(c) Between research work requiring an elaborate layout of laboratory facilities and equipment, and research involving primarily the application of mental effort and requiring little or no equipment.

The objective and result should be to burden manufacturing work, or different kinds of manufacturing work, and research work, or different kinds of research work, each with the indirect costs properly applicable to the respective kind of work. If a nondepartmentized plant or individual department is so constituted that the indirect costs, rather than relating fairly proportionately to all work in the plant or department, particularly to the work under the ERDA contract, relate more to some work than to other work, consideration should be given to further departmentization. The costing refinement may be made on a quasi-department basis from data furnished by the existing accounting system or developed on as reasonable an analysis as the facts and circumstances permit. The further departmentization should preferably be incorporated into the contractor's own accounting system.

$9-15.5009-3 Distribution of service

department costs to production departments.

The total indirect costs of each productive department include an appropriate share of the costs incurred by the nonproductive or socalled service departments, such as the maintenance department, the power plant department, stores handling department, and tool room department. The basis used to distribute the costs of each individual service department should result in equitable allocation of the service department costs to the productive departments, particularly those productive departments in which work under the ERDA contract is performed. In the case of each service department the distribution method used should be appropriate in the circumstances, whether it be based on number of workers, floor space occupied, measurable services, total labor costs, total labor hours, some other basis, or a combination of methods.

9-15.5009-4 Distribution of indirect costs of

productive departments to work done.

In order to distribute the indirect costs of a productive department to the work done in the particular department, it is necessary that the apportionment be based on a factor which is common to all work performed in the particular department and which closely approximates the extent to which the services represented by the indirect costs of the department are utilized in performing the work done on the individual contracts and work orders. The variety and complexity of production work makes it difficult to determine the most appropriate and equitable common denominator for distributing a department's indirect costs to the department's work. Since, insofar as the use

made of services represented by a productive department's indirect costs is concerned, the major factor common to all work of the department is either direct labor cost or the time required for performance, the methods commonly used for distributing a department's indirect costs, each of which is based on one of these two factors,

(d) The machine hours method. Which of these methods is most appropriate for a particular department depends on whether distribution of the department's indirect costs equitably should be proportionate to the department's costs of direct labor, hours of direct labor, or hours of machine use. If the contractor's departmentization follows sound and recognized lines of organizational subdivision, one of these methods usually will be found sufficiently accurate and equitable to be accepted. If not, departmental refinement or quasidepartmentization may be required, or combinations of the above methods or the development of other methods equitable in the particular circumstances may be necessary.

$9-15.5009-5 General and administrative expenses.

(a) Allowability. As indicated in §9-15.5005-3, a contractor's general and administrative expenses may be accepted for apportionment to work under an ERDA off-site architect-engineer (see also $9-3.404-50(f)(1)(iii)), supply, or research contract only to the extent that they are established, after careful examination, to be allowable in nature and, on the basis of incidence to its performance, properly allocable to the work. The following are a few examples of expenses which, although not unallowable because of their basic nature, are not incident to the performance of an ERDA contract:

(1) The salaries and expenses of corporate officers, and their staffs, whose services do not apply to the performance of the ERDA contract work, e.g., those whose services are devoted to sales activities promoting the marketing of the contractor's manufactured products; or to matters completely separate from the contractor's manufactured products, such as the merchandising of products made by others; or to the handling of investments so substantial as to constitute in effect a separate business.

(2) Legal and other expenses in connection with applications for patents for the contractor's account.

(3) Outgoing freight costs, inapplicable to the ERDA contract products because delivery of such products is taken f.o.b. contractor's plant.

(4) Expenses (depreciation, operation, and maintenance of buildings and equipment, labor, and other costs) applicable to warehousing and storage of the contractor's products but not incident to the products under the ERDA contract because they are delivered upon completion.

(5) Expenses of maintenance and repairs which would normally have been performed in an accounting period prior to the period of performance of the ERDA contract but which for some reason--possibly abnormal operating conditions, shortages or high costs of materials or labor, or lack of funds--have been deferred.

(b) Allocation. No one method of distribution can be stated to be always most equitable and best for purposes of distributing a contractor's allowable and properly allocable general and administrative expenses to individual jobs and, specifically, to work for ERDA. Careful consideration of the expenses themselves, of differences in work performed, and of the relationship of the expenses to the different kinds of productive activity is necessary in each case to assure that the method used produces fair and equitable results in the particular curcumstances. Several of the methods frequently employed are briefly discussed below.

