negotiation of interim bidding and billing G&A rates, the contractor agreed to classify as unallowable various in-house costs incurred for the expansion program, and various directly associated costs of the identifiable unallowable costs. On the basis of negotiations and agreements between the contractor and the contracting officer's authorized representatives, interim G&A rates were established, based on the net balance of allowable G&A costs. Application of the rates negotiated to proposals, and on an interim basis to billings, for covered contracts constitutes compliance with the standard.

(e) An official of a company, whose salary, travel, and subsistence expenses are charged regularly as general and administrative (G&A) expenses, takes several business associates on what is clearly a business entertainment trip. The entertainment costs of such trips is expressly unallowable because it constitutes entertainment expense, and is separately identified by the contractor. The

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contractor does not regularly include his G&A expenses in any indirect-expense allocation base. In these circumstances, the official's travel and subsistence expenses would be directly associated costs for identification with the unallowable entertainment expense. However, unless this type of activity constituted a significant part of the official's regular duties and responsibilities on which his salary was based, no part of the official's salary would be required to be identified as a directly associated cost of the unallowable entertainment expense. § 405.70 Exemptions.

None for this standard. § 405.80 Effective date.

April 1, 1974. (38 FR 31813, Nov. 19, 1973) § 1-3.1220–6 Cost accounting period. PART 406–Cost ACCOUNTING STANDARD

Cost ACCOUNTING PERIOD Sec. 406.10 General applicability. 406.20 Purpose. 406.30 Definitions. 406.40 Fundamental requirement. 406.50 Techniques for application. 406.60 Illustrations. 406.70 Exemptions. 406.80 Effective date.

AUTHORITY: Sec. 719, Defense Production Act of 1950, as amended (Pub. L. 91-379, 50 U.S.C. App. 2168).

SOURCE: 38 FR 30730, Nov. 7, 1973 unless otherwise noted. § 406.10 General applicability.

This standard shall be used by defense contractors and subcontractors under Federal contracts entered into after the effective date hereof and by all relevant Federal agencies in estimating, accumulating, and reporting costs in connection with the pricing, administration, and settlement of all negotiated prime contract and subcontract national defense procurements with the United States in excess of $100,000 other than contracts or subcontracts where the price negotiated is based on: (a) Established catalog or market prices of commercial items sold in substantial quantities to the general public, or (b) prices set by law or regulation. $ 406.20 Purpose.

The purpose of this Cost Accounting Standard is to provide criteria for the selection of the time periods to be used as cost accounting periods for contract cost estimating, accumulating, and reporting. This standard will reduce the effects of variations in the flow of costs within each cost accounting period. It will also enhance ob

jectivity, consistency, and verifiability, and promote uniformity and comparability in contract cost measurements. $ 406.30 Definitions.

(a) The following definitions which are prominent in this standard are reprinted from Part 400 of this chapter for convenience. Other terms which are used in this standard and are defined in Part 400 of this chapter have the meanings ascribed to them in that part unless the text demands a different definition or the definition is modi. fied in paragraph (b) of this section.

(1) Allocate. To assign an item of cost, or a group of items of cost, to one or more cost objectives. This term includes both direct assignment of cost and the reassignment of a share from an indirect cost pool.

(2) Cost objective. A function, organiza. tional subdivision, contract or other work unit for which cost data are desired and for which provision is made to accumulate and measure the cost of processes, products, jobs, capitalized projects, etc.

(3) Fiscal year. The accounting period for which annual financial statements are regularly prepared, generally a period of 12 months, 52 weeks, or 53 weeks.

(4) Indirect cost pool. A grouping of incurred costs identified with two or more ob. jectives but not identified specifically with any final cost objective.

(b) The following modifications of definitions set forth in Part 400 of this chapter are applicable: None. $ 406.40 Fundamental requirement.

(a) A contractor shall use his fiscal year as his cost accounting period, except that:

(1) Costs of an indirect function which exists for only a part of a cost accounting period may be allocated to cost objectives of that same part of the period as provided in $ 406.50(a).

(2) An annual period other than the fiscal year may, as provided in $ 406.50(d), be used as the cost accounting period if its use is an established practice of the contractor.

(3) A transitional cost accounting period other than a year shall be used whenever a change of fiscal year occurs.

