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.
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.
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;
- total cost input (TCI)
- 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.
- 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.
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.