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sets). In the absence of reliable data for
measurement or estimation of the consu
tion of asset services by the techniques
tioned, the expected consumption of ser
may be represented by the passage of t
The appropriate method of deprecia
should be selected as follows:

(1) An accelerated method of deprecia
Is approprlate where the expected consu
tion of asset services is significantly gre
in early years of asset life.

(11) The straight-line method of depre tion is appropriate where the expected sumption of asset services is reasonably 1 over the service life of the asset (or grou assets).

(6) The estimated service life and met of depreciation to be used for an orig complement of low-cost equipment shal

- usefulness in effect as of the first day of the cost ac. eriod tangi counting period in which the assets are For standby acquired. Use of this alternative procedure records are shall cease as soon as the contractor is able withdrawal to develop estimates which are appropriately

supported by his own experience. s of useful. (5) The contracting parties may agree on h are sup

the estimated service life of individual tan. retirement gible capital assets where the unique pur. Erom active pose for which the equipment was acquired - incidental or other special circumstances warrant &

of assets) shorter estimated service life than the life propriately determined in accordance with the other

factors ex provisions of this 409,50(e) and where the The factors shorter life can be reasonably predicted. experience (f) (1) The method of depreciation used

for financial accounting purposes (or other cal useful accounting purposes where depreciation is experienced not recorded for financial accounting purund quality poses) shall be used for contract costing

unless (1) such method does not reasonably nic useful reflect the expected cons

mption of services I technical for the tangible capital asset (or group of

asset (or assets) to which applied, or (ii) the method : or service is unacceptable for Federal income tax pur

poses. If the contractor's method of deprecinaintained ation used for financial accounting purposes e at retire (or other accounting purposes as provided hooses, at above) dces not reasonably reflect the ex

retention pected consumption of services or is unacsample of ceptable for Federal income tax purposes, he 1. Whether shall establish a method of depreciation for ally or by contract costing which meets these criteria, ervice life in accordance with paragraph (f)(3) of this records of section. lual assets (2) After the date of initial applicability ts as long of this standard, selection of methods of de. be burden preciation for newly acquired tangible capital stify esti assets, which are different from the methods orter than currently being used for like assets in similar

circumstances, shall be supported by projecgraph (e) tions of the expected consumption of services

available of those assets (or groups of assets) to which ts of this the different methods of depreciation shall i contrac apply. Support in accordance with paragraph t and his

(f) (3) of this section shall be based on the available

expected consumption of services of either inLfter that dividual assets or any reasonable grouping of 5 for esti assets as long as the basis selected for groupapital as ing assets is.consistently used. d service (3) The expected consumption of asset

purposes services over the estimated service life of a re depre tangible capital asset (or group of assets) is

account influenced by the factors mentioned in par. cial orga agraph (a) of this section which affect either nder the potential activity or potential output of the ► of this

asset (or group of assets). These factors may iate sup be measured by the expected activity or the

expected physical output of the assets, as for tangible example: Hours of operation, number of opactor has

erations performed, number of units proience for

duced, or number of miles traveled. An 8Cbased on ceptable surrogate for expected activity or al period output might be a monetary measure of that ess than

activity or output generated by use of tanestab

gible capital assets, such as estimated labor nder the

dollars, total cost incurred or total revenues, 1 by the

to the extent that such monetary measures dditions, can reasonably be related to the usage of spe. hich are cific tangible capital assets (or groups of as

258

based on the expected consumption of s ices over the expected useful life of the c plement as a whole and shall not be based the individual items which form complement.

(h) Estimated residual values shall be termined for all tangible capital assets groups of assets). For tangible personal p erty, only estimated residual values wi exceed 10 percent of the capitalized cos the asset (or group of assets) need be 1 In establishing depreciable costs. W. either the declining balance method of de ciation or the class life asset deprecia range system is used consistent with the visions of this standard, the residual vi need not be deducted from capitalized cos determine depreciable costs. No deprecia cost shall be charged which would sigi cantly reduce book value of a tangible cap asset (or group of assets) below its resto

value,

(1) Estimates of service life, consump
of services, and residual value shall be re
amined for tangible capital assets (or gri
of assets) whenever circumstances cha
significantly. Where changes are made to
estimated service life, residual value,
method of depreciation during the life
tangible capital asset, the remaining der
ciable costs for cost accounting purposes s)
be limited to the undepreciated cost of
assets and shall be assigned only to the i
accounting period in which the change
made and to subsequent periods.

