To a certain extent, CAS 418 parallels the FAR coverage on indirect costs found in FAR 31.203. However, CAS goes beyond the requirements of the FAR and provides more definitive guidance for selecting allocation bases. For example, the requirement for a written statement of accounting policies for classifying costs as direct or indirect is found in CAS but not FAR.
As mentioned, CAS requires that indirect expense allocation pools be homogeneous. The term "homogeneous" is not defined in this standard. One has to refer to the CAS Board's Statement of Objectives, Policies, and Concepts to find the definition.
Homogeneity means that the costs of functions allocated by a single base have the same or similar relationship to the cost objectives for which the functions are performed, and the grouping of such costs in homogeneous pools for allocation to benefited cost objectives results in a better identification of cost with cost objectives.
The concept of homogeneity has often been a contentious issue between the Government and its contractors. There have been several Board cases (Armed Services Board of Contract Appeals) involving CAS 418. In the latest case, the contractor prevailed because, although the Government demonstrated a "better" allocation method, it had not addressed "materiality". In other words, just because you can find a better method, it doesn't matter unless it also results in a material difference on contracts. Materiality is a judgment call but there is some materiality criteria found in CAS 903.305. In determining whether amounts of cost are material or immaterial, the following criteria shall be considered (also, no one criterion is necessarily determinative):
- The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be material.
- The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost, the more likely it is to be material
- The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect costs, will normally have more impact than the same amount of indirect costs.
- The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.
- The cumulative impact of individually immaterial items.
- The cost of administrative processing of any necessary price adjustments.
- Material amount of management and supervision: If an indirect cost pool contains a material amount of the costs of management or supervision of activities involving direct labor or direct material, the standard requires selecting an allocation base representative of the activity being supervised. Allocation bases are limited to direct labor hours or dollars, machine hours, units of production, or material costs, whichever is more likely to vary in proportion to the costs included in the cost pool being allocated.
- Immaterial amount of management and supervision: If an indirect cost pool does not contain material amounts of the costs of management or supervision of activities involving direct labor or direct material, the standard specifies criteria for selecting a base representing an appropriate measure of resource consumption. The standard establishes a hierarchy of acceptable representations of beneficial or causal relationships between the activities in the pool and benefiting cost objectives. The best representation is a measure of the resource consumption of the activities of the indirect cost pool. If consumption measures are unavailable, or impractical to ascertain, the next best representation is a measure of the output of the activities of the indirect cost pool. If neither resources consumed nor output of the activities can be measured practically, the standard requires the use of a surrogate that varies in proportion to the services received to be used as a measure of resources consumed.
Beneficial/Causal: The allocation base used should result in an allocation to cost objectives in reasonable proportion to the beneficial or causal relationship of the pooled costs to cost objectives. Where the allocation base used is direct labor hours or dollars, all work accomplished, including hours worked in excess of 8 hours per day/40 hours per week by exempt employees or assigned costs, should be included as appropriate in the base for allocation of overhead costs.
Special Allocations. CAS 418.50(f) provides for a special allocation of indirect costs if a particular final cost objective (e.g., contract) would receive a disproportionate allocation of indirect costs from an indirect cost pool. However, the allocation from the indirect cost pool to a particular final cost objective must be commensurate with the benefits received. The amount of special allocation must be removed from the indirect cost pool and the particular final cost objective’s base costs must be removed for the base used to allocate the indirect cost pool.