CAS 407 - Use of Standard Costs for Direct Material and Direct Labor

CAS 407 - Use of Standard Costs for Direct Material and Direct Labor. The purpose of Cost Accounting Standard 407 is to provide some criteria for impacted contractors under which "standard costs" can be used for estimating, accumulating and reporting direct material and direct labor costs. It does not cover standards for overhead, service centers or pre-established measures used solely for estimating.

This standard does not require contractors to establish a standard cost accounting system but if a contractor chooses to cost Government contracts through a standard cost accounting system, and if the contractor is subject to "full CAS coverage", then this particular standard applies.

Now if you do not have a standard cost accounting system, or have plans to implement such a system, you can stop reading. This standard is not for you. If however, you have implemented a standard cost accounting system or are considering such, read on. We do not have data on the number of government contractors subject to CAS 407 but we sense it is pretty low. We know of government auditors who have never encountered a contractor subject to CAS 407 in 30+ years of auditing. Most government contracts do not lend themselves to standard costing system approaches.

There are a number of criteria that a standard cost accounting system must meet in order for it to qualify for use on Government contracts.

• The standard costs must be entered into the books of account. This should be fairly obvious. If you use them, book them. However, properly computed variances may be allocated by memorandum worksheet adjustments rather than entered in the books of account.
• The standard costs and related variances must be appropriately accounted for at the level of the production unit.

• A production unit is "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 for allocating variances." This concept of homogeneity should permit contractors a degree of flexibility in setting and revising standards on the basis of individual needs and circumstances and still provide for the proper cost assignment of variances. Under this concept a single product manufacturer would be permitted to have one labor variance account for the entire plant, while a multi product manufacturer would be required to have a variance account for each product line and/or for the various common part sub product lines.

• Everything must be in writing. The practices with respect to the setting and revising of standards, use of standard costs, and disposition of variances must be stated in writing and consistently followed.The written statement of practices shall include
• bases and criteria 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.