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unit. The cost input base selected to repre segment having a responsibility for final sent the total activity of a business unit dur cost objectives, the expense of the home ing a cost accounting period may be: (1) office functions shall be segregated. These exTotal cost input, (2) value-added cost input, penses shall be allocated to all benefiting or or (3) single element cost input. The deter causing segments, including the segment permination of which cost input base best rep forming the home office functions, pursuant resents the total activity of a business unit to disclosed established accounting must be judged on the basis of the circum practices for the allocation of home office exstances of each business unit.

penses to segments. (1) A total cost input base is generally (1) For purposes of allocating the G&A acceptable as an appropriate measure of the expense pool, items produced or worked on total activity of a business unit.

for stock or product inventory shall be ac(2) Value-added cost input shall be used counted for as final cost objectives in accordas an allocation base where inclusion of ma ance with the following paragraphs: terial and subcontract costs would signifi (1) Where items are produced or worked cantly distort the allocation of the G&A ex on for stock or product inventory in a given pense pool in relation to the benefits received

cost accounting period, the cost input to and where costs other than direct labor are such items in that period shall be included significant measures of total activity. A only once in the computation of the G&A value-added cost input base is total cost in expense allocation base and in the computaput less material and subcontract costs.

tion of the G&A expense allocation rate for (3) A single element cost input base, e.g., that period and shall not be included in the direct labor hours or direct labor dollars, computation of the base or rate for any which represents the total activity of a busi other cost accounting period. ness unit may be used to allocate the G&A (2) A portion of the G&A expense pool expense pool where it produces equitable re shall be allocated to items produced or sults. A single element base may not produce worked on for stock or product inventory equitable results where other measures of in the cost accounting period or periods activity are also significant in relation to to in which such items are produced at the tal activity. A single element base is inap rates determined for such periods except propriate where it is an insignificant part of as provided in (3) below. the total cost of some of the final cost ob (3) Where the contractor does not injectives.

clude G&A expense in inventory as part (e) Where, prior to the effective date of of the cost of stock or product inventory this Standard, a business unit's disclosed or items, the G&A rate of the cost accountestablished cost accounting practice was to ing period in which such items are issued use a cost of sales or sales base, that busi to final cost objectives may be used to ness unit may use the transition method set determine the G&A expenses applicable out in Appendix A hereof.

to issues of stock or product inventory items. (1) Cost input shall include those ex (J) Where a particular final cost objecpenses which by operation of this Standard tive in relation to other final cost objectives are excluded from the G&A expense pool receives significantly more or less benefit and are not part of a combined pool of G&A from G&A expense than would be reflected expenses and other expenses allocated using by the allocation of such expenses using a the same allocation base.

base determined pursuant to paragraph (d) (8) (1) Allocations of the home office ex of this section, the business unit shall acpenses of (1) line management of particular count for this particular final cost objective segments or groups of segments, (11) residual by a special allocation from the G&A exexpenses, and (111) directly allocated ex pense pool to the particular final cost obpenses related to the management and ad jective commensurate with the benefits ministration of the receiving segment as a

received. The amount of a special allocation whole shall be included in the receiving seg

to any such final cost objective shall be exment's G&A expense pool.

cluded from the G&A expense pool required (2) Any separate allocation of the ex by section 410.40(a), and the particular penses of home office (1) centralized service

final cost objective's cost input data shall functions, (11) staff management of specific

be excluded from the base used to allocate activities of segments, and (111) central pay

this pool. ments or accruals, which is received by a

§ 410.60 Illustrations. segment shall be allocated to the segment cost objectives in proportion to the beneficial

(a) Business Unit A has been including

the cost of scientific computer operations or causal relationship between the cost ob

in its G&A expense pool. The scientific comjectives and the expense if such allocation is significant in amount. Where a beneficial or

puter is used predominately for research

and development, rather than for the mancausal relationship for the expense is not agement and administration of the business identifiable with segment cost objectives, the unit as a whole. The costs of the scientific expense may be included in the G&A expense computer operation do not satisfy the Standpool.

ard's definition of G&A expense; however, (h) Where a segment performs home office they may remain in the G&A expense pool tunotions and also performs as an operating unless they can be allocated to business unit

