Thursday, April 28, 2011

CAS 410 - Allocation of Business Unit G&A Expenses to Final Cost Objectives

CAS 410 - Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives. CAS 410 provides criteria for allocating general and administrative (G&A) expenses to final cost objectives (e.g. contracts) and provides guidelines for the type of expenses that should be included in the G&A expense pool. It also requires that G&A expenses be allocated on a cost input base which represents the total activity of the company.

This could well be one of the most contentious of all the CAS standards because it requires a level of judgment to implement. It requires contractors to use judgment on what costs should be included in the pool and it requires the exercise of judgment to devise an "allocation base" that represents the total activity of the company. If the Government doesn't like the allocation methodology it will cite a contractor in noncompliance with CAS 410 (or FAR 15-203(d) - the functionally equivalent FAR requirement that applies to non-CAS covered contractors. This gets a little technical so hold on.
 
G&A expenses must be grouped in a separate indirect cost pool and allocated only to final cost objectives. For an expense to be classified as G&A, it must be incurred for managing and administering the whole business unit. Therefore, those management expenses that can be more directly measured by a base other than cost input should be removed from the G&A expense pool. For example, expenses such as program management, procurement, subcontract administration, G&A expenses incurred for another segment, etc., should not be identified as G&A expenses. They should be the subject of a separate distribution in reasonable proportion to the benefits received. However, immaterial expenses which are not G&A may be included in the G&A expense pool. The G&A expense pool may be combined with other expenses allocated to final cost objectives if the base for the combined pool is appropriate for allocating both the G&A expense pool and the other expenses, and the individual and total expenses of the G&A  expense pool can be identified separately from the other expenses.

 
The allocation base for allocating G&A expenses must include any unallowable costs that were charged or allocated to the base. FAR 31.203(d) requires that G&A expenses be allocated to final cost objectives through a base that contains unallowable costs. FAR 31.203(d) states that "all items properly includable in an indirect cost base should bear a pro rata share of indirect costs irrespective of their acceptance as Government contracts costs."

Selling costs may be accounted for in the G&A expense pool or in a separate pool. CAS 410 takes a permissive position. CAS 410.40(d) requires a separate allocation of costs, if the costs can be allocated to business unit cost objectives on a beneficial or causal relationship which is best measured by a base other than a cost input base. Therefore, if the inclusion of selling costs in the G&A pool results in an inequitable allocation, auditors should carefully evaluate the selling activities to determine whether selling costs should be separately allocated on a beneficial or causal relationship by a different base.

 
Home office expenses allocated to a segment may or may not be included in the segment's G&A expense pool. The standard states that allocation of line management expenses, residual expenses and directly allocated expenses related to managing and administering the receiving segments are to be included in the G&A expense pool. Separate allocations of home office centralized service functions, staff management of specific activities of segments, and significant central payments of accruals must be allocated to the benefiting cost objective. However, when there is no discernible causal or beneficial relationship with any of the cost objectives, these expenses may be included in the segments G&A expense pool.
 
Any other costs which do not satisfy the definition of G&A expenses maybe included in the G&A expense pool if they were previously a part of G&A and cannot be allocated to final cost objectives on a beneficial or causal relationship best measured by a base other than a cost input base.

CAS 410 requires that a cost input base used to allocate the G&A expense pool 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;
  1. total cost input (TCI)
  2. value-added cost input (TCI less material and subcontract costs) - used where 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.
  3. single element cost input - used where a single element base (e.g. direct labor hours, direct labor dollars, etc) represents that total activity of a business unit. A single element base is inappropriate where it is an insignificant part of the total cost of some of the final cost objectives.
The determination of which cost input base best represent the total activity of a business unit must be judged on the basis of the circumstances of each business unit.

CAS 410 permits a special allocation of G&A expenses if a particular final cost objective would receive a disproportionate allocation of G&A expense by using the cost input base. However, the allocation from the G&A expense pool to the particular final cost objective must be commensurate with the benefits received. The amount of the special allocation must also be removed from the existing G&A expense pool and the particular final cost objectives base costs must be removed from the base used to allocate the G&A pool.

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