(4) Where a contractor's cost accounting period is different from the reporting period required by Renegotiation Board regulations, the latter may be used for such reporting.

(b) A contractor shall follow consistent practices in his selection of the cost accounting period or periods in which any types of expense and any types of adjustment to expense (including prior-period adjustments) are accumulated and allocated.

(c) The same cost accounting period shall be used for accumulating costs in an indirect cost pool as for establishing its allocation base, except that the contracting par

ties may agree to use a different period for ing period not materially different from establishing an allocation base as provided that which otherwise could be obtained. in & 406.50(e).

(f) When a transitional cost accounting

period is required under the provisions of $ 406.50 Techniques for application.

$ 406.40(a)(3), the contractor may select any (a) The cost of an indirect function which one of the following: (1) The period, less exists for only a part of a cost accounting than a year in length, extending from the period may be allocated on the basis of data end of his previous cost accounting period for that part of the cost accounting period to the beginning of his next regular cost acif the cost is (1) material in amount, (2) ac

counting period; (2) a period in excess of a cumulated in a separate indirect cost pool,

year, but not longer than fifteen months, and (3) allocated on the basis of an appro

obtained by combining the period described priate direct measure of the activity or

in subparagraph (1) of this paragraph with output of the function during that part of

the previous cost accounting period; or (3) a the period.

period in excess of a year, but not longer (b) The practices required by $ 406.40(b)

than fifteen months, obtained by combining of this standard shall include appropriate

the period described in subparagraph (1) of

this paragraph with the next regular cost practices for deferrals, accruals, and other adjustments to be used in identifying the

accounting period. A change in the contrac

tor's cost accounting period is a change in cost accounting periods among which any

accounting practices for which an adjusttypes of expense and any types of adjust

ment in the contract price may be required ment to expense are distributed. If an ex

in accordance with paragraph (a)(4)(B) of pense, such as taxes, insurance or employee

the contract clause set out at $ 331.50 of this leave, is identified with a fixed recurring,

chapter. annual period which is different from the contractor's cost accounting period, the $ 406.60 Ilustrations. standard permits continued use of that dif

(a) A contractor allocates general manageferent period. Such expenses shall be dis

ment expenses on the basis of total cost tributed to cost accounting periods in ac

input. In a proposal for a covered negotiated cordance with the contractor's established

fixed-price contract, he estimates the allocapractices for accruals, deferrals and other

ble expenses based solely on the estimated adjustments.

amount of the general management expense (c) Indirect cost allocation rates, based on

pool and the amount of the total cost input estimates, which are used for the purpose of

base estimated to be incurred during the expediting the closing of contracts which

eight months in which performance is are terminated or completed prior to the

scheduled to be commenced and completed. end of a cost accounting period need not be

Such a proposal would be in violation of the those finally determined or negotiated for

requirements of this standard that the calthat cost accounting period. They shall, culation of the amounts of both the indirect however, be developed to represent a full

cost pools and the allocation bases be based cost accounting period, except as provided

on the contractor's cost accounting period. in paragraph (a) of this section.

(b) A contractor whose cost accounting (d) A contractor may, upon mutual agree period is the calendar year, installs a comment with the Government, use as his cost puter service center to begin operations on accounting period a fixed annual period May 1. The operating expense related to the other than his fiscal year, if the use of such new service center is expected to be material a period is an established practice of the in amount, will be accumulated in a sepacontractor and is consistently used for man rate indirect cost poll, and will be allocated aging and controlling the business, and ap to the benefiting cost objectives on the basis propriate accruals, deferrals, or other ad of measured usage. The total operating exjustments are made with respect to such penses of the computer service center for annual periods.

the eight month part of the cost accounting (e) The contracting parties may agree to period may be allocated to the benefiting use an annual period which does not coin cost objectives of that same eight month cide precisely with the cost accounting period. period for developing the data used in estab (c) A contractor changes his fiscal year lishing an allocation base: Provided, (1) The from a calendar year to the 12-month period practice is necessary to obtain significant ending May 31. For financial reporting puradministrative convenience, (2) the practice poses, he has a five-month transitional is consistently followed by the contractor, "fiscal year.” The same five-month period (3) the annual period used is representative must be used as the transitional cost acof the activity of the cost accounting period counting period; it may not be combined as for which the indirect costs to be allocated provided in $ 406.50(f), because the transiare accumulated, and (4) the practice can tional period would be longer than fifteen reasonably be estimated to provide a distri- months. The new fiscal year must be adoptbution to cost objectives of the cost account. ed thereafter as his regular cost accounting

period. The change in his cost accounting period is a change in accounting practices; adjustments of the contract prices may thereafter be required in accordance with paragraph (a)(4)(B) of the contract clause set out at $ 331.50 of this chapter.

