Information of cost Accounting:
What is Cost Accounting?
This can be described as the process of accumulating, measuring, analyzing, interpreting and reporting cost information that is both useful and relevant to the internal and external stakeholders of a business entity. External stakeholders are those who have a vested financial interest in a business or company. For example banks (loans), financial houses (mortgages), investors (investments), etc. Internal stakeholders are the business or company directors, managers, division heads, etc.
One of the many benefits of cost accounting is that it turns data into information, knowledge and wisdom about a business entity's operations that is useful for:
Measuring performance:
Reducing or managing costs
Determining the fees or prices for goods and services
deciding to authorize, modify or discontinue a program or activity
Another benefit is that information on the costs programs and activities may be used as a basis to estimate future costs in preparing and reviewing budget requests. Once budgets are approved and executed, cost information serves as a useful feedback on performance. Moreover, costs may be compared to known or assumed benefits to identify value-added and non-value added activities. Reliable information on the cost of programs and activities is crucial for the effective management of a business entity's operations. Cost accounting is especially important for fulfilling the objective of assessing operational performance. The objective is to improve the efficiency and effectiveness of operations by furnishing program managers and others with timely and relevant cost-based performance information to allow for continuous improvement in delivering outputs and outcomes to stakeholders. Cost accounting has been with us since early times to help managers understand the costs of running a business. Modern cost accounting originated during the industrial revolution, when the complexities of running a large scale business led to the development of systems for recording and tracking costs to help business owners and managers make decisions.
In the early industrial age, most of the costs incurred by a business were what modern accountants call "variable costs" because they varied directly with the amount of production. Money was spent on labors, raw materials, power to run a factory, etc. in direct proportion to production. Managers could simply total the variable costs for a product and use this as a rough guide for decision-making.
Some costs tend to remain the same even during busy periods, unlike variable costs which rise and fall with volume of work. Over time, the importance of these "fixed costs" has become more important to managers. Examples of fixed costs include the depreciation of plant and equipment, and the cost of departments such as maintenance, tooling, production control, purchasing, quality control, storage and handling, plant supervision and engineering. In the early twentieth century, these costs were of little importance to most businesses. However, in the twenty-first century, these costs are often more important than the variable cost of a product, and allocating them to a broad range of products can lead to bad decision making.
In modern accounting, costs are measured in accordance with Generally Accepted Accounting Principles (GAAP). In accordance to GAAP the principle is to record historical events and assign a monetary value to each event that has taken place. Costs are measured in units of currency by convention. Cost accounting could also be defined as a kind of management accounting that translates the Supply Chain (the series of events in the production process that, in concert, result in a product) into financial values.
In conclusion, for any business entity - from the smallest business enterprise to the largest multinational corporation - to be successful requires the use of cost accounting concepts and practices. It provides key data to managers for planning and controlling, as well as costing products, services, and customers. The central focus is how it could help managers make better decisions. For this reason businesses and companies hire cost accountants and they are increasingly becoming integral members of decision-making teams instead of just data providers.
Cost that remains constant regardless of sales volume. Fixed costs include salaries of executives, interest expense, rent, depreciation, and insurance expenses. They contrast with variable costs (direct labor, materials costs), which are distinguished from semivariable costs. Semivariable costs vary, but not necessarily in direct relation to sales. They may also remain fixed up to a level of sales, then increase when sales enter a higher range. For example, expenses associated with a delivery truck would be fixed up to the level of sales where a second truck was required. Obviously, no costs are purely fixed; the assumption, however, serves the purposes of cost accounting for limited planning periods. Cost accounting is also concerned with the allocation of portions of fixed costs to inventory costs, also called indirect costs, overhead, factory overhead, and supplemental overhead.
Information on Cost accounting vs. Management accounting:
Cost accounting is considered as the technique and process of ascertaining costs of a given thing.
Management accounting is a system that collects, classifies, summaries, analyses and reports information that will assist managers in their decision making and control activates.
Cost Accounting may be a technique or a tool or a process:
Of ascertaining the cost of a cost center and how to load those cost on the relative profit center of an organization or a firm.
Management accounting is basically a system which defines the collection, analysis, summary, reporting of the information and the availability of the information and assuring the availability of the information for a manager to take a more appropriate decision. As we know Information is the tool of a manager.
COST ACCOUNTING STANDARDS:
Cost Account Standards (CAS) are complex, misunderstood, and often used with apprehension by people in the procurement profession. However, the analyst must be familiar with the standards to understand Defense Contract Audit Agency (DCAA) reports regarding CAS findings and to advise the contracting officer (CO)/Integrated Product Team (IPT) of their impact. This chapter will familiarize the reader with CAS. It will not discuss the details of each individual standard but will provide an easy-to-use summary of each standard. Any analyst desiring or requiring a deeper understanding should review 48 CFR 9904.
Appendix 14A highlights Cost Accounting Standards. This chapter will provide a greater understanding of these Cost Accounting Standards by covering the following topics:
Background & history,
CAS versus cost principles,
Applicability,
Types of coverage,
Disclosure statements,
Administration,
Implementation, and
Standards summary.
Background & History:
General
The CAS is a result of concern for the pricing and accounting practices of defense contractors. There was no consistency within and between contractors’ cost accounting practices, making it difficult to conduct standard audits. In 1968, Congress asked the General Accounting Office (GAO) to study the feasibility of establishing and applying CAS to provide greater uniformity in cost accounting as a basis for negotiating and administering procurement contracts. The GAO concluded that it was indeed feasible and recommended Government-wide coverage on both fixed-price and cost-type contracts. Congress subsequently established the Cost Accounting Standards Board (CASB), which in turn instituted the CAS. After the standards were implemented in 1980, Congress decided the Board had fulfilled its mission and dissolved it. The board was re-established in 1988. The CASB will be further discussed in section 14.2.2.
