Wednesday, February 9, 2011

CAS 411 - Accounting for Acquisition Costs of Material

CAS 411 - Accounting for Acquisition Costs of Material Cost Accounting Standard 411 provides guidance on using inventory costing methods and, according to the Standard itself, improves the measurement and assignment of costs to cost objectives (e.g. contracts). The standard requires contractors to accumulate the cost of material and allocate it to cost objectives according to written statements of accounting policies and practices.

There are two basic methods of charging material costs to Government contracts. One is by direct identification of the material item to a particular contract and the other is through inventory. To allocate a cost directly to a contract, the end use of that material or category of material must be identified at the time of purchase or production. Contractors can allocate a category of material directly even though it maintains an inventory of this material, as long as the cost objective was specifically identified and the cost allocated at the time of purchase or production. This could lead to a situation where material could be allocated at different costs to the same cost objective, one cost by direct identification and one through issuance out of inventory. That would be perfectly acceptable under this Standard.
The contractor's written statements of accounting policies and practices for accumulating and allocating costs of materials must clearly set out
  • the specific conditions under which these costs may be directly allocated to cost objectives and
  • the inventory costing method to be used for allocating material costs issued from inventory.
Materials used solely in performing indirect functions or which are not a significant element of production cost may be allocated to an indirect cost pool. However, when the ending inventory significantly exceeds the beginning inventory the pool should be credited for the unused portion and an asset account established for a like amount. The standard does not require the contractor to take a physical count of the ending inventories for these indirect materials but the method for estimating the cost of unconsumed indirect materials at year end must be reasonable.

All materials, except those directly allocated to final cost objectives and those allocated to an indirect cost pool must be accounted for in material inventory records. "Material inventory record" means any record for accumulating the cost of material for issue to one or more cost objectives.

When issuing material from a company-owned inventory, any of the following inventory costing methods are acceptable, provided the same costing method is consistently used for similar categories of material within the same business unit:

  • The first-in, first-out (FIFO) method
  • The moving average cost method
  • The weighted average cost method
  • The standard cost method
  • The last-in, first-out (LIFO) method
Of the foregoing inventory costing methods, the most commonly used are the FIFO and weighted average methods.
Material cost is the acquisition cost of a category of material. The purchase price must be adjusted by extra charges incurred (e.g. shipping and handling) or discounts and credits earned. These adjustments must be charged or credited to the same cost objective as the material price; when this is not practical, charges or credits may be included in an appropriate indirect cost pool, provided this practice is consistent.

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