CAS - Part II. The Cost Allocation Standards Dixon Hughes Goodman, LLP

Transcription

1 CAS - Part II The Cost Allocation Standards 1

2 Agenda Session I Administration: CAS Overview Applicability Types of Coverage CAS Administration Part II - The Cost Allocation Standards Part III - The Cost Assignment and Measurement Standards Part IV - The CAS Disclosure Statement 2

3 A Quick Review Contracts, not contractors, are subject to CAS! Contract Subject to CAS? 10 Exemptions listed in (b) Modified vs. Full $50 million threshold Disclosure Statement Full yes Modified - maybe 3

4 The Cost Accounting Standards 4

5 The Format of the Standards Purpose (.20) Definitions (.30) Fundamental Requirement (.40) Techniques for Application (.50) Illustrations (.60) Interpretation (.61) Exemption (.62) Effective Date (.63) 5

6 The Basic Standards & The Cost Allocation Standards 6

7 The BASIC Standards CAS Consistency CAS Double counting CAS Unallowable cost CAS Cost accounting period 7

8 CAS 401, Consistency in Estimating, Accumulating and Reporting Costs Contractor s practices in estimating costs must be the same used to accumulate and report costs Grouping of homogeneous costs for estimating purposes is not a violation of the standard provided that the actual costs are accumulated at a greater level of detail during performance 8

9 Interpretation No. 1 to CAS 401 If a factor is used to estimate scrap or yield on a cost estimate, the pool and the base must be accounted for during performance Amount of detail required is a matter for negotiation with Government procurement authorities 9

10 Question CAS 401 Compliant? A contractor's proposal shows the cost of engineering labor by class, i.e., Engineer I, Engineer II, etc. However, it is the contractor's practice to accumulate engineering labor by type, i.e., Electrical Engineer, Design Engineer, etc. 10

11 CAS 402 Consistency-Costs Incurred for Same Purpose Costs that are defined as a direct cost must be a direct cost to all final cost objectives in like circumstances Costs that are defined as an indirect cost must be indirect with respect to all final cost objectives in like circumstances The customer willingness or unwillingness to treat a cost as direct or indirect is irrelevant 11

12 Interpretation No. 1 CAS 402 Bid and proposal costs that are required by a contract can be either direct or indirect Policy has to be consistently followed Examples of when the bid and proposal costs could be direct: Basic ordering agreements and ID IQ contracts Definitization of a letter contract Request for equitable adjustment 12

13 Question - CAS 402 Compliant? A contractor has hundreds of cranes located throughout a shipyard. Their maintenance, taxes, and depreciation costs are recorded in a general account and then allocated to departmental overhead pools for distribution to contracts. The Dry Dock has the cost of eight cranes charged to its overhead pool because their use is unique to the Dry Dock operations. 13

14 CAS 405, Accounting for Unallowable Costs Requires exclusion of unallowable costs (both expressly unallowable or mutually agreed as being unallowable) from billings, proposals, or cost submissions Requires identification of costs that are unallowable as a result of a contracting officers final decision if an appeal is being made 14

15 CAS 406, Cost Accounting Period Contractor must use its fiscal year for its cost accounting period Transitional cost accounting period must be used if a contractor changes its fiscal year A change in cost accounting period is a change in a cost accounting practice 15

16 Cost Allocation Standards CAS Standard costs CAS Cost of Money CAS General & Administrative CAS Home office expenses CAS Direct and Indirect Costs CAS B&P and IR&D 16

17 CAS 407, Use of Standard Costs Covers direct labor and direct material costs Standard cost must be entered into the formal books of account Standard costs and variances must be accounted for at the level of the production unit Practices with respect to setting and revising standards, use of standards and disposition of variances are stated in writing and consistently followed Effective Date: Next full fiscal year after receiving a covered contract 17

18 CAS 414, Cost of Money Contractors facility capital has to be allocated to appropriate cost pools The cost of money rate is the Secretary of the Treasury Rate The cost of capital committed to facilities shall be computed for each contract using the facilities capital cost of money factors computed for each cost accounting period 18

19 Example of CAS 414 calculations Total Engineering Manufacturing General and Assets Overhead Overhead Administrative Property $ 750,000 $ 187,500 $ 487,500 $ 75,000 Plant 1,750, ,562 1,225,175 87,513 Equipment 795, , ,500 79,500 Total Assets $ 3,295,250 $ 784,062 $ 2,269,175 $ 242,013 Treasury Interest Rate 6.375% Cost of Money Pool $ 49,984 $ 144,660 $ 15,428 Cost Pool Allocation Base $ 750,425 $ 1,275,400 $ 5,275,975 Cost of Money Factors