() (1) Gains and losses on dispositior
tangible capital assets shall be considered
adjustments of depreciation costs previou
recognized and shall be assigned to the
accounting period in which disposition
curs except as provided in paragraphs
(2) and (3) of this section. The gain or 1
for each asset disposed of is the difference

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tween the net amount realized, including surance proceeds in the event of involunt conversion, and its undepreciated balai However, the gain to be recognized for a tract costing purposes shall be limited to difference between the original acquisit

sets). In the absence of reliable data for the measurement or estimation of the consumption of asset services by the techniques mentioned, the expected consumption of services may be represented by the passage of time. The appropriate method of depreciation should be selected as follows:

(1) An accelerated method of depreciation is appropriate where the expected consumption of asset services is significantly greater in early years of asset life.

(11) The straight-line method of depreciation is appropriate where the expected consumption of asset services is reasonably level over the service life of the asset (or group of assets).

(g) The estimated service life and method of depreciation to be used for an original complement of low-cost equipment shall be based on the expected consumption of services over the expected useful life of the complement as a whole and shall not be based on the individual items which form the complement.

(h) Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed 10 percent of the capitalized cost of the asset (or group of assets) need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this standard, the residual value need not be deducted from capitalized cost to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value.

(1) Estimates of service life, consumption of services, and residual value shall be reexamined for tangible capital assets (or group of assets) whenever circumstances change significantly. Where changes are made to the estimated service life, residual value, or method of depreciation during the life of a tangible capital asset, the remaining depreclable costs for cost accounting purposes shall be limited to the undepreciated cost of the assets and shall be assigned only to the cost accounting period in which the change is made and to subsequent periods.

(1) (1) Gains and losses on disposition of tangible capital assets shall be considered as adjustments of depreciation costs previously recognized and shall be assigned to the cost accounting period in which disposition occurs except as provided in paragraphs (h) (2) and (3) of this section. The gain or loss for each asset disposed of is the difference between the net amount realized, including insurance proceeds in the event of involuntary conversion, and its undepreciated balance. However, the gain to be recognized for contract costing purposes shall be limited to the difference between the original acquisition

cost of the assets and its undepreciated balance.

(2) Gains and losses on the disposition of tangible capital assets shall not be recognized where: (1) Assets are grouped and such gains and losses are processed through the accumulated depreciation account, or (11) the asset is given in exchange as part of the purchase price of a similar asset and the gain or loss is included in computing the depreciable cost of the new asset. Where the disposition results from an involuntary conversion and the asset is replaced by a similar asset, gains and losses may either be recognized in the period of disposition or used to adjust the depreciable cost base of the new asset.

(3) The contracting parties may account for gains and losses arising from mass or extraordinary dispositions in a manner which will result in treatment equitable to all parties.

(4) Gains and losses on disposition of tangible capital assets transferred in other than an arms-length transaction and subsequently disposed of within 12 months from the date of transfer shall be assigned to the transferor.

(k) Where, in accordance with $ 409.40(b) (1), the depreciation costs of like tangible capital assets used for similar purposes are directly charged to cost objectives on the basis of usage, average charging rates based on cost shall be established for the use of such assets. Any variances between total depreciation cost charged to cost objectives and total depreciation cost for the cost accounting period shall be accounted for in accordance with the contractor's established practice for handling such variances.

(1) Practices for determining depreciation methods, estimated service lives and estimated residual values need not be changed for assets acquired prior to compliance with this standard if otherwise acceptable under applicable procurement regulations. However, if changes are effected such changes must conform to the criteria established in this standard and may be effected on a prospective basis to cover the undepreciated balance of cost by agreement between the contracting parties pursuant to negotiation under (a) (4) (B) of the Contract clause set out at $ 331.50 of the Board's regulations (4 CFR 331.50). $ 409.60 Illustrations.

The following examples are illustrative of the provisions of this standard.

(a) X, Y, and Z companies purchase identical milling machines to be used for similar purposes.

