identified only at the time rates are proposed, established, revised, or adjusted. (b) The visibility requirement of paragraph (a) above may be satisfied by any form of cost identification which is adequate for purposes of contract cost determination and verification. The standard does not require such cost identification for purposes which are not relevant to the determination of Government contract cost. Thus, to provide visibility for incurred costs, acceptable alternative practices would include (1) the segregation of unallowable costs in separate accounts maintained for this purpose in the regular books of account. (2) the development and maintenance of separate accounting records or work papers, or (3) the use of any less formal cost accounting techniques which establishes and maintains adequate cost identification to permit audit verification of the accounting recognition given unallowable costs. Contractors may satisfy the visibility requirements for estimated 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 Illustrations. (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 & 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 unallowable manufac turing 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 15-205.23) (FPR Note: Comparable section in the FPR 18 1-15.205.23) incurred for incorporation fees and for charges for special services of outside attorneys, accountants, promoters, and con. sultants. 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 contractor does not regularly include his G&A expenses in any indirect-expense allocation base. In these circumstances, the offcial'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. 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 objectivity, 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 convenlence. 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 modified 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, organizational 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. 247 (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 incured costs identified with two or more objectives 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 parties may agree to use a different period for establishing an allocation base as provided in § 406.50(e). 406.50 Techniques for application. (a) The cost of an indirect function which exists for only a part of a cost accounting period may be allocated on the basis of data for that part of the cost accounting period if the cost is (1) material in amount, (2) accumulated in a separate indirect cost pool, and (3) allocated on the basis of an appropriate direct measure of the activity or output of the function during that part of the period. (b) The practices required by § 406.40(b) of this standard shall include appropriate practices for deferrals, accruals, and other adjustments to be used in identifying the cost accounting periods among which any types of expense and any types of adjustment to expense are distributed. If an expense, such as taxes, insurance or employee leave, is identified with a fixed recurring, annual period which is different from the contractor's cost accounting period, the standard permits continued use of that different period. Such expenses shall be distributed to cost accounting periods in accordance with the contractor's established practices for accruals, deferrals and other adjustments. (c) Indirect cost allocation rates, based on estimates, which are used for the purpose of expediting the closing of contracts which are terminated or completed prior to the end of a cost accounting period need not be those finally determined or negotiated for that cost accounting period. They shall, however, be developed to represent a full cost accounting period, except as provided in paragraph (a) of this section. (d) A contractor may, upon mutual agreement with the Government, use as his cost accounting period a fixed annual period other than his fiscal year, if the use of such a period is an established practice of the contractor and is consistently used for managing and controlling the business, and appropriate accruals, deferrals, or other adjustments are made with respect to such annual periods. (e) The contracting parties may agree to use an annual period which does not coincide precisely with the cost accounting period for developing the data used in establishing an allocation base: Provided, (1) The practice is necessary to obtain significant administrative convenience, (2) the practice is consistently followed by the contractor, (3) the annual period used is representative of the activity of the cost accounting period for which the indirect costs to be allocated are accumulated, and (4) the practice can reasonably be estimated to provide a distribution to cost objectives of the cost accounting period not materially different from that which otherwise could be obtained. (f) When a transitional cost accounting period is required under the provisions of § 406.40(a) (3), the contractor may select any one of the following: (1) The period, less than a year in length, extending from the end of his previous cost accounting period to the beginning of his next regular cost accounting period; (2) a period in excess of a year, but not longer than fifteen months, obtained by combining the period described in subparagraph (1) of this paragraph with the previous cost accounting period; or (3) a period in excess of a year, but not longer than fifteen months, obtained by combining the period described in subparagraph (1) of this paragraph with the next regular cost accounting period. A change in the contractor's cost accounting period is a change in accounting practices for which an adjustment in the contract price may be required in accordance with paragraph (a) (4) (B) of the contract clause set out at § 331.50 of this chapter. (8) A contractor allocates general management expenses on the basis of total cost input. In a proposal for a covered negotiated fixed-price contract, he estimates the allocable expenses based solely on the estimated amount of the general management expense pool and the amount of the total cost input base estimated to be incurred during the eight months in which performance is scheduled to be commenced and completed. Such a proposal would be in violation of the re quirements of this standard that the calcula. tion of the amounts of both the indirect cost pools and the allocation bases be based on the contractor's cost accounting period. (b) A contractor whose cost accounting period is the calendar year, installs a computer service center to begin operations on May 1. The operating expense related