(1) Total manufacturing costs (including material) may in many cases be an appropriate basis for distributing general and administrative expenses to jobs in connection with which the relation to one another of the component cost elements is substantially the same as the cost pattern of the contractor's work generally. However, they would be an inappropriate basis in the case of a job whose material cost component, due to heavy material purchases and subcontracting, is abnormally high by comparison with the general cost pattern of the contractor's total work. In such a case the normal general and administrative expense rate applicable to total manufacturing cost, arrived at on the basis of the general cost pattern of the contractor's work, should be appropriately adjusted because of the special circumstances pertaining to the particular job, or a different basis of allocation should be used to distribute general and administrative expenses to the job. For cost reimbursement purposes, total manufacturing costs generally constitute a more appropriate base for the distribution of general and administrative expenses than does either the total cost of goods sold or total sales. Each of these latter bases may be deficient and inequitable in that it distributes general and administrative expenses to work sold rather than to work performed during the period concerned.

(2) Processing costs are used in many cases as the basis for allocating general and administrative expense. If the major indirect costs attributable to material--such as purchasing, receiving, inspecting or testing, internal handling (to stockrooms and to jobs directly from stockrooms), storing, inventorying, controlling, and issuing materials--are either included in indirect manufacturing costs or segregated and treated separately as material burden or materialhandling expense, it will probably be more equitable to exclude material cost from, than to include it in, the base for allocating general and administrative expense. However, exclusion of material cost from the base for allocation of general and administrative expense where the administrative costs attributable to materials are accounted for as general and administrative expenses might well be subject to the criticism that costs. which contribute to the generation of general and administrative expenses are not included in the base for their allocation.

(3) Direct labor cost alone is sometimes used as the basis for allocating general and administrative expenses. However, in many cases use of this method would be inappropriate since it fails to recognize that processing costs other than direct labor and also, to some extent at least, material costs serve to generate and to benefit from the incurrence of general and administrative expense. The propriety of this method would be subject to serious questions in a situation where the cost patttern of a particular job (i.e., the portion of the cost representing labor, other processing costs, and material) differs significantly from the normal cost pattern of the contractor's total work.

(c) Allocation of home office expenses of multiplant organizations. In the case of a multiplant organization there will be, in addition to the general and administrative expenses of the individual plants, overall company general and administrative expenses. These latter expenses require distribution or apportionment to all of the company's plants and other activities on an equitable basis or bases. Generally, these overall company expenses are not distributed to the company's various activities as a single pool of expense. Rather, individual classifications of expense or categories of similar types of expenses are spread separately on varied bases--such as number of employees, total payrolls, total manufacturing costs, services rendered, time devoted, and allocations based on the results of detailed studies and analyses in prior years. The total activities of an organization may include, in addition to manufacturing, separate and distinct operations (such as sale and distribution of standard commercial products of the company's own manufacture, merchandising of products made by and purchased from other manufacurers, and investment activities) so varied and dissimilar as to render extremely difficult the problem of determining the proper factors to serve as common

denominators for the fair and equitable allocation of the overall company expenses. Moreover, each expenditure within a given expense classification probably does not benefit all activities in the same way and to the same extent as does any other expenditure in the same expense classification. The foregoing serves to emphasize that the relationship of company general and administrative expenses to individual plants and other activities is not susceptible of precise evaluation. The objective must be, as to the particular classification or categories of such expense, a basis of apportionment which accomplishes its reasonable and equitable, though admittedly only approximately correct, distribution to the company's various activities, particularly those in which work for ERDA is performed.

$9-15.5010 Application of basic

principles to particular situations.

This guide contains examples of the application of the policy and principles outlined in Subpart 9-15.50 to particular situations.

$9-15.5010-1 Consideration of costs

confined to locations involved.

If a contractor does work for ERDA at two or more plants, offices, or departments, the indirect costs of each plant, office, or department will be applied only to the work of the particular plant, office or department. Separate treatment of plants, offices, and departments for accounting purposes is always important; this importance is further accentuated if one of them is furnished with ERDA equipment. Similarly, where a contractor that operates more than one plant, office, or department does work for ERDA at only one particular location, only the costs applicable to the particular location involved should be considered in costing the ERDA work. The costs related to the other plants, offices, or departments which do not perform services in connection with the ERDA contract, are inapplicable to the work under the ERDA contract.

$9-15.5010-2 Field work.

Where a contractor conducts operational activities both at its plant and at field locations, the apportionment to the field work of indirect operating costs incurred at the plant should be confined to only those expenses which are actually applicable to the field work. For example, indirect labor, idle time of direct labor, and other indirect costs applicable only to the contractor's operational activities at the plant location should not be apportioned to field work. Moreover, if the indirect operating expenses applicable to field work as well as work at the plant are apportioned on the basis of direct labor, direct labor at the field location should, for purposes of the