CAS was designed to achieve uniformity and consistency in the measurement, assignment, and allocation of costs to Government contracts. The standards were based on examinations of common cost accounting practices throughout the industry. Advice and comments were sought from Government agencies, industry, and professional accounting associations. Numerous publications on the subject were also reviewed. CAS is not, therefore, an onerous set of Government rules, regulations, and requirements. CAS does not provide rigid, inflexible procedures. In fact, most standards provide numerous options in accounting techniques. The GAO recognized the impossibility of implementing precise methods or techniques in its recommendation to Congress. CAS does establish limits and constraints on what is considered appropriate, allowing the CAS to meet the goal of providing consistency and uniformity in cost accounting. Listed below are the standard definitions of the three areas of Cost Accounting.
The Three Areas of Cost Accounting (48 CFR 9903.302-1)
Measurement of Cost involves the methods and techniques used in defining the components of cost, determining the basis of cost measurement, and establishing criteria for use of alternative cost measurement techniques. Examples of cost measurement are listed below:
The use of historical cost, market value, or present value;
The use of standard or actual cost; or the designation of items of cost which must be included or excluded from tangible assets or pension cost.
Assignment of cost to cost accounting period refers to the method used in determining the amount of cost to be assigned to individual cost accounting periods. Examples are the requirements for use of accrual basis or cash basis accounting.
Allocation of cost to cost objectives refers to the method of determining direct and indirect allocation of cost. Examples of allocation issues are listed below:
The accumulation of costs; the determination of whether to charge costs direct or indirect; or the determination of the composition of cost pools and their allocation bases.
The Cost Accounting Standards Board (CASB)
Congress re-instituted the CASB in 1988 as a permanent and independent board and assigned it to the Office of Federal Procurement Policy (OFPP) in the Office of Management and Budget (OMB). The CASB was given exclusive authority to make, promulgate, amend, and rescind cost accounting standards and regulations. The five-member board is chaired by the OFPP Administrator with one representative from the Department of Defense and one from the General Services Administration. The remaining two members are from the private sector. One is from industry and the other is a cost accounting expert. A quorum consists of three members, one of which must be from the private sector. Each board member, with the exception of the Chairman, serves a 4-year term. The OF PP Administrator (Chairman) must ensure that no agency regulation is inconsistent with CAS. Costs subject to CAS cannot be subject to other agency regulations that differ in the measurement, assignment, and allocation of costs.
Cost Accounting Standards Reform
According to FAA AMS section 3.2.3.3.2, the FAA guidelines for CAS are: 1.) CAS does not apply to commercial items and 2.) Full or modified CAS coverage may be applied to cost type contracts only.
Summary of the Cost Accounting Standards:
Table 14-1 lists the 20 CAS. The asterisks (*) denote the standards that apply when a contractor is subject to modified coverage only (discussed in section 14.6).
Cost Accounting Standards:
Title
Consistency in Estimating, Accumulating, and Reporting Costs
Consistency in Allocating Costs Incurred for the Same Purpose
Allocation of Home Office Expenses to Segments
Capitalization of Tangible Assets
Accounting for Unallowable Costs
Cost Accounting Period
Use of Standard Costs for Direct Material and Direct Labor
Accounting for Costs of Compensated Personal Absence
Depreciation of Tangible Capital Assets
Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
Accounting for Acquisition Costs of Material
Composition and Measurement of Pension Cost
Adjustment and Allocation of Pension Cost
Cost of Money as an Element of the Cost of Facilities Capital
Accounting for the Cost of Deferred Compensation
Accounting for Insurance Costs
Cost of Money as an Element of the Cost of Capital Assets under Construction
Allocation of Direct and Indirect Costs Reserved
Accounting for Independent Research and Development and Bid and Proposal Costs
Cost Accounting Standards versus Cost Principles CAS and cost principles are not one and the same. As previously mentioned, CAS addresses cost accounting--the measurement, assignment, and allocation of costs to Government contracts. The cost principles address cost allow ability. Cost allow ability is a procurement matter and is a function of law, regulation, or individual contracts. Costs may be allocable but unallowable.
Some of the cost principles have directly incorporated certain cost accounting standards. If costs related to these principles are not accounted for in accordance with CAS, then the cost is unallowable. Table 14-2 shows the link between certain principles and CAS.
CAS versus Cost Principles:
Cost Principle
CAS
Consistency (general principle)
Accounting for Unallowable Costs (general principle)
Cost Accounting Period (general principle)
Compensation for Personal Services
Cost of Money:
Depreciation
Independent Research & Development and Bid & Proposal costs
Insurance & Indemnification
Applicability
In the FAA, CAS applies as specified in 48 CFR 99, subpart 9903.201, to all Screening Information Requests (SIRs) and cost reimbursable contracts (and subcontracts); however, there are many exceptions. The easiest way to determine applicability is to assume CAS applies to all cost type contracts unless one of the following exemptions applies:
Contracts awarded on the basis of price alone;
Negotiated contracts or subcontracts under $500,000;
Contracts and subcontracts with small businesses;
Contracts and subcontracts in which the price is set by law or regulation;
Contracts and subcontracts for commercial items;
Contracts and subcontracts to be executed outside the US, its territories, or possessions;
Contracts and subcontracts with educational institutions other than those to be performed by Federally Funded Research and Development Centers (FFRDCs);
Contracts and subcontracts subject to modified CAS coverage in accordance with 48 CFR 9903.201-2; or
Contracts and subcontracts awarded to a United Kingdom contractor for performance substantially in the UK, provided the contractor has filed a Disclosure Statement with the UK Ministry of Defense.
If a contract requires the prime contractor to follow CAS, the CAS requirement must be passed down to its subcontractors, unless they meet one of the listed exemptions. Vice versa, if a prime contractor need not follow CAS, neither do its subcontractors.