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r causal red by a base esenting the it during a

seting funcI in its G&A acludes the er segment. gets for the ed from B's Fred to the

its customers. The acquisition cost of
building is not part of the total cost in
base; however, the depreciation taken
the building would be part of the total
input base. The costs of construction of
small production facility are not part of
total cost input base. The requirements
Cost Accounting Standard 404 provide to
those G&A expenses which are identifia
with the constructed asset and are mater
in amount shall be capitalized as part
the cost of the production facility. If th
are G&A expense; material in amount &
Identified with the constructed asset, th
G&A expenses would be removed from
G&A expense pool prior to the allocation
this pool to final cost objectives. The c
of the testing device shall be part of the to
cost input base per the requirements of C
Accounting Standard 404 which provie
that the cost of constructed assets identi

2 personnel

wo parts e

who es-e:all guidmint which -tions, etc. 1:; included expense of ated to the

the beneween that 1. This proe require

led selling pool. Busito include bol. Under

Business lling costs 11 be alloted in ac410.50(d). ded IR&D le pool. C llocate its

1978 (astion), the e its G&A e requireg its final ursement is subject

jectives using a cost input base as required
by 410.50(d). If C chooses not to use the
transition method in 410.50(e), the con-
tractual provision requiring appropriate
equitable adjustment of the prices of af-
fected prime contracts and subcontracts will
bo implemented.

(4) Business Unit C has accounted for
and allocated IR&D and B&P costs in a cost
pool separate and apart from the G&A ex-
pense pool, C may continue to account for
these costs in a separate cost pool under the
provision of this Standard. If C is to use a
total cost input base, these costs when ac-
counted for and allocated in a cost pool
separate and apart from the G&A expense
pool will become part of the total cost in.
put base used by c to allocate the G&A
expense pool.

(5) Business Unit C has included selling costs as part of its G&A expense pool. Business Unit C has used a cost of sales base to allocate the G&A expense pool. Business Unit C desires to continue to allocate selling costs using the costs of sales base. Under the provisions of this standard, Business Unit C would account for selling costs as 8 cost pool separate and apart from the G&A expense pool, and continue to allocate these costs over a cost of sales base. If C uses & total cost input base to allocate the G&A expense pool, the selling costs will become part of the total cost input base.

(d) (1) Business Unit D has accounted for selling costs in a cost pool separate and apart from its G&A expense pool and has allocated these costs using a cost of sales base. Under the provisions of this Standard. Business Unit D may continue to account for those costs in a separate pool and allocate them using a cost of sales base. Business Unit D has a total cost input base to allocate its G&A expense pool. The selling costs will become part of the cost input base used by Business Unit D to allocate the G&A expense pool.

(2) During a cost accounting period, Business Unit D buys $2,000,000 of raw materials. At the end of that cost accounting period, $500,000 of raw materials inventory have not been charged out to contracts or other cost objectives. The $500,000 of raw materials are not part of the total cost input base for the cost accounting period, because they have not been charged to the production of goods and services during that period. If all of the $2,000,000 worth of raw material had been charged to cost objectives during the cost accounting period, the cost input base for the allocation of the G&A expense pool would include the entire $2,000,000.

(3) Business Unit D manufactures a varlety of testing devices. During a cost accounting period, Business Unit D acquires and uses a small building, constructs & small production facility using its own resources, and keeps for its own use one unit of a testing device that it manufactures and sells to

with the contractor's regular product sh
include a full share of indirect cost,

(e) (1) Business Unit E produces It
Z for stock or product inventory. ?
business unit does not include G&A
Pense as part of the inventory cost of th
items for costing or financial reporting p
poses. A production run of these items
curred during Cost Accounting Period 1
number of the units produced were not
sued during Period 1 and are issued in Per
2. However, those units produced in Perio
shall be included in the cost input of t
period for calculating the G&A expe
allocation base and shall not be included
the cost input of Period 2.

(2) Business Unit E should apply
G&A expense rate of Period 1 to those un
of Item Z issued during Period 1 and n
apply the rate of Period 2 to the units issu

the pre

5 use the

&P costs m Janu5t count-existing eexisting nse pool to 410.50

In Period 2.

(3) If the practice of Business Unit
is to include G&A expense as part of the c
of stock or product inventory, the inventi
cost of all units of Item z produced in Peri
1 and remaining in inventory at the end
Period 1, should include G&A expense usi
the G&A rate of Period 1.
(1)(1) Business Unit F produced Item
for stock or product inventory. The busin
unit does not include G&A expense as p
of the inventory' cast of these items. A pi
duction run of these items was started, fi
Ished, and placed into inventory in a sing
cost accounting period. These items are
sued during the next cost accounting perio

(2) The cost of items produced for sto
of product inventory should be included
the G&A base in the same year they are pr
duced. The cost of such items is not to
included in the G&A base on the basis
when they are issued to final cost objectiv
Therefore, the time of issuance of these iter
from Inventory to a final cost objective
irrelevant in computing the G&A base.

