Friday, April 30, 2010

Indirect Cost Allocation Bases - Part 2

Yesterday we began a discussion on indirect cost allcoation bases focusing on the requirements of FAR 31.203. If you missed that post, click here to read it before going on. Today we will conclude our discussion with comments on what the CAS 410 (Cost Accounting Standards) has to say about the G&A (General and Administrative) allocation base. If your company is not subject to CAS, you're not bound by these requirements. However, this standard is pretty good cost accounting in our opinion and we encourage companies to at least consider the methodologies described in the standard.

First, a definition of G&A. G&A costs represent management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole. G&A expense does not include those management expenses whose beneficial or causal relationship to cost abojectives can be more directly measured by a base other than a cost input base representing the total activity of a business unit during a cost accounting period.

According to CAS 410, the cost input base used to allocate the G&A expense pool shall include all significant elements of that cost input which represent the total activity of the business unit. The cost input base selected to represent the total activity of a business unit during a cost accounting period may be:
  • Total cost input (TCI);
  • Value-added cost input (excludes material and subcontract costs) or
  • Single element cost input.

The determination of which cost input base best represents the total activity of a business unit must be judged on the basis of the circumstances of each business unit. So, there is definately not a "one size fits all" directive to this standard.

A value added base is best when the inclusion of material and subcontract costs would significantly distort the allocation of the G&A expense pool in relation to the benefits received, and where costs other than direct labor are significant measures of total activity.

A single element cost input base (e.g. direct labor hours or direct labor dollars) is useful where that element best representsw the total activity of a business. A single element base is not appropriate when it represents an insignificant part of the total cost of some of the final cost objectives.

Whatever allocation base you use, be aware that the Government may ask you why you chose one over another. Be prepared with your explanation and logic.

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