The applicability to contract modifications is similar. If CAS applies to the initial contract, it also applies to contract modifications. Vice versa, if the initial award is not covered, neither are contract modifications.
Types of Coverage
One of two types of coverage may apply: full or modified. Full coverage requires compliance with the entire set of 20 standards. Modified coverage requires compliance with only four of the nineteen standards--401, 402, 405, and 406. The criteria for determining the appropriate coverage is as follows: (48 CFR 9903.201-2)
Full coverage applies when a contractor business unit:
Receives a single CAS-covered contract of $25 million; or
Received $25 million or more in net CAS-covered awards during its preceding cost accounting period in which one award exceeds $1 million.
Modified coverage applies when a contractor business unit:
Received less than $25 million in CAS-covered net awards in the immediately preceding cost accounting period; or
Received $25 million or more of net CAS-covered awards in an immediately preceding cost accounting period in which no individual award exceeded $1 million.
Once a contract subject to modified coverage is awarded, modified coverage applies to all covered contracts less than $25 million received in the same accounting period, unless a contract of $25 million or more is received. In that case, full coverage applies to that contract and all others awarded within the same accounting period. However, the contracts originally subject to modified coverage will maintain that coverage.
Disclosure Statements
"A Disclosure Statement is a written description of a contractor’s cost accounting practices and procedures." [48 CFR 9903.202-1(a)] It is used as a means to measure the consistency and compliance of a contractor’s day-to-day cost accounting with applicable CAS. Table 14-3 summarizes the type of information found in Disclosure Statements.
Information Contained in Disclosure Statement
Part
Category
Type of Information
Cover Sheet and Certification
Company address and contact name.
Certification of statement accuracy.
General Information
Sales and industry data.
Description of cost accounting system.
Integration of cost accounting system with financial accounting system.
Capability of producing unit or job costs.
Fiscal year.
Direct Costs
Method of charging direct materials.
Method of charging direct labor.
As applicable, method of direct material and labor standard costing and variance disposition.
Treatment of interorganizational transfers.
Direct versus Indirect
Criteria for determining how costs are charged or allocated to cost objectives.
Treatment of specific transactions involving direct labor, direct material, and miscellaneous costs.
Indirect Costs
The number and types of indirect cost pools to include general and administrative (G&A), the composition of cost pools, and the allocation base.
Number of and how service center costs are allocated to expense pools.
Method of charging costs to direct and indirect objectives; composition of allocation base.
Allocation of IR&D/B&P to cost objectives.
Depreciation and Capitalization Practices
Method of depreciation.
Method of determining useful lives and residual value.
Comparison to methods used for tax and financial purposes.
Criteria for capitalization. Treatment of costs incurred in procurement of assets.
Other Costs and Credits
Method of charging and crediting compensated personal absence.
Treatment of severance payments and supplemental unemployment.
Deferred Compensation and Insurance Cost
Listing and description of the contribution basis of the three pension plans which cover the greatest number of employees.
Listing and description of the contribution basis of the three deferred compensation plans which cover the greatest number of employees.
Description of purchased insurance and treatment of self-insurance programs.
Home Office Expenses
Description of home office expense pools and method of allocation.
Description of home office expenses.
Sales information.
FAA Submittal Requirements
Per FAA’s AMS clause 3.2.3, Disclosure Statements are required for all CAS contracts with full coverage. The CO cannot award a covered contract for $25 million or more until the otherwise successful offeror submits an adequate Disclosure Statement. The offeror should submit the statement to the cognizant Administrative Contracting Officer (ACO) in conjunction with submission of the proposal to the FAA unless previously submitted. Case Study 14-1 provides an example of the deadline for submitting a disclosure statement.
When to Submit a Disclosure Statement
Background:
Suppose in January 2001 ABC Company submits a proposal, valued at $750,000 regarding the FAA’s new, advanced, do-everything radar (ADDER).
In the previous cost accounting period, Contractor Fiscal Year (CFY) 2000, (ABC’s fiscal year is the same as the calendar year), ABC accumulated $25 million of net awards of which one exceeded $1 million.
Conclusions:
The ABC Company is not required to submit a Disclosure Statement until the end of the first 90 days of 2001, approximately the end of March. If the FAA makes the award before March, ABC is still not required to submit the statement until the end of the 90-day period. Conversely, if the FAA awards the contract after March, ABC must submit the statement to the FAA or its cognizant ACO at the end of the period, regardless of whether or not the award has been made.
Business units subject to modified coverage do not normally submit Disclosure Statements. The exception to the rule is if the unit is a contributing segment. Each segment of a business unit with costs of over $500,000 included in the price or estimated cost must submit their own Disclosure Statement unless the contract falls under one of the stated exemptions listed. A segment may also be exempt from submission if the segment’s CAS-covered awards in the previous cost accounting period were less than $10 million and less than 30 percent of the total sales for that segment. Case Study 14-2 provides an example of when a business unit must submit its own disclosure statement.
CASE STUDY 0-2. When a Business Unit Must Submit a Disclosure statement
Background:
Suppose the ABC Company in the previous example represented an interorganizational transfer in a larger proposal submitted by WeR’Big, Inc.
The value of the transfer is $510,000 and the value of the proposal is $26 million.
Conclusions:
ABC Company must submit a Disclosure Statement unless it is specifically exempted or the value of covered contracts awarded in the previous cost accounting period, the year 2000, was less than 30 percent of total sales and less than $10 million.
All home or group offices that allocate costs to segments performing covered contracts must submit Part VIII of the disclosure statement.
14.7.2 Adequacy versus Compliance
A disclosure statement must be both adequate and compliant. It must adequately describe the contractor’s cost accounting practices, and the cost accounting practices, in turn, must comply with CAS.