(1) Company X estimates service life for tangible capital assets on an individual asset basis. Its experience with similar machines is that the average replacement period 1s 14 years. Under the provisions of the standard, Company X shall use the estimated service life of 14 years for the milling machine unless it can demonstrate changed

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ferent esti

zice life for ng assets of imilar servhe tools are

The averne tools for dance with Company Y acquisition at estimate

(3) A company maintains retirement ords which show acquisition dates. The c pany should select a sampling time pe: which, preferably, is significantly longer the anticipated life of the assets for w lives are to be estimated. The comp would then select a random sample of Itretired in each year of the sampling t period and tabulate age at retirement.

(4) A company maintains only a recor acquisitions for each year. The comp should select a random sample of items quired in the most recent complete year determine from current records or obse tions whether each item is currently in s ice. The acquisitions of each prior should be sampled in turn to determin sample items are currently in service. sampling should be performed for at perlod significantly longer than the ant pated life of assets for which the lives to be established, but can be discontinue

ice life for ping assets

to service and equipgroup. The hinery and

years. In the standnated servtion unless ate for the

e depreciascribed in tly to final g machine 2 hours of > depreciatime basis i charging es in the ciation for 1 to bene

Government. Contractor capitalizes the
building at its fair value. Under the standard
the depreciable cost of the asset based on
that value may be accounted for over its
estimated service life and allocated to cost
objectives in accordance with contractor's
cost allocation practices.

(1) A major item of equipment which was
acquired prior to the applicability of this
standard was estimated, at acquisition, to
have a service life of 12 years and a residual
value of no more than 10 percent of acquisl.
tion cost. After 4 years of service, during
which time this standard has become appli-
cable, a change in the production situation
results in a well-supported determination to
shorten the estimated service life to a total
of 7 years. The revised estimated residual
value is 15 percent of acquisition cost. The
manual depreciation charges based on this
particular asset will be appropriately In-
creased to amortize the remaining cost, less
the current estimate of residual value, over
the remaining 3 years of expected usefulness.
This change is not a change of cost account-
ing practice, but a correction of numeric
estimates. The requirement of $ 409.50(1)
for an adjustment pursuant to section (a)
(4) (B) of the CAS clause does not apply.

(8) The support required by $ 409.50(e)
can, in all likelihood, be derived by sam.
pling from almost any reasonable fixed asset
records. Of course, the more complete the
data in the records which are available, the
more confidence there can be in determina-
tions of asset service lives. The following
descriptions of sampling methods are 11.
lustrations of techniques which may be use-
ful even with limited fixed asset records.

(1) A company maintains an inventory of assets in use. The company should select a sampling time period which, preferably, 18 significantly longer than the anticipated life of the assets for which lives are to be established. Of course, the inventory must be available for each year in the sampling time period. The company would then select a random sample of items in each year except the most recent year of the time period. Each Item in the sample would be compared to the subsequent year's inventory to determine if the asset is still in service; if not, then the asset had been retired in the year from which the sample was drawn. The item is then traced to prior year inventories to determine the year in which acquired.

NOTE: Sufficient items must be drawn in each year to assure an adequate sample.

(2) A company maintains an inventory of assets in use and also has a record of retirements. In this case the company does not have to compare the sample to subsequent years to determine if disposition has OCcurred. As in Example (1) above the sample items are traced to prior years to determine the year in which acquired.

the point at which sample items no loi appear in current use. From the data talned, mortality tables can be construi to determine average asset life.

(5) A company does not maintain counting records on fully depreciated as: However, property records are maintai. and such records are retained for 3 y after disposition of an asset in groups year of disposition. An analysis of these tirements may be made by selecting larger dollar items for each categtory of sets for which lives are to be determi (for example, at least 75 percent of acquisition values retired each year). cases cited above are only examples many other examples could have been u Also In any example, a company's individ circumstances must be considered in ou

capitalizes
new lathe.
urs for the
ves as an
quipment
tool hold-
ches, and
i compris
ge life of
ns will be
expected
equal to
od service
the origi.

to take into account possible biased rest because of changes in organizations, pr ucts, acquisition policies, economic fact etc. The results from example (g) (5), Instance, might be substantially distor If the 3 year period was unusual with rest to dispositions. Therefore, the examples Illustrative only and any sampling perforn in compliance with this standard sho take into account all relevant informat to assure that reasonable results are obtair

t facility 10 years, program. 5 million.

be compility acjired for Although atracting epreciate

$409.70 Exemption.