to the new service center is expected to be material in amount, will be accumulated in a separate indirect cost poll, and will be allocated to the benefiting cost objectives on the basis of measured usage. The total operating expenses of the computer service center for the eight month part of the cost accounting period may be allocated to the benefiting cost objectives of that same eight month period. (c) A contractor changes his fiscal year from a calendar year to the 12-month period ending May 31. For financial reporting purposes, he has a five-month transitional "fiscal year." The same five-month period must be used as the transitional cost accounting period; it may not be combined as provided in § 406.50(f), because the transitional period would be longer than fifteen months. The new fiscal year must be adopted thereafter as his regular cost accounting period. The change in his cost accounting period is s 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). eral contracts entered into after the effective date hereof and by all relevant Federal agencles 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. § 407.20 Purpose. (a) The purpose of this Cost Accounting Standard is to provide criteria under which standard costs may be used for estimating, 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 preestablished measure, expressed in physical terms, of the quantity of material. (7) Production unit. A grouping of activities which either uses homogeneous inputs of direct material and direct labor or yields homogeneous outputs such that the costs or statistics related to these homogeneous inputs or outputs are appropriate as bases (8) Standard costs. Any cost computed (b) The following modifications of defi- (1) Actual cost. An amount determined on the basis of cost incurred. § 407.40 Fundamental requirement. Standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor only when all of the following criteria are met: (a) Standard costs are entered into the books of account; (b) Standard costs and related variances are appropriately accounted for at the level of the production unit; and (c) Practices with respect to the setting and revising of standards, use of standard costs, and disposition of variances are stated in writing and are consistently followed. $407.50 Techniques for application. (a) (1) A contractor's written statement of practices with respect to standards shall include the bases and criteria (such as engineering studies, experience, or other supporting data) used in setting and revising standards; the period during which standards are to remain effective; the level (such as ideal or realistic) at which material-quantity standards and labor-time standards are set; and conditions (such as those expected to prevail at the beginning of a period) which material-price standards and labor-rate standards are designed to reflect. (2) Where only either the material price or material quantity is set at standard, with the other component stated at actual, the result of the multiplication shall be treated as material cost at standard. Similarly, where only either the labor rate or labor time is set at standard, with the other component stated at actual, the result of the multiplication shall be treated as labor cost at standard. (3) A labor-rate standard may be set to cover a category of direct labor only if the functions performed within that category are not materially disparate and the employees involved are interchangeable with respect to the functions performed. (4) A labor-rate standard may be set to cover a group of direct labor workers who perform disparate functions only under either one of the following conditions: (1) Where that group of workers all work in a single production unit yielding homogeneous outputs (in this case, the same laborrate standard shall be applied to each worker in that group), or (11) Where that group of workers, in the performance of their respective functions, forms an integral team (in this case, a laborrate standard shall be set for each integral team). (b) (1) Material-price standards may be used and their related variances may be recognized either at the time purchases of material are entered into the books of account or at the time material cost is allocated to production units. (2) Where material-price standards are used and related variances are recognized at the time purchases of material are entered into the books of account, they shall be accumulated separately by homogeneous groupings of material. Examples of homogeneous groupings of material are: (1) Where prices of all items in that group. ing of material are expected to fluctuate in the same direction and at substantially the same rate, or (11) Where items in that grouping of material are held for use in a single production unit yielding homogeneous outputs. (3) Where material-price variances are recognized at the time purchases of material are entered into the books of account, variances of each homogeneous grouping of material shall be allocated (except as provided in paragraph (b) (4) of this section), at least annually, to items in purchaseditems inventory and to production units receiving items from that homogeneous grouping of material, in accordance with either one of the following practices, which shall be consistently followed: (1) Items in purchased-items inventory of a homogeneous grouping of material are adjusted from standard cost to actual cost; the balance of the material-price variance, after reflecting these adjustments, shall be allocated to production units on the basis of the total of standard cost of material received from that homogeneous grouping of material by each of the production units; or (11) Items, at standard cost, in purchaseditems inventory of a homogeneous grouping of material, are treated, collectively, as a production unit; the material-price varlance shall be allocated to production units on the basis of standard cost of material received from that homogeneous grouping of material by each of the production units. (4) Where material-price variances are recognized at the time purchases of material are entered into the books of account, variances of each homogeneous grouping of material which are insignificant may be included in appropriate indirect cost pools for allocation to applicable cost objectives. (5) Where a material-price variance is allocated to a production unit in accordance with paragraph (b) (3) of this section, it may be combined with material-quantity variance into one material-cost variance for that production unit. A separate materialcost variance shall be accumulated for each production unit. |