The contract auditor is responsible for conducting the adequacy and compliance reviews. Under the adequacy review, the audit focuses on whether the disclosure statement is current, accurate, and complete. The auditor reports the results of the review to the cognizant administrating contracting officer (ACO) who then issues a determination on adequacy. If inadequate, the contractor must submit a revised statement. The FAA should not award a contract unless a Disclosure Statement is deemed adequate by the cognizant ACO, although the CO may waive the requirement for adequacy if it is in the best interest of the FAA and/or the Government as a whole.
Once the ACO determines the statement to be adequate, the contract auditor conducts a review to check if disclosed cost accounting practices comply with CAS and cost principles. The auditor also reports the results of this review to the cognizant ACO who then makes a determination on compliance. CAS compliance issues are addressed by the cognizant ACO in accordance with the CAS Administration clause.
14.7.3 Miscellaneous Disclosure Statement Issues
If the contractor notifies the CO that the disclosure statement contains privileged and confidential information, such as trade secrets and commercial or financial information, the FAA cannot release the statement outside the Government (48 CFR 9903.202-4).
Disclosure statement requirements apply in equal force to subcontractors as well as prime contractors. Although the prime or higher tier subcontractor is responsible for CAS administration of their subcontractors, the subcontractor may submit the statement directly to its cognizant ACO if the statement contains confidential or privileged information. (Pre-award determination of adequacy is not required.)
14.8 Cost Accounting Standards Administration
CAS is in the background of contract administration. CAS becomes a focus when the contractor is found noncompliant, the contractor wants to make a change, or the standards themselves are changed. This section will discuss price adjustments necessary to effect accounting changes. It will also address the topic of who is responsible for CAS administration.
14.8.1 Price Adjustments
There are three situations that may require price adjustments:
New or revised CAS requiring cost accounting practice changes;
Voluntary changes to cost accounting practices; and
Noncompliance with CAS/failure to follow disclosed practices.
The actions taken for each of these are similar, but sufficiently different to merit individual discussion.
New or Revised CAS
Once a covered contract is awarded, a new or revised CAS standard becomes applicable to a fully covered contractor on or after the effective date. It applies prospectively to all current fully CAS-covered contracts from the award date of the new covered contract. For example, if a new standard is effective May 1, 2000, and a covered contract is awarded August 20, 2001, the new standard is applicable to all current fully CAS-covered contracts beginning August 20, 2001.
Once the new or revised standard is effective, the contractor must submit a description of the accounting change required (most often submitted in a revised Disclosure Statement), the potential impact of the change, and a general dollar magnitude of the change within 60 days of the effective date of the change or another date as agreed upon. The ACO reviews the change and makes determinations of materiality, adequacy, and compliance. The contractor must submit a more detailed cost proposal within 60 days (or other agreed-upon date) of the determination. The proposal should identify each fully CAS-covered contract and subcontract (contracts and subcontracts containing the clause "CAS").
Voluntary Change
The contractor may unilaterally change its accounting practices. The contractor must submit a description of the proposed change (proposed revision to Disclosure Statement), the potential impact, and general dollar magnitude of the change not less than 60 days prior to implementing the change. The ACO reviews the change and makes determinations of materiality, adequacy, and compliance. The contractor must submit a cost impact proposal within 60 days of the determinations. The proposal must identify all CAS-covered contracts and subcontracts (full and modified coverage).
There are two possible outcomes to voluntary changes. 1.) The contractor makes the change at no increased cost to the Government, assuming it is CAS compliant. The proposal in this scenario will detail the shifts in cost between contracts necessary to ensure there is not an overall cost increase for the Government as a whole. 2.) The second possible outcome is that the change is made at increased cost to the Government if the ACO finds the change is desirable and not detrimental to the Government. There is little guidance or criteria to measure and judge "desirable and not detrimental," but greater cost is not the key factor or else there would not be an allowable alternative to the "no increased cost" outcome. The cost proposal for this latter scenario would depict the cost increase among affected contracts.
CAS Noncompliance/Failure to Follow Cost Accounting Practices
The ACO issues an initial finding of noncompliance whenever the auditor or an equivalent party discovers the contractor is either not complying with some specific CAS or is not consistently following its disclosed practices. (The finding of noncompliance may follow a review of disclosure statement and/or proposed accounting change.) The contractor must submit a description of the accounting change necessary to comply with CAS (revised disclosure statement), the potential impact of the changes, and a general dollar magnitude of the change. If the contractor is not consistently following disclosed practices, a description and/or revised statement may not be needed if the contractor’s corrective action is to follow its originally disclosed practice.
The contractor has 60 days to submit the information described above unless it disagrees with the finding. If the contractor disagrees, it has 60 days to present rebuttal arguments and evidence. The ACO must consider the arguments and issue a final determination of compliance or noncompliance. The contractor must submit a cost impact proposal within 60 days of a final determination of noncompliance. The proposal must identify the cost impact for each CAS-covered contract and subcontract (full or modified) from the date of failure to comply with CAS or it must follow disclosed practices until the date the problem is corrected. Interest is applicable to any increased cost due to the noncompliance or failure to follow disclosed practice.
Common Aspects of Price Adjustments
There are four common aspects of all price adjustments.
The general dollar magnitude and the cost impact proposal must delineate the shift of costs between CAS-covered contracts by contract type. This is due to the different treatment required in negotiating equitable adjustments for each type of contract.
The ACO should not adjust prices if the cost impact is immaterial. What is considered material or immaterial depends on the situation. The following criteria are guidelines (48 CFR 9903.305) for determining materiality. No one criterion is determinative in and of itself.
The absolute dollar amount--the larger the dollar amount, the more likely that it is material.
