Friday, February 14, 2014

CAS 410 - What Are Special Allocations?

Cost Accounting Standard (CAS) 410 provides criteria for allocating general and administrative (G&A) costs 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. For a more detailed look at this standard, read our prior posting on the subject.

One of the key considerations in allocating G&A expenses is determining the most appropriate allocation base - one that will achieve a causal/beneficial relationship between the final cost objectives and the costs to be allocated to those final cost objectives. Commonly used allocation bases include the total cost input (TCI) allocation base, the value-added allocation base, and the single (cost) element allocation base. The decision on appropriate allocation base should be carefully considered because it will impact the recovery of costs under Government contracts. But sometimes, a single allocation base just won't do and that's why CAS has the 'J' clause.

The so-called 'J' clause (named because its found in CAS 9904.410-50(j)) follows:
Where a particular final cost objective in relation to other final cost objectives receives significantly more or less benefit from G&A expense than would be reflected by the allocation of such expenses using a base determined pursuant to paragraph (d) of this subsection, the business unit shall account for this particular final cost objective by a special allocation from the G&A expense pool to the particular final cost ojbective commensurate with the benefits received. The amount of a special allocation to any such final cost objective shall be excluded from the G&A expense pool ... and the particular final cost objective's cost input data shall be excluded from the base used to allocate this pool.

These 'J' clause allocations are used a lot be larger contractors and not so much by smaller contractors. Part of the reason is that larger contractors have the knowledge and sophisticated accounting and job costing system to satisfy the Government (auditors) that special allocations are necessary in order to achieve a fair and equitable allocation of costs. In our opinion, the special allocation should be used a lot more than it is.

Auditors are naturally suspicious whenever they see a 'J' clause allocation. Some contractors have abused the clause for various reasons; perhaps to "buy-in" on a certain contract. DCAA's audit guidance on this subject reflects these known risk areas:
For a given final cost objective to qualify for special treatment, a significant difference in its beneficial or causal relationship to G&A expense, as compared with the relationship of other final cost objectives to G&A expenses, should be apparent and supported. Because G&A expense, by definition, is for the general management and administration of the business unit as a whole, special allocations should generally be limited to unusual circumstances outside the normal operations and activities of the business. The special allocation should be identified to a particular final cost objective. A need for special allocation to a class of contracts or type of situation would indicate that the allocation base being used is not representative of the total activity of the business unit during a typical cost accounting period. 
Contractors (and prospective contractors) should at least consider whether a special allocation (or a 'J' clause allocation) would improve the allocation of costs to contracts and other final cost objectives.

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