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(8) The normal productive activity Business Unit G includes the construction

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its customers. The acquisition cost of the building is not part of the total cost input base; however, the depreciation taken

on the building would be part of the total cost input base. The costs of construction of the small production facility are not part of the total cost input base. The requirements of Cost Accounting Standard 404 provide that those G&A expenses which are identifiable with the constructed asset and are material in amount shall be capitalized as part of the cost of the production facility. If there are G&A expenses material in amount and identified with the constructed asset, these G&A expenses would be removed from the G&A expense pool prior to the allocation of this pool to final cost objectives. The cost of the testing device shall be part of the total cost input base per the requirements of Cost Accounting Standard 404 which provides that the cost of constructed assets identical with the contractor's regular product shall include a full share of indirect cost.

(e) (1) Business Unit E produces Item Z for stock or product inventory. The business unit does not include G&A expense as part of the inventory cost of these items for costing or financial reporting purposes. A production run of these items occurred during Cost Accounting Period 1. A number of the units produced were not issued during Period 1 and are issued in Period 2. However, those units produced in Period 1 shall be included in the cost input of that period for calculating the G&A expense allocation base and shall not be included in the cost input of Period 2.

(2) Business Unit E should apply the G&A expense rate of Period 1 to those units of Item z issued during Period 1 and may apply the rate of Period 2 to the units issued. in Period 2.

(3) If the practice of Business Unit E Is to include G&A expense as part of the cost of stock or product inventory, the inventory cost of all units of Item z produced in Period 1 and remaining in inventory at the end of Period 1, should include G&A expense using the G&A rate of Period 1.

(f) (1) Business Unit F produced Item X for stock or product inventory. The business unit does not include G&A expense as part of the inventory cost of these items. A production run of these items was started, finIshed, and placed into inventory in a single cost accounting period. These items are issued during the next cost accounting period.

(2) The cost of items produced for stock or product inventory should be included in the G&A base in the same year they are produced. The cost of such items is not to be included in the G&A base on the basis of when they are issued to final cost objectives. Therefore, the time of issuance of these items from inventory to a final cost objective is irrelevant in computing the G&A base.

(8) The normal productive activity of Business Unit G includes the construction of

base operating facilities for others. G total cost input base to allocate G&A e to final cost objectives. As part of a co to construct an operating facility. G to acquire a large group of trucks and mobile equipment to equip the base a ing facility. G does not usually supply equipment. The cost of the equipmen stitutes a significant part of the co cost. A special G&A allocation to this co shall be agreed to by the parties if they that in the circumstances the contrac whole receives substantially less benefi the G&A expense pool than that which be represented by a cost allocation ba Inclusion of the contract cost in the cost input base.

(h) (1) The home office of Segm separately allocates to benefiting or ing segments significant home office ex of (1) staff management functions ro to manufacturing, (11) staff manag functions relative to engineering, (111 tral payment of health insurance cos (iv) residual expenses. H receives the penses as separate allocations. H mai three indirect cost pools: (1) G&A ex (11) manufacturing overhead and (111 gineering overhead: all home office ext allocated to H are included in H's G& pense pool.

(2) This accounting practice of H not comply with $ 410.50(g) (2), Home residual expenses should be in the G& pense pool, and the expenses of the management functions relative to mar turing and engineering should be inc in the manufacturing overhead and neering overhead pools, respectively health insurance costs should be allo in proportion to the beneficial and relationship between these costs and H objectives. $ 410,70 Eremptions.

This Standard shall not apply to co tors who are subject to the provisic Federal Management Circular 73-8 Principles for Educational Institutior Circular 74-4 (Principles for Determ Costs Applicable to Grants and Con with State and Local Governments). § 410.80 Effective date.

(a) The effective date of this Sta is October 1, 1976 (41 FR 27311, JE 1976).

(b) This Standard shall be follow each contractor after the start of his fiscal year beginning after January 1, 19

APPENDIX A

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$ 1-3.1220-10

Title 41—Public Contracts, Property Management

& cost of sales or sales base to a cost input base.