The amount of contract cost compared to the amount under consideration--the greater the proportion of the considered amount versus the contract cost, the more likely it is material.
The relationship between a cost item and a cost objective. Direct cost items, especially if they are part of an allocation base for indirect costs, will have more impact than the same amount for indirect costs.
The impact on funding--there is more impact if the change influences the distribution of costs between Government and commercial cost objectives.
The cumulative impact of individually immaterial items--do they offset one another, or do they accumulate in one direction (increase or decrease)?
The administrative cost of processing the price adjustment modification shall be considered versus the amount to be recovered--if administrative costs exceed the amount, the less likely it is material.
The cognizant ACO (with audit assistance) is responsible for evaluating and negotiating price adjustments on behalf of all affected Government agencies. The ACO should invite affected COs to participate in negotiations, especially if the impact is greater than $10,000. The ACO will execute contract modifications to contracts within the ACO’s own agency. The ACO will prepare and send negotiation memorandums to all affected agencies, so that they may execute modifications for the amounts negotiated. Finally, the ACO should furnish copies of the negotiation memorandum to the cognizant ACO of the next higher tier subcontractor or prime contractor if a subcontract is affected.
There are enforcement measures the ACO can take if the contractor does not submit either the general dollar magnitude or cost impact proposal.
The ACO may withhold up to 10 percent of each payment due to a contractor from its prime CAS-covered contracts until the proposal is submitted. The total withheld amount cannot exceed the general dollar magnitude. If the contractor does not provide the general dollar magnitude, the ACO can estimate it with audit assistance.
If the contractor and the ACO fail to agree on a price adjustment, the ACO may unilaterally establish the adjustment subject to dispute procedures. The ACO can make the unilateral adjustment if the contractor fails to submit proposals after reaching the general dollar magnitude ceiling.
14.8.2 Effecting the Price Adjustment
The price adjustment is straightforward in most circumstances. The modification should lower or raise the estimated cost of cost-type contracts or the price of fixed-price arrangements. The adjustment is a little more difficult when it comes to effecting voluntary changes at no increased cost to the Government. The ACO must ensure the contractor does not recoup any cost increase.
14.8.3 Administration Responsibility
CAS and accounting changes impact many agencies. As a result, CAS administration rests with the ACO cognizant of a particular contractor business unit. This ACO is often referred to as the DACO (Divisional Administrative CO) or the CACO (Corporate Administrative CO). The administration of CAS by one individual is necessary for efficient and effective resolution of CAS changes. If each CO administering a CAS-covered contract made a determination of compliance or resolved disputes, one business unit would face conflicting interpretations of a single CAS or different opinions on voluntary accounting changes. The burden would be enormous on both the contractor and on the Government, and administrative costs would soar.
CAS administration duties may rest with another agency outside of the FAA. Accordingly, some contractors follow CAS as statutorily mandated. Other contractors follow CAS and other procurement matters in accordance with the FAA AMS. The analyst must be aware of the particular situation and assist the DACO in assessing and evaluating the impact of CAS changes if requested.
A change in accounting practice is not always straight-forward. Case Study 14-3 shows how increased costs due to a change in the grouping of costs does not equate to an accounting change requiring an equitable adjustment.
CASE STUDY 0-3. What Constitutes an Accounting Practice Change
Background:
Martin Marietta Corporation (MMC) (now part of Lockheed Martin Corp.) in the early 1980’s had three intermediate home offices. All of its Government contracts were worked out of five segments reporting to the Aerospace headquarters (ASH) home office. Indirect expenses incurred by ASH were collected and grouped into three categories and allocated among three bases:
Pool Base, Marketing Sales, Foreign marketing, Foreign sales, Residual Total Cost Input.
In 1986, MMC eliminated ASH. Some of the five segments that had reported to ASH reported directly to corporate headquarters. Others reported to a newly created intermediate home office, Information & Communications Systems Headquarters (I&CSH). The former ASH cost pools were split among the pools at corporate and among the pools at I&CSH. The method in which MMC now allocated the indirect expenses to the two home offices was the same as the method used prior to the elimination of ASH. MMC filed a cost impact proposal for the accounting practice changes it had made. DCAA, however, found the impact to be immaterial, and no price adjustment was made. MMC did not include any changes in the grouping of costs in its cost impact proposal.
The transfer of management functions from ASH to I&CSH resulted in increased costs on a FAA contract. While the method used was the same as previously used the result was that an increased percentage of the indirect expenses were allocated to I&CSH. The FAA CO determined that the reorganization amounted to a change in accounting practice and did not allow any increased costs. MMC requested a decision from DoD because it did not consider the FAA CO to be cognizant in CAS matters. The DoD CO found that the reorganization resulted in a change to accounting practices. MMC appealed to the Armed Services Board of Contract Appeals (ASBCA).
ASBCA Decision:
The ASBCA decided in favor of MMC. The board distinguished changes between those in cost and segment groupings and those in allocation methods. MMC’s reorganization was the former, and therefore, did not constitute an accounting practice change. The Government appealed to the Court of Appeals for the Federal Circuit (CAFC).
