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usefulness riod tangior standby Cecords are withdrawal

of useful

are supretirement com active incidental of assets) propriately Cactors exhe factors experience

sets). In the absence of reliable data for the
measurement or estimation of the consump-
tion of asset services by the techniques men-
tioned, 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 consump-
tion 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).

(6) 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 servlces over the expected useful life of the complement as a whole and shall not be based on

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Whether lly or by rvice life ecords of nal assets s as long e burden Lify estiter than

the individual items which form the
complement.

(h) Estimated residual values shall be de-
termined for all tangible capital assets (or
groups of assets). For tangible personal prop.
erty, 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 depre-
ciation or the class life asset depreciation
mange system is used consistent with the pro-
visions 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 signifi-
cantly reduce book value of a tangible capital
Asset (or group of assets) below its residual

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raph (e) available s of this contracand hisavailable ter that for estipital as

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value.

(1) Estimates of service life, consumption
of services, and residual value shall be reex-
Amined 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 depre-
clable costs for cost accounting purposes shall
be limited to the undepreciated cost of the tri
assets and shall be assigned only to the cost

de
accounting period in which the change is
made and to subsequent periods.

0) (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

the
Accounting period in which disposition oca
curs except as provided in paragraphs (h)
12) and (3) of this section. The gain or loss

pui
for each asset disposed of is the difference be-

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sets). In the absence of reliable data for the cost of the assets and its undepreciated ba
measurement or estimation of the consump ance.
tion of asset services by the techniques men (2) Gains and losses on the disposition
tioned, the expected consumption of services tangible capital assets shall not be recognize
may be represented by the passage of time. where: (1) Assets are grouped and such gali
The appropriate method of depreciation and losses are processed through the a
should be selected as follows:

cumulated depreciation account, or (11) th (1) An accelerated method of depreciation asset is given in exchange as par of th is appropriate where the expected consump purchase price of a similar asset and th tion of asset services is significantly greater gain or loss is included in computing th In early years of asset life.

depreciable cost of the new asset. Where th (11) The straight-line method of deprecia disposition results from an involuntary cor tion is appropriate where the expected con version and the asset is replaced by a sim sumption of asset services is reasonably level lar asset, gains and losses may either be rec over the service life of the asset (or group of ognized in the period of disposition or use assets).

to adjust the depreciable cost base of th (g) The estimated service life and method new asset. of depreciation to be used for an original (3) The contracting parties may accour complement of low-cost equipment shall be for gains and losses arising from mass or ex based on the expected consumption of serv traordinary dispositions in a manner whic ices over the expected useful life of the com will result in treatment equitable to all par

ties. plement as a whole and shall not be based on the individual items which form the (4) Gains and losses on disposition of tar complement.

gible capital assets transferred in other tha (h) Estimated residual values shall be de an arms-length transaction and subsequent termined for all tangible capital assets (or disposed of within 12 months from the dat groups of assets). For tangible personal prop

of transfer shall be assigned to the trans erty, only estimated residual values which

feror. exceed 10 percent of the capitalized cost of (k) Where, in accordance with $ 409.40(b the asset (or group of assets) need be used (1), the depreciation costs of like tangib in establishing depreciable costs. Where capital assets used for similar purposes ar either the declining balance method of depre

directly charged to cost objectives on th clation or the class life asset depreciation

basis of usage, average charging rates base

on cost shall be established for the use range system is used consistent with the provisions of this standard, the residual value such assets. Any variances between total de need not be deducted from capitalized cost to

preciation cost charged to cost objectives an determine depreciable costs. No depreciation

total depreciation cost for the cost account cost shall be charged which would signif

ing period shall be accounted for in accord cantly reduce book value of a tangible capital

ance with the contractor's established prac asset (or group of assets) below its residual

tice for handling such variances. value.

(1) Practices for determining depreciatio (1) Estimates of service life, consumption

methods, estimated service lives and esti of services, and residual value shall be reex

mated residual values need not be changeamined for tangible capital assets (or group

for assets acquired prior to compliance wit of assets) whenever circumstances change

this standard if otherwise acceptable unde significantly. Where changes are made to the

applicable procurement regulations. How

ever, if changes are effected such change estimated service life, residual value, or

must conform to the criteria established in method of depreciation during the life of a

this standard and may be effected on a pro tangible capital asset, the remaining depre

spective basis to cover the undepreciated bal clable costs for cost accounting purposes shall ance of cost by agreement between the con be limited to the undepreciated cost of the tracting parties pursuant to negotiation un assets and shall be assigned only to the cost der (a) (4) (B) of the Contract clause se accounting period in which the change is

out at $ 331.50 of the Board's regulations (made and to subsequent periods.

