CAS 406 - Cost Accounting Period

CAS 406 - Cost Accounting Period. The purpose of CAS 406 is to provide criteria for selecting the time periods to be used as cost accounting periods for accumulating and reporting costs. At the time of its promulgation, the CAS Board felt it was necessary to reduce the effects of variations in the flow of costs within each cost accounting period. Secondarily, it could also enhance objectivity, consistency, and verifiability and promote uniformity and comparability in contract cost measurements.

The fundamental requirement of CAS 406 requires contractors to use a cost accounting period that lines up with its fiscal year (or some other 12 month period if agreed to by the Government). So when you forecast indirect rates, those rates should be based on a fiscal year. When submitting final indirect expense rates, the final rates should be based on a fiscal year.

This is pretty much a common sense requirement. What else would a contractor legitimately base a rate calculation on other than its fiscal year. Perhaps some contractors were using partial years' data on which to to base indirect rates rates and by using partial year data, was able to skew the results somehow. In the Standard's preamble comments, there was concern expressed that the use of partial year data could increase costs to the Government. But the main problem that the Standard addressed it "The lack of a firm requirement specifying the cost accounting period to be used."

Until last year, we could have said that we had never seen a CAS 406 noncompliance audit report issed. In 2010, one DCAA office issued a CAS 406 noncompliance which has yet to be resolved and will probably be thrown out by the contracting officer since there is no cost impact. It involved an indirect function that existed for only a part of a cost accounting period. The contractor allocated the costs of this new function to the cost objectives of that same part of the cost accounting period as required by CAS 9904.406-40(a)(1). The auditor believed that the contractor should have gone back to the beginning of the fiscal year and "recast" financial data into the new indirect methodology. This incident aside, there just are not many CAS 406 noncompliance.

CAS 406 applies to both full and modified CAS-covered contracts.