This standard shall not apply where co pensation for the use of tangible capital sets is based on use allowances as provi for by the provisions of Federal Managem Circular 73-8 (Cost Principles for Edu tional Institutions), Federal Managem Circular 744 (Principles for Determin Costs Applicable to Grants and Contra with State and Local Governments), or ot appropriate Federal procurement regulatio

g by dohe buildher comthe local

260

Under the

8 409.80 Effectivo date.

(a). The effective date of this Cost Ac ing Standard is July 1, 1975 (40 FR April 8, 1975).

(b) This Cost Accounting Standard be followed by each contractor for a gible capital assets acquired on or afstart of his next fiscal year beginning the receipt of a contract to which th: Accounting Standard is applicable. [40 FR 60027, Dec. 31, 1975)

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§ 1-3.1220-10 Allocation of bu

unit general and administrati

penses to final cost objectives. PART 410—ALLOCATION OF BUSINESS

GENERAL AND ADMINISTRATIVE EXPEN FINAL COST OBJECTIVES

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(3) A company maintains retirement records which show acquisition dates. The company should select a sampling time period which, preferably, is significantly longer than the anticipated life of the assets for which lives are to be estimated. The company would then select a random sample of items retired in each year of the sampling time period and tabulate age at retirement.

(4) A company maintains only a record of acquisitions for each year. The company should select a random sample of items acquired in the most recent complete year and determine from current records or observations whether each item is currently in service. The acquisitions of each prior year should be sampled in turn to determine if sample items are currently in service. This sampling should be performed for a time period significantly longer than the anticipated life of assets for which the lives are to be established, but can be discontinued at the point at which sample items no longer appear in current use. From the data cbtained, mortality tables can be constructed to determine average asset life.

(5) A company does not maintain accounting records on fully depreciated assets. However, property records are maintained, and such records are retained for 3 years after disposition of an asset in groups by year of disposition. An analysis of these retirements may be made by selecting the larger dollar items for each categtory of assets for which lives are to be determined (for example, at least 75 percent of the acquisition values retired each year). The cases cited above are only examples and many other examples could have been used. Also in any example, a company's individual circumstances must be considered in order to take into account possible biased results because of changes in organizations, products, acquisition policies, economic factors, etc. The results from example (g) (5), for instance, might be substantially distorted 1f the 3 year period was unusual with respect to dispositions. Therefore, the examples are Illustrative only and any sampling performed in compliance with this standard should take into account all relevant information to assure that reasonable results are obtained.

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Sec. 410.10 General applicability. 410.20 Purpose. 410.30 Definitions. 410.40 Fundamental requirement. 410.50 Techniques for application. 410.60 Illustrations. 410.70 Exemptions. 410.80 Effective date. Appendix A-Transition from a cost o

or sales base to a cost input b AUTHORITY: 84 Stat. 796, sec. 103, 50 App. 2168.

SOURCE: The provisions of Part 410 E at 41 FR 16135, April 16, 1976, Correct FR. 22241, June 2, 1976, unless oth noted.

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$ 410.10 General applicability.

General applicability of this Cos counting Standard is established by $ of the Board's regulations on applica exemption, and waiver of the requirem include the Cost Accounting Standard tract clause in negotiated defense prim tracts and subcontracts ($ 331.300 chapter). § 410.20 Purpose. The purpose

of

this Cost Accou Standard is to provide criteria for ti location of business unit general and a istrative (G&A) expenses to business final cost objectives based on their ben or causal relationship. These expenses sent the cost of the management an ministration of the business unit as a The Standard also provides criteria fc allocation of home office expenses re by a segment to the cost objectives o segment. This Standard will increas likelihood of achieving objectivity in t location of expenses to final cost obje

Tom

sample

8 409.70 Exomption.

This standard shall not apply where compensation for the use of tangible capital assets is based on use allowances as provide :1 for by the provisions of Federal Management Circular 73-8 (Cost Principles for Educational Institutions), Federal Management Circular 74-4 (Principles for Determining Costs Applicable to Grants and Contracts with State and Local Governments), or other appropriate Federal procurement regulations.

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ng con

: terms ard are pter for used in t 400 of ibed to emands ition is ction.

cost or ore cost

direct ment of

unit. The cost input base selected to rej
sent the total activity of a business unit
ing a cost accounting period may be:
Total cost input, (2) value-added cost ing
or (3) single element cost input. The de
mination of which cost input base best
resents the total activity of a business
must be judged on the basis of the circu
stances of each business unit.