CFR 331.50). (1) (1) Gains and losses on disposition of

8 409.60 Illustrations. tangible capital assets shall be considered as

The following examples are Illustrative o adjustments of depreciation costs previously

the provisions of this standard. recognized and shall be assigned to the cost

(a) X, Y, and Z companies purchase identiaccounting period in which disposition oc

cal milling machines to be used for simila: curs except as provided in paragraphs (h)

purposes. (2) and (3) of this section. The gain or loss

(1) Company X estimates service life for for each asset disposed of is the difference be

tangible capital assets on an individual astween the net amount realized, including in set basis. Its experience with similar masurance proceeds in the event of involuntary

chines is that the average replacement perloc conversion, and its undepreciated balance. 1s 14 years. Under the provisions of the However, the gain to be recognized for con standard, Company X shall use the estimatec tract costing purposes shall be limited to the

service life of 14 years for the milling madifference between the original acquisition chine unless it can demonstrate changed

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»ng con 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 f terms allocated to final cost objectives of that cost dard are accounting period by means of a cost input Epter for base representing the total activity of the

used in business unit except as provided in parart 400 of graph (b)(2) of this section. The cost input cribed to base selected shall be the one which best demands represents the total activity of a typical cost nition is accounting period. ection. (2) The allocation of the G&A expense pool ? cost or to any particular final cost objectives which more cost receive benefits significantly different from n direct the benefits accruing to other final cost obument of

jectives shall be determined by special allo

cation, (410.50(I)). f an or (c) Home office expenses received by a rganiza segment shall be allocated to segment cost ents. objectives as required by 410.50(g). G&A ex (d) (1) Except as provided in (d) (2) below, purposes any costs which do not satisfy the definition pods and of G&A expenses in this Standard, but which riod. have been classified by a business unit as =rganiza G&A expenses can remain in the G&A exer work pense pool unless they can be allocated to - and for business unit cost objectives on a beneficial late and or casual relationship which is best measured cts, jobs, by a base other than a cost input base.

(2) Independent Research and DevelopObjective ment costs and Bidding and Proposal costs rect and shall be treated pursuant to provisions of tor's ac

existing laws regulations and other controlfinal ac ling factors.

§ 410.50 Techniques for application. (G&A) ial, and (a) G&A expenses of a segment incurred or allo

by another segment shall be removed from s for the the incurring segment's G&A expense pool

. -ation of They shall be allocated to the segment for

expense which the expenses were incurred on the expenses basis of the beneficial or causal relationship nship to

between the expenses incurred and all benely meas fiting or causing segments. If the expenses put base

are incurred for two or more segments, they business

shall be allocated using an allocation base od

common to all such segments. divisions,

(b) The G&A expense pool may be comher sub

bined with other expenses for allocation to ting didentified

final cost objectives provided that: produc

(1) The allocation base used for the comerm in

bined pool is appropriate both for the alloCor-oper

cation of the G&A expense pool under this ventures Standard and for the allocation of the other eign) in expenses; and ity own (2) Provision is made to identify the comose joint ponents and total of the G&A expense pool and for

separately from the other expenses in the less than

combined pool. which it

(c) Expenses which are not G&A expenses

and are insignificant in amount may be inf defiini

cluded in the G&A expense pool for allocation chapter

to final cost objectives. One.

(d) The cost input base used to allocate

the G&A expense pool shall include all siga shall be

nificant elements of that cost input which ost pool represent the total activity of the business

262

direct labor hours or direct labor dollars,
which represents the total activity of a busi-
ness unit may be used to allocate the G&A
expense pool where it produces equitable re-
sults. A single element base may not produce
equitable results where other measures of
activity are also significant in relation to to-
tal activity. A single element base is inap-
propriate where it is an insignificant part of
the total cost of some of the final cost ob-
fectives
(e) Where, prior to the effective date of
this Standard, a business unit's disclosed or
established cost accounting practice was to
use & cost of sales or sales base, that busi-
ness unit may use the transition method set
out in Appendix A hereof.

