The cost of services performed by Segment X should include all costs properly allocated and include properly allocated general and administrative expenses (G&A). The focus is on measuring the cost of the transferred services and the related question of which cost accounting rules should be applied. Regarding cost accounting rules, with respect to G&A, as the questioner has already identified, the focus is on CAS 410.
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Unless resulting in an inequitable result, the cost accounting for services performed by Segment X directly in support of the government contract statement of work being performed by Company Y should be accounted for by Segment X using its established cost accounting practices. If those established practices would lead to an inequitable allocation of costs, a special allocation may be more appropriate. Once the costs are determined by Segment X, the total cost of performing the statement of work should then be transferred to Company Y.
It appears the services provided by Segment X are not such a deviation from Segment X’s normal productive activity, when compared to the normal services produced by Segment X, that the causal or beneficial relationship between the G&A cost pool and G&A base costs would be different and require a special allocation.
As the questioner has stated, a determination of whether or not the services performed by Segment X at issue are final cost objectives is highly relevant to the determination about applicability of CAS 410. This is born out in the purpose section of the standard itself. According to 48 CFR 9904.410-20, “The purpose of . . . [CAS 410] is to provide criteria for the allocation of business unit general and administration (G&A) expenses to business unit final cost objectives based on their beneficial or causal relationship.” (Underlining added) So whether or not Segment X is a “business unit” and whether or not the services performed in support of the government contract statement of work are “final cost objectives” within the meaning of CAS 410 is relevant.
First, per 48 CFR 9904.410-30(a) (2), a “business unit” is any “segment of an organization, or an entire business organization which is not divided into segments.” Relatedly, a “segment” includes “subsidiaries (domestic and foreign) in which the organization has a majority ownership.” [48 CFR 9904.410-30(a) (7)] To this point, the facts provided by the questioner indicate that Segment X is a wholly owned subsidiary of the same parent, Mega Corporation, of which Company Y is also a wholly owned subsidiary. This supports the conclusion that Segment X is a “business unit” and as such CAS 410 provides the criteria for the allocation of its G&A expenses to final cost objectives.
But now let us move on to address whether or not the services performed by Segment X are “final cost objectives.” As the questioner stated, a “Final cost objective means a cost objective which has allocated to it both direct and indirect costs, and, in the contractor’s accumulation systems, is one of the final accumulation points.” [48 CFR 9904.410-30(a) (4)]. To add to the significance of determining whether or not the service performed by Segment X constitutes a final cost objective, according to 48 CFR 9904.410-40(a), “Business unit G&A expenses . . . shall be allocated only to final cost objectives.” Although contracts are most often final cost objectives, the contractor’s accumulation system will define what a final cost objective is. Both Segment X and Company Y are subsidiaries of Mega Corporation and apparently have separate corporate existences. Separate legal entities have the capacity to contract and it may be that the two subsidiaries here have done so in this circumstance. Irrespective, an intercompany work order or other agreement may serve the same purpose (final cost objective) and the activity under the agreement could be said to be part of the total activity of the business unit. So, if Segment X’s services are not “final cost objectives,” Segment X’s G&A cannot be allocated to them in accordance with CAS 410.
Whether or not the services provided by Segment X can be removed from Segment X’s G&A base is addressed at 48 CFR 9904.410-50(d), that provides: “The cost input base used to allocate the G&A expense pool shall include all significant elements of that cost input which represent the total activity of the business unit.” It best to describe Segment X’s efforts in support of the government contract statement of work held by Company Y as a significant element of that cost input which represents the total activity of the business unit. Also note, that 9904.410-50(f) provides: “Cost input shall include those expenses which by operation of this Standard are excluded from the G&A expense pool and are not part of a combined pool of G&A expenses and other expenses allocated using the same allocation base.” Again, this seems to suggest that in this circumstance, the cost of services that are being provided by Segment X must remain in Segment X’s G&A base. By extension, allocable G&A expenses must remain in Segment X’s G&A pool.
After transfer of Segment X costs, Company Y would include all of Segment X costs and add any allocable Company Y indirect direct, including allocable General and Administrative (G&A) costs under very similar reasoning as that provided for the treatment of G&A by Segment X. Otherwise, costs would be excluded from the G&A base costs that represent the total activity of Company Y.
The questioner is posing the proposition that some portion of Segment X G&A should somehow be directly identified to Company Y and then subcontracted for Segment X G&A pool and added to the Company Y G&A pool. It does not seem that the segment G&A expense accumulated and allocated by Segment X is actually G&A expense of Company Y and therefore should not reasonably be included in Company Y’s G&A pool to be allocated on Company Y’s G&A base. If, however, Segment X incurred G&A expenses that were actually G&A expenses of Company Y, then these G&A expenses should be transferred to Company Y and removed from Segment X’s G&A pool along with the corresponding removal of base costs. This is supported by 48 CFR 9904.410-50(a) that provides: “G&A expenses of a segment incurred by another segment shall be removed from the incurring segment's G&A expense pool. They shall be allocated to the segment for which the expenses were incurred on the basis of the beneficial or causal relationship between the expenses incurred and all benefiting or causing segments.”