(1) A total cost input base is gener
acceptable as an appropriate measure of
total activity of a business unit.

(2) Value-added cost input shall be u as an allocation base where inclusion of I terial and subcontract costs would sigr cantly distort the allocation of the G&A pense pool in relation to the benefits recei and where costs other than direct labor significant measures of total activity value-added cost input base is total cost put less material and subcontract costs.

(3) A single element cost input base,

an or-ganizants. G&A exurposes bds and lod. 'ganizaer work and for ate and ts, Jobs,

bjective ect and or's acnal ac

which shall be allocated only to final cost
objectives.

(b) (1) The G&A expense pool of a business
unit for a cost accounting period shall be
allocated to final cost objectives of that cost
accounting period by means of a cost input
base representing the total activity of the
business unit except as provided in para-
graph (b)(2) of this section. The cost input
base selected shall be the one which best
represents the total activity of a typical cost
accounting period.

(2) The allocation of the G&A expense pool to any particular final cost objectives which receive benefits significantly different from the benefits accruing to other final cost objectives shall be determined by special allocation, (410.50 (1)).

(c) Home office expenses received by a segment shall be allocated to segment cost objectives as required by 410.50(g).

(d) (1) Except as provided in (d) (2) below, any costs which do not satisfy the definition of G&A expenses in this Standard, but which have been classified by a business unit as G&A expenses

can remain in the G&A ex-
pense pool unless they can be allocated to
business unit cost objectives on a beneficial
or casual relationship which is best measured
by a base other than a cost input base.

(2) Independent Research and Develop-
ment costs and Bidding and Proposal costs
shall be treated pursuant to provisions of
existing laws regulations and other control-
ling factors.
$ 410.50 Techniques for application.

(a) G&A expenses of a segment incurred
by another segment shall be removed from
the incurring segment's G&A expense pool.
They shall be allocated to the segment for
which the expenses were incurred on the
basis of the beneficial or causal relationship
between the expenses incurred and all bene-
fiting or causing segments. If the expenses
are incurred for two or more segments, they
shall be allocated using an allocation base
common to all such segments.

(b) The G&A expense pool may be combined with other expenses for allocation to final cost objectives provided that:

(1) The allocation base used for the combined pool is appropriate both for the allocation of the G&A expense pool under this Standard and for the allocation of the other expenses; and

(2) Provision is made to identify the components and total of the G&A expense pool separately from the other expenses in the combined pool.

(c) Expenses which are not G&A expenses and are insignificant in amount may be included in the G&A expense pool for allocation to final cost objectives.

(d) The cost input base used to allocate the G&A expense pool shall include all sig. nificant elements of that cost input which represent the total activity of the business

direct labor hours or direct labor doll
which represents the total activity of a bi
Dess unit may be used to allocate the c
expense pool where it produces equitable
sults. A single element base may not prod
equitable results where other measures
activity are also significant in relation to
tal activity. A single element base is in
propriate where it is an insignificant par
the total cost of some of the final cost
jectives.

(e) Where, prior to the effective date
this Standard, a business unit's disclosec
established cost accounting practice was
use a cost of sales or sales base, that by
ness unit may use the transition method
out in Appendix A hereof.

(1) Cost input shall include those penses which by operation of this Stand

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are excluded from the G&A expense P and are not part of a combined pool of G expenses and other expenses allocated us the same allocation base.

(B) (1) Allocations of the home office penses of (1) line management of particu segments or groups of segments, (11) resid expenses, and (111) directly allocated penses related to the management and ministration of the receiving segment a whole shall be included in the receiving ment's G&A expense pool.

(2) Any separate allocation of the penses of home office (1) centralized serv functions, (l) staff management of spec. activities of segments, and (ul) central pa ments or accruals, which is received by segment shall be allocated to the segm cost objectives in proportion to the benefic of causal relationship between the cost ( jectives and the expense if such allocation significant in amount. Where a beneficial

defiinichapter le.

causal relationship for the expense is i Identifiable with segment cost objectives, 1 expense may be included in the G&A exper

pool.

hall be it pool

(b) Where & segment performs home off functions and also performs as an operati

262

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