(1) Calculate the cost of sales or sales base in accordance with the cost accounting practice disclosed or established prior to the date established by Section 410.80 (b) of this Cost Accounting Standard.

(2) Calculate the G&A expense allocation rate using the base determined in paragraph (1) above and use that rate to allocate from the G&A expense pool to the final cost objectives which were in existence prior to the date on which the business unit must first allocate costs in accordance with the requirements of this Cost Accounting Standard.

(3) Calculate a cost input base in compliance with $ 410.50(d) above.

(4) Calculate the G&A expense rate using the base determined in paragraph (3) above and use that rate to allocate from the G&A expense pool to those final cost objectives which arise under contracts entered into on or after the date on which the business unit must first allocate costs in accordance with the requirements of this Cost Accounting Standard.

(5) The calculations set forth in paragraphs (1)-(4) above shall be performed for each cost accounting period during which final cost objectives described in (2) are being performed.

(6) The business unit shall establish an inventory suspense account. The amount of the inventory suspense account shall be equal to the beginning inventory of contracts subject to the CAS clause of the cost accounting period in which the business unit must first allocate costs in accordance with the requirements of this Cost Accounting Standard.

(7) In any cost accounting period, after the cost accounting periods described in (5) above, if the ending inventory of contracts subject to the CAS clause in less than the balance of the inventory suspense account, the business unit shall calculate two G&A expense allocation rates, one to allocate G&A expenses to contracts subject to the CAS clause and one applicable to other work.

(a) The G&A expense pool shall be divided in the proportion which the cost input of the G&A expense allocation base of the contracts subject to the CAS clause bears to the total of the cost indut allocation base, selected in accordance with & 410.50(d), for the cost accounting period.

(b) The G&A expenses applicable to contracts subject to the CAS clause shall be reduced by an amount determined by multiplying the difference between the balance of the inventory suspense account and the ending inventory of contracts subject to the CAS clause by the cost of sales rate, as determined under (1) above, of the cost accounting period in which a business unit must first allocate costs in accordance with the requirements of this Cost Accounting Standard.

(8) In any cost accounting period in which such a reduction is made, the balance of the inventory suspense account shall be reduced to be equal to the ending inventory of contracts subject to the CAS clause of that cost accounting period.

The following illustrates how a business unit would use this transition method.

1. Business Unit R has been using a cost of sales base to allocate its G&A expense pool to final cost objectives, Business Unit R uses a calendar year as its cost accounting period. On October 1, 1976 (assumed for purposes of this illustration) Cost Accounting Standard 410 becomes effective. On October 2, 1976, Business Unit R receives a three-year contract containing the Cost Accounting Standards clause. As a result, Business Unit R must comply with the requirements of the Standard in the cost accounting period beginning in January, 1978.

As of January 3, 1978, Business Unit R has the following contracts:

(1) Contract I-A four-year contract awarded in January, 1975.

(2) Contract II-A three-year contract which was negotiated in March, 1976, and was awarded on October 2, 1976.

(3) Contract III-A four-year contract awarded on January 2, 1978.

If Business Unit R chooses to use the transition method provided in § 410.50(e), it will allocate the G&A expense pool to these contracts as follows:

(a) Contract I-Since Contract I was in existence prior to January 1, 1978, the G&A expense pool shall be allocated to it using a cost of sales base as provided in 410.50(e).

(b) Contract II-Since this contract was in existence prior to January 1, 1978, the G&A expense pool shall be allocated to it using a cost of sales base as provided in § 410.50(e).

(c) Contract III—Since this contract was awarded after January 1, 1978, the G&A expense pool shall be allocated to this contract using a cost input base.

Having chosen to use § 410.50(e), Business Unit R will use the transition method of allocating the G&A expense pool to final cost objectives until all contracts awarded prior to January 1, 1978, are completed (1979 if the contracts are completed on schedule). Beginning with the cost accounting period subsequent to that time, 1980, Business Unit R will use a cost input base to allocate the G&A expense pool to all cost objectives. Business Unit R will also carry forward an inventory suspense account in accordance with the requirements of this Standard.

2.A Business Unit Nis first required to allocate its costs in accordance with the requirements of CAS 410 during the fiscal year beginning January 1, 1978. Business Unit N has used a cost of sales base to allocate its G&A expense pool.

During the years 1978, 1979, 1980, Business Unit N reported the following data:

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