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  • Question

    1.) Is there a "generally accepted auditing practice", or a "generally accepted accounting procedure" which mandates the appropriate (acceptable) method for allocating Raytheon's support costs to an item (part number)'s unit price ? If so, what is the correct method (should a straight, single percentage be applied to all part numbers ? Or, can Raytheon use numerous varying percentages applied to various different part numbers?) 2.) Is there a Federal Acquisition Regulation policy on this issue which mandates a specific method of allocating these support costs to part numbers' unit prices ? If so, what is it and what method does the FAR dictate to use ?


    Answer

    A comprehensive answer to this question would require a detailed analysis of not only the nature of the Government contract involved in order to determine applicability of the potential and various cost accounting rules, but also a thorough understanding of the particular Government contractor’s established cost accounting practices.  To get a reasonably correct answer to the question posed one should consult those within the Department of Defense with access to such details, such as the cognizant Defense Contract Audit Agency auditor.

    Nonetheless, generally speaking, the cost accounting rules for the allocation of contractor costs to Government contracts are:

    (1) Cost Accounting Standards (“CAS”) (currently found at http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/farapndx1.htm);
    (2) Federal Acquisition Regulations (FAR) “Cost Principles” (http://farsite.hill.af.mil/reghtml/regs/far2afmcfars/fardfars/far/31.htm); and
    (3) Generally Accepted Accounting Principles (“GAAP”), (see https://asc.fasb.org/help&cid=1175804733759). 
     
    The three sets of cost accounting rules listed directly above, encompass most all of the relevant cost accounting rules applicable to cost accounting for Government contract purposes.  The three rules are to be applied in hierarchical order.  That is to say, if the CAS are applicable to the Government contract for which costs are being accounted for, then CAS would control to the extent that it addresses the cost accounting issues in question.  Then, alternatively, if the CAS are not applicable to the Government contract or they do not otherwise address the cost accounting issue in question, the FAR Cost Principles would control.  And finally, and less likely, if neither CAS nor the FAR Cost Principles are applicable or provide coverage of the cost accounting issue, then GAAP would control to the extent GAAP addressed the cost accounting issue. 

    The questioner here states that the “support costs” at issue are “indirect costs” (See Cost Accounting Standards at 99 CFR 9904.402-30(a)(5) for a definition of “indirect costs”).  There are 19 Cost Accounting Standards (CAS) and one, CAS 418, is particularly relevant, as its primary purpose is the consistent determination of indirect costs and provision of criteria for the accumulation and allocation of indirect costs to final cost objectives (or contracts).  For the purposes at hand, CAS 418 might be summarized as follows:

    § Provides criteria for the consistent determination of direct and indirect costs
    § Provides for the accumulation of indirect costs in indirect cost pools and provides guidance relating to the selection of allocation measures based on the beneficial or causal relationship between an indirect cost pool and cost objectives.
    § Requires a written policy on classification of costs as direct/indirect.
    § Requires homogeneous indirect cost pools for allocation of indirect costs to intermediate and final cost objectives.
    § Requires, if there are significant costs of management or supervision, the indirect cost pool must be allocated over a base representative of the activity being managed or supervised.
    § Requires, if there are no significant management or supervision costs, the indirect cost pool must be allocated over a base representative of resource consumption, using one of the following allocation bases:
     
    -  A resource consumption measure;
    -  An output measure (activities); or
    -   A surrogate that is representative of resources consumed.
     
    If CAS is not applicable (see 9903.201-1 for applicability of CAS), then the FAR Contract