CAFC Ruling:
The court affirmed the ASBCA decision and ruled in favor of MMC. The court found that MMC had not changed its method or technique of allocating costs. It still used the "beneficial or causal relationship" test in allocating its indirect costs. Chief Judge Glenn Archer stated, "We conclude that the phrase ‘change to a cost accounting practice,’ as used in FAR and MMC’s CAS-covered contracts, refers to changes in the proportional measurement, assignment, or allocation of costs. The Secretary’s (Secretary of Defense) contention that merely changing the size of cost pools or the grouping of segments as a result of a reorganization causes a cost accounting practice change that must be rejected. Organizational changes alone do not create a change in a cost accounting practice. Under the Secretary’s definition, any change to the size or composition of cost pools or grouping of segments, no matter how small, would technically be a change to a cost accounting practice requiring the contractor to submit a cost impact proposal. This definition would require a contractor to file an enormous number of proposals because, as the CASB recognized, there are many changes required in a ‘dynamic business environment.’ This construction is inconsistent with the CASB’s understanding that business changes of themselves are not changes in cost accounting practices." (Sec. of Defense v. Martin Marietta Corp., CAFC, No 93-1164, 2/10/95)
Cost Accounting Standards Implementation
There are five clauses implementing CAS within the FAA Acquisition Management System (FAA AMS) clauses section 3.2.3. If a CO believes that a contract is subject to CAS, he or she should include "CAS Notices and Certification" (FAA AMS clause 3.2.3-1) in the appropriate SIR. This provision provides the following:
Offeror certifies submission or exemption from submission of Disclosure Statement by doing one of the following:
Certifying submission of statement to ACO in conjunction with submission of proposal;
Certifying previous submission of statement to ACO;
Certifying to monetary exemption (below full coverage threshold and not otherwise required to submit statement as a performing segment on a fully covered contract); or
Certifying to interim exemption (90-day grace period as discussed previously in paragraph 0).
Offeror certifies to modified coverage as appropriate; and
Offeror identifies accounting changes required by award of contract.
The SIR and contract should include the clause "CAS" (FAA AMS clause 3.2.3-2) if the contract is subject to full coverage or the clause "Disclosure and Consistency of Cost Accounting Practices" (FAA AMS clause 3.2.3-3) if the offeror certifies its eligibility for modified coverage. The clause "Administration of CAS" (FAA AMS clause 3.2.3-5) is included in the contract if it is subject to full or modified coverage.
Summary
The analyst should be familiar with CAS, when it applies and the types of contracts covered. Disclosure statements are required for all CAS contracts with full coverage and for modified coverage under certain circumstances. The disclosure statement is an important means to measure consistency and compliance with applicable CAS. The analyst must also be cognizant throughout the process of the effects of 1.) new or revised CAS practices, 2.) voluntary changes to cost accounting practices or 3.) noncompliance. In essence, the analyst should be able to converse with DCAA and support COs on CAS related matters. True application-level knowledge, however, will only come through complete review of pertinent references, frequent exposure, and experience.
Appendix
Cost Accounting Standards
CAS 401
Purpose
Requirement
Consistency in Estimating, Accumulating, and Reporting Costs
To ensure that the contractor’s practices used in estimating costs for a proposal are consistent with cost accounting practices used to accumulate and report costs.
Consistency will:
Increase the likelihood that comparable transactions are treated alike; and
Facilitate preparation of reliable cost estimates and their comparison with the costs of performance. Comparison, in turn, will:
Provide basis for financial control over costs;
Aid in establishing accountability; and
Provide a basis for evaluating estimating capabilities.
The contractor’s practices used in estimating costs in pricing a proposal shall be consistent with its cost accounting practices used in accumulating and reporting costs.
Cost accounting practices must be consistent in regard to the following areas:
Classification of elements or functions of costs as direct or indirect;
The indirect cost pools to which each element or function of costs charged or proposed to be charged; and
Methods of allocating indirect costs to the contract.
Comment: Applies under modified and full coverage.
CAS 402
Title
Purpose
Requirement
Consistency in Allocating Costs Incurred for the Same Purpose
Requires that each type of cost be allocated only once and on only one basis to any contract or other cost objective. Criteria for determining the allocation of costs to a product, contract, or other cost objective should be the same for all similar objectives. The standard helps prevent:
Overcharging
Double-counting
No final cost objective shall have any cost allocated as an indirect cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective, and vice versa.
Equally applicable to estimates of costs to be incurred as used in contract proposals.
Comment: Applies under modified and full coverage.
CAS 403
Title
Purpose
Requirement
Allocation of Home Office Expenses to Segments
To establish criteria for allocation of the expenses of a home office to the segments based on the beneficial or causal relationship between such expenses and the receiving segments through:
Identification of expenses for direct allocation to segments to the maximum extent practical;
Accumulation of significant non-directly allocated expenses into logical and relatively homogeneous pools to be allocated on bases reflecting the relationship of the expenses to the segments; and
Allocation of any remaining office expenses to all segments.
Home office expense shall be allocated on the basis of the beneficial or causal relationship between supporting and receiving activities.
Centralized service functions, if not directly allocable, shall be allocated to segments on the basis of the service furnished to or received by each segment. (For example, centralized purchasing could be allocated by the number or value of orders for each segment.)
Staff or line management, if not directly allocable, shall be allocated using bases representative of total activity being managed (e.g., manufacturing costs for manufacturing management).
Central payment or accruals such as pension expenses, if not directly allocable, shall be allocated using an allocation base representative of the factors on which the total payment is based, such as payroll.
Staff management such as the chief financial officer shall be allocated on a base representative of the segment’s total activity.
Comment: Applies under full coverage only.
CAS 404
Title
Purpose
Requirement
Capitalization of Tangible Assets
To facilitate the measurement of costs associated with tangible assets consistently over time.
Contractor must establish reasonable and consistently followed policy.
The policy shall designate economic and physical characteristics for capitalization of tangible assets. Policy must come within the following guidelines:
Term:
Minimum service life, which shall not exceed 2 years, but may be a shorter period;
Minimum acquisition cost criterion which shall not exceed $5,000 but which may be a smaller amount.
Contractor may designate other specific characteristics pertinent to capitalization policy.
Contractor’s policy shall provide for identification of assets to the maximum extent practical.
Costs incurred which result in extending the life or increasing the productivity of an asset and meet the criteria of the capitalization policy shall be capitalized. (Repair and maintenance are period costs.)
Comment: Applies under full coverage only.