(d) Financial reports to stockholders are made on a calendar year basis for the entire contractor corporation. However, the contracting segment does all internal financial planning, budgeting, and internal reporting on the basis of a “model year." The contracting parties agree to use a “model year” and they agree to overhead rates on the “model year" basis. They also agree on a technique for prorating fiscal year assignments of corporate home office expenses between model years. This practice is permitted by the standard.

(e) Most financial accounts and contract cost records are maintained on the basis of a fiscal year which ends November 30 each year. However, employee vacation allowances are regularly managed on the basis of a "vacation year” which ends September 30 each year. Vacation expenses are estimated uniformly during each "vacation year." Adjustments are made each October to adjust the accrued liability to actual, and the estimating rates are modified to the extent deemed appropriate. This use of a separate annual period for determining the amounts of vacation expense is permitted under $ 406.50(b). § 406.70 Exemptions.

None. § 406.80 Effective date.

(a) The effective date of this standard is July 1, 1974. (39 FR 10115, Mar. 18, 1974)

(b) This standard shall be followed by each contractor as of the start of his next fiscal year beginning after receipt of a contract to which this standard is applicable.

This standard shall be used by defense contractors and subcontractors under Federal contracts entered into after the effective date hereof and by all relevant Federal agencies in estimating, accumulating, and reporting costs in connection with the pricing, administration, and settlement of all negotiated prime contract and subcontract national defense procurements with the United States in excess of $100,000, other than contracts or subcontracts where the price negotiated is based on: (a) Established catalog or market prices of commercial items sold in substantial quantities to the general public, or (b) prices set by law or regulation. 83 $ 407.20 Purpose.

(a) The purpose of this Cost Accounting Standard is to provide criteria under which standard costs may be used for estimati accumulating, and reporting costs of direct material and direct labor; and to provide criteria relating to the establishment of standards, accumulation of standard costs, and accumulation and disposition of variances from standard costs. Consistent application of these criteria where standard costs are in use will improve cost measurement and cost assignment.

(b) This Cost Accounting Standard is not intended to cover the use of pre-established measures solely for estimating. § 407.30 Definitions.

(a) The following definitions of terms which are prominent in this Cost Accounting Standard are reprinted from Part 400 of this chapter for convenience. Other terms which are used in this Cost Accounting Standard and are defined in Part 400 of this chapter have the meanings ascribed to them in that part unless the text demands a different definition or the definition is modified in paragraph (b) of this section.

(1) Labor cost at standard. A pre-established measure of the labor element of cost, computed by multiplying labor-rate standard by labor-time standard.

(2) Labor-rate standard. A pre-established measure, expressed in monetary terms, of the price of labor.

(3) Labor-time standard. A pre-established measure, expressed in temporal terms, of the quantity of labor.

(4) Material cost at standard. A pre-established measure of the material element of cost, computed by multiplying materialprice standard by material-quantity standard.

(5) Material-price standard. A pre-established measure, expressed in monetary terms, of the price of material.

(6) Material-quantity standard. A pre-established measure, expressed in physical terms, of the quantity of material.

§ 1-3.1220-7 Use of standard costs for

direct material and direct labor.

PART 407-USE OF STANDARD COSTS FOR DIRECT MATERIAL AND DIRECT LABOR

Sec.

407.10 General applicability.
407.20 Purpose.
407.30 Definitions.
407.40 Fundamental requirement.
407.50 Techniques for application.
407.60 Illustrations.
407.70 Exemptions.
407.80 Effective date.

AUTHORITY: 84 Stat. 796, sec. 103 (50 U.S.C. App. 2168).

SOURCE: 39 FR 11869, Apr. 1, 1974, unless otherwise noted. $ 407.10 General applicability.

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