(1) Cost input shall include those ex-
penses which by operation of this Standard

ment's G&A expense pool.

(2) Any separate allocation of the expenses of home office (1) centralized service functions, (11) staff management of specific activities of segments, and (ll) central pay. ments or accruals, which is received by a segment shall be allocated to the segment cost objectives in proportion to the beneficial of causal relationship between the cost objectives and the expense if such allocation is significant in amount. Where a beneficial or causal relationship for the expense is not Identifiable with segment cost objectives, the expense may be included in the G&A expense pool.

(5) Where a segment performs home office functions and also performs as an operating 90-1320_17-18

263

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unit. The cost input base selected to repre segment having a responsibility for fin sent the total activity of a business unit dur cost objectives, the expense of the hon ing a cost accounting period may be: (1) office functions shall be segregated. These e Total cost input, (2) value-added cost input, penses shall be allocated to all benefiting or (3) single element cost input. The deter causing segments, including the segment pe mination of which cost input base best rep forming the home office functions, pursua resents the total activity of a business unit to disclosed

established accounti must be judged on the basis of the circum practices for the allocation of home office e stances of each business unit.

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

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

cost accounting period, the cost input and where costs other than direct labor are

such items in that period shall be include significant measures of total activity. A

only once in the computation of the G& value-added cost input base is total cost in

expense allocation base and in the computa put less material and subcontract costs. tion of the G&A expense allocation rate f

(3) A single element cost input base, e.g., that period and shall not be included in te direct labor hours or direct labor dollars,

computation of the base or rate for ar 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 pa expense pool where it produces equitable re shall be allocated to items produced sults. A single element base may not produce worked on for stock or product invento equitable results where other measures of in the cost accounting period or perio activity are also significant in relation to to in which such items are produced at th tal activity. A single element base is inap rates determined for such periods excej 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 in jectives.

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

G&A expenses applicab out in Appendix A hereof.

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

base determined pursuant to paragraph ( (g) (1) Allocations of the home office ex of this section, the business unit shall a penses of (1) line management of particular

count for this particular final cost objectisegments or groups of segments, (11) residual by a special allocation from the G&A e expenses, and (111) directly allocated ex pense pool to the particular final cost o penses related to the management and ad jective commensurate with the benefi ministration of the receiving segment as a

received. The amount of a special allocatic whole shall be included in the receiving seg to any such final cost objective shall be e ment's G&A expense pool.

cluded from the G&A expense pool require (2) Any separate allocation of the ex

by section 410.40(a), and the particula penses of home office (1) centralized service

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

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

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

410.60 Illustrations. segment shall be allocated to the segment

(a) Business Unit A has been includin cost objectives in proportion to the beneficial

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

in its G&A expense pool. The scientific con jectives and the expense if such allocation is

puter is used predominately for researc significant in amount. Where a beneficial or and development, rather than for the man causal relationship for the expense is not agement and administration of the busine Identifiable with segment cost objectives, the unit as a whole. The costs of the scientif expense may be included in the G&A expense computer operation do not satisfy the Stand pool.

ard's definition of G&A expense; howeve (h) Where a segment performs home office they may remain in the G&A expense po functions and also performs as an operating unless they can be allocated to business un

263

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ng func

its G&A ides the segment. ; for the from B's

to the

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

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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 & 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 ex. pense 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. It 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

a small building, constructs a 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

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
2 for stock or product inventory. The
business unit does not include G&A ex-
pense as part of the inventory cost of these
items for costing or financial reporting pur-
poses. A production run of these items oc-
curred during Cost Accounting Period 1. A
number of the units produced were not is-
sued 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
apply the rate of Period 2 to the units issued

d selling ol. Busi

include l. Under Business ing costs 1 be alloed in ac10.50(d). ed IR&D e pool. C Locate its 1978 (ason), the its G&A requireits final ursement 5 subject

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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 pro-
duction run of these items was started, fin-
Ished, and placed into Inventory in a single
cost accounting period. These items are is-
sued during the next cost accounting period.

(2) The cost of items produced for stock
of product inventory should be included in
the G&A base in the same year they are pro-
duced. 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

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(B) The normal productive activity of Business Unit G Includes the construction of

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