CAS 405
Title
Purpose
Requirement
Accounting for Unallowable Costs
To facilitate the negotiation, audit, administration and settlement of contracts by establishing guidelines covering:
Identification of costs specifically described as unallowable; and
The cost accounting treatment to be accorded such identified unallowable costs.
Note:
Unallowable costs are determined by agencies in accordance with individual contracts and applicable procurement regulations and statutes.
Costs expressly unallowable, or mutually agreed to be unallowable, shall be identified and excluded from any billing, claim, or proposal to the Government.
Costs which become designated as unallowable as a result of a CO’s written decision pursuant to disputes procedures shall be identified if included or used in the computation of any billing, claim, or proposal.
Costs directly associated with unallowable costs that would not have been incurred if not for the incurrence of the unallowable costs are also unallowable.
Costs of any project not contractually authorized shall be accounted for in a manner which allows ready separation from costs of authorized projects.
Where unallowable costs are normally part of a base(s) for the allocation of indirect expenses, the unallowable costs shall remain a part of the base(s).
Comment: Applies under modified and full coverage. 48 CFR 9904.405
CAS 406
Title
Purpose
Requirement
Cost Accounting Period
To provide criteria for the selection of the time periods to be used as cost accounting periods.
To reduce the effects of variations in the flow of costs within each cost accounting period.
To enhance objectivity, consistency, verifiability, uniformity, and comparability in contract cost measurements.
Contractor shall use its fiscal year as cost accounting period, except that:
Costs of an indirect function which exists for only a part of a cost accounting period may be allocated to cost objectives of that same part of the period.
An annual period other than the fiscal year can be used if mutually agreed upon and consistently followed by the contractor for managing and controlling its business, and appropriate accruals, deferrals, or other adjustments are made with respect to such annual period.
A transitional period other than a year not to exceed 15 months may be used when a change in fiscal year occurs.
The same cost accounting period shall be used for accumulating costs in an indirect cost pool as for establishing its allocation base.
Comment: Applies under modified and full coverage.
CAS 407
Title
Purpose
Requirement
Use of Standard Costs for Direct Material and Direct Labor
To improve cost measurement and cost assignment for contractors that choose to use a "standard" type accounting system.
Standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor when:
Standard costs are entered into the books of the account;
Standard costs and related variances are appropriately accounted for at the level of the production unit; and
Practices regarding the setting and revising of standards, use of standard costs, and disposition of variances are stated in writing and are consistently followed.
Comment: Applies under full coverage only. 48 CFR 9904.407 Does not cover the use of pre-established measures solely for estimating.
CAS 408
Title
Purpose
Requirement
Accounting for Costs of Compensated Personal Absence
To improve and provide uniformity in the measurement of costs of vacation, sick leave, holiday, and other compensated personal absence and increase the probability that the measured costs are allocated to the proper cost objectives.
The costs of compensated personal absence shall be assigned to the cost accounting period or periods in which the entitlement was earned.
The costs of compensated personal absence for an entire cost accounting period shall be allocated pro-rata on an annual basis among the final cost objectives of that period.
Comment: Applies under full coverage only.
CAS 409
Title
Purpose
Requirement
Depreciation of Tangible Capital Assets
To provide a systematic and rational flow of the costs of tangible assets to benefited cost objectives over the expected service lives of the assets.
Depreciable cost shall be assigned to cost accounting periods.
The depreciable cost shall be its capitalized costs less estimated residual value;
Estimated service life shall be used to determine the accounting periods to which the depreciation cost will be assigned;
The method of depreciation shall reflect the pattern of consumption of services over the life of the asset; and
The gain or loss recognized upon disposition shall be assigned to the period in which disposition occurs.
Annual depreciation cost shall be allocated to cost objectives.
Cost may be charged directly to the cost objective if charges are made on the basis of usage and only if costs of all like assets used for similar purposes are charged in the same manner;
Where tangible capital assets function as an organizational unit whose costs are charged to other cost objectives based on measurement of the services provided by the organizational unit;
If not allocated in #1 or #2 , costs should be included in an appropriate indirect cost pool; and
Gain or loss shall be allocated in the same manner as depreciation cost.
Comment: Applies under full coverage only.
CAS 410
Title
Purpose
Requirement
Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives
To provide criteria for the allocation of business unit G&A expenses to business final cost objectives based on their beneficial or causal relationship.
To increase the likelihood of achieving objectivity in the allocation expenses to final cost objectives and comparability of cost data among contractors in similar circumstances.
Business unit G&A expenses shall be grouped in a separate indirect cost pool which shall be allocated only to final cost objectives.
The G&A expense pool shall be allocated by means of a cost input base which best represents the total activity of a typical cost accounting period (i.e., total cost input, value-added cost input, or single element cost input).
Home office expenses received by a segment shall be included in its G&A expense pool. (Exceptions apply.)
Any costs that do not satisfy the definition of a G&A expense can remain in the G&A pool unless they can be allocated on a beneficial or causal relationship best measured by a base other than cost input.
Comment: Applies under full coverage only.
CAS 411
Title
Purpose
Requirement
Accounting for Acquisition Costs of Material
To improve the measurement and assignment of costs to cost objectives.
Contractor shall have, and consistently apply, written accounting policies for accumulating and allocating costs of material.
Costs of units of a category of material may be allocated directly, provided the cost objective was specifically identified at time of purchase or production of units.
Cost of material which is used solely in indirect functions or is not a significant element of production may be included in an indirect cost pool. (If significant, cost of indirect material not consumed shall be established as an asset at the end of the period.)
Cost of a category of material shall be accounted for in material inventory records.
Costing method for material issued from inventory shall be one of the following methods: FIFO, LIFO, Weighted average, Moving average, or standard cost
Comment: Applies under full coverage only.
CAS 412
Title
Purpose
Requirement
Composition and Measurement of Pension Cost
To provide guidance for determining and measuring the components of pension costs.
To enhance uniformity and consistency in accounting for pension costs and increase the probability that those costs are properly allocated to cost objectives.
Four components of defined-benefit plan costs: normal cost, part of any unfunded actuarial liability, interest equivalent on unamortized portion of liability, and adjustment for actuarial loss or gains.
For defined-contribution plans, the cost is the net contribution required.
For measurement of defined-benefit plan costs, an actuarial cost method is required to separately measure each of the four components listed above.
Costs computed for a cost accounting period are only assignable to that period and are allocable to cost objectives to the extent that liquidation can be compelled or is actually effected.
Comment: Applies under full coverage only; however, the "Compensation for Personal Services" cost principle incorporates the standard by reference and requires compliance.
CAS 413
Title
Purpose
Requirement
Adjustment and Allocation of Pension Cost
To enhance uniformity and consistency in accounting for pension costs.
To provide guidance for adjusting pension cost by measuring actuarial gains and losses to cost accounting periods.
To provide the basis on which to allocate pension cost to segments of an organization.
Actuarial gains and losses shall be calculated annually and shall be assigned to the cost accounting period for which the valuation is made and to subsequent periods.
The value of all pension fund assets shall be determined under an asset valuation method which takes into account unrealized appreciation and depreciation of the market value of the assets in the pension fund.
Pension cost shall be allocated to each segment having participants in a pension plan.
Comment: Applies under full coverage only; however, the "Compensation for Personal Services" cost principle incorporates the standard by reference and requires compliance.
CAS 414
Title
Purpose
Requirement
Cost of Money as an Element of the Cost of Facilities Capital
To improve cost measurement by providing for allocation of cost of contractor investment in facilities capital to negotiated contracts.
The investment base used in computing the cost of money for facilities capital shall be computed from accounting data used for contract cost purposes.
The cost of money rate shall be based on rates determined by the Secretary of the Treasury pursuant to Public Law 92-41.
The cost of capital committed to facilities shall be separately computed for each contract using facilities capital cost of money factors computed for each cost accounting period.
Comment: Applies under full coverage only; however, the "Cost of Money" cost principle requires compliance with this standard in order for cost
CAS 415
Title
Purpose
Requirement
Accounting for the Cost of Deferred Compensation
To increase the probability that the cost of deferred compensation is allocated to cost objectives in a uniform and consistent manner.
The cost of deferred compensation shall be assigned to the cost accounting period in which the contractor incurs an obligation to compensate the employee.
If no obligation is incurred prior to payment, the cost of deferred compensation shall be the amount paid and shall be assigned to the period in which payment is made.
The measurement of the amount of cost shall be the present value of future benefits to be paid by the contractor.
The cost of each award (to each employee) shall be considered separately unless a group basis can be measured with reasonable accuracy.
Comment: Applies under full coverage only; however, the "Compensation for Personal Services" cost principle incorporates the standard by
CAS 416
Title
Purpose
Requirement
Accounting for Insurance Costs
To increase the probability that insurance costs are allocated to cost objectives in a uniform and consistent manner.
The amount of insurance cost to be assigned to a cost accounting period is the projected average loss for the period plus insurance administration expenses.
Any premium for purchased insurance shall be pro-rated among the periods covered by the policy unless the insurance was purchased specifically for and directly allocated to a final cost objective.
The allocation of insurance costs to cost objectives shall be based on the beneficial or causal relationship.
Comment: Applies under full coverage only; however, the "Insurance and Indemnification" cost principle requires compliance with this standard
CAS 417
Title
Purpose
Requirement
Cost of Money as an Element of the Cost of Capital Assets under Construction
To improve cost measurement by providing recognition of cost of contractor investment in assets under construction.
Provide greater uniformity in accounting of asset acquisition costs.
The cost of money applicable to the investment in tangible and intangible capital assets being constructed, fabricated, or developed for a contractor’s own use shall be included in the capitalized acquisition cost of such assets.
The cost of money rate shall be based on interest rates determined by the Secretary of the Treasury pursuant to Public Law 92-41.
A representative investment amount shall be determined each period for each capital asset being contracted, fabricated, or developed giving appropriate consideration to the rate at which costs of construction are incurred.
Comment: Applies under full coverage only; however, the "Cost of Money" cost principle requires compliance with this standard in order for cost
CAS 418
Title
Purpose
Requirement
Allocation of Direct and Indirect Costs
To improve classification of costs as either direct or indirect.
To improve the allocation of indirect costs.
To provide criteria for accumulating indirect costs into cost pools.
Written and consistently followed accounting policies required.
Indirect costs shall be accumulated in homogeneous cost pools.
Pooled costs shall be allocated to cost objectives in reasonable proportion to the beneficial or causal relationship as follows:
If cost pool costs consist of material amounts of management or supervision costs, the pool shall be allocated to a base representative of the activity being managed or supervised.
If management or supervision costs are not significant, the pool shall be allocated based on resource consumption measure.
CAS 420
Title
Purpose
Requirement
Accounting for Independent Research and Development and Bid and Proposal Costs
To improve cost allocation of IR&D and B&P costs.
The basic unit for identification and accumulation of IR&D and B&P costs shall be the individual IR&D or B&P project.
The individual project shall consist of all allocable costs except G&A.
The IR&D and B&P cost pools shall consist of project costs and other allocable costs except G&A.
The IR&D and B&P cost pools of a home office shall be allocated to segments based on a beneficial or causal relationship.
IR&D and B&P cost pools of a business unit shall be allocated to the final cost objectives of that business unit based on a beneficial or causal relationship.
IR&D and B&P costs incurred in a cost accounting period shall not be assigned to any other period. (Exceptions apply to IR&D.)