20 Application of CAS 414 to a pricing action FCCOM Factor FCCOM Amount Direct Material $ 275,000 Manufacturing Direct Labor 375, $ 42,534 Manufacturing Overhead 200% 750,000 Engineering Direct Labor 75, $ 4,996 Engineering Overhead 60% 45,000 Total Cost Input $ 1,520, $ 4,445 General & Administrative Expenses 9% 136,800 Total Cost $ 1,656,800 Profit Objective 15% 248,520 FCCOM 51,974 Price $ 1,957,294 Actual Mark-up 18% 20

21 CAS 410, Allocation of G&A Expenses Business unit Final cost objectives Requires the use of a cost input base Provides several options Total cost input (total cost incurred - general and administrative expenses) Value added (total cost input - direct material and subcontracts) Single element DCAA partial to total cost input Effective date: Full fiscal year after receiving a covered contract 21

22 Impact of Allocation Base on Cost Recovery Non-Gov't Work Gov't Work $ Amount % of Base $ Amount % of Base Direct Labor $ 6,000,000 $ 2,500,000 80% 4,800,000 2,000,000 Value Add Base $ 10,800,000 71% $ 4,500,000 29% Materials & Subs 1,000,000 6,500,000 Total Cost Input Base $ 11,800,000 52% $ 11,000,000 48% 22

23 CAS 403, Allocation of Home Office Expenses Costs have to be allocated on a base that reflects a causal or beneficial relationship Three steps to the allocation process: Specific identification Homogeneous cost pools Three factor formula Effective date: Next full fiscal year after receipt of a covered contract 23

24 Application of the three factor formula Percentage Calculations Allocation Percentage Calculations Allocation of Home Office Expenses Segment A Segment B Segment C Segment D Segment E Segment A Segment B Segment C Segment D Segment E Segment A Segment B Segment C Segment D Segment E Payroll $ % $2,450, % 1,250, % 450, % 500, % 1,095, % 54.19% 22.66% 3.16% 3.57% 16.43% $3,660,263 $1,530,929 $213,158 $241,084 $1,109,567 Detail by Segment Assets $ % $15,000, % 4,750, % 275, % 325, % 4,650, % Sales $ % $275,000, % 125,000, % 2,450, % 3,230, % 53,320, % Total Organization Total Payroll Total Assets Total Sales $5,745,000 $25,000,250 $459,000,750 Amount to be allocated $6,755,000 24

25 Interpretation No. 1 to CAS 403 Interpretation deals with the inclusion of segment book income in the allocation base for allocating state taxes Requires that the taxing agency must expressly use segment book income to determine tax liability before segment book income can be used in the allocation base 25

26 CAS 418, Allocation of Direct and Indirect Costs Requires written policy Indirect costs have to be grouped into homogenous cost pools Categorizes two types of indirect costs: Those associated with the supervision and management of direct labor and direct material Those that are not associated with the supervision and management of direct labor and direct material 26

27 Allocation of each type of indirect cost Associated with direct labor and material direct labor hour or cost base machine hour base units of production direct material Not associated with direct labor and material first, a measure of resource consumption, then a measure of output, finally a surrogate 27

28 CAS 418 requires that cost be allocated to: Final cost objectives Goods produced for inventory or stock Cost centers used to accumulate costs identified with a process cost system Goods or services produced or acquired for other segments of the contractor and for other cost objectives of the business unit Self constructed assets 28

29 Questions CAS 418 Compliant? A contractor proposes to establish an allocation method for the central reproduction cost center. The contractor wants to use the number of personnel in each department as the base for allocation of the cost center? 29

30 CAS 420, Accounting for IR&D and B&P Costs IR&D and B&P costs shall be accumulated in individual projects IR&D and B&P costs are to bear all allocable expenses except for business unit general and administrative expenses IR&D and B&P incurred at the home office will be allocated to business units on a causal or beneficial relationship 30

31 Questions & Answers 31

32 Contact information Bill Walter, CPA Executive Director Government Contract Advisory Practice Dixon Hughes Goodman LLP 1410 Spring Hill Road, Suite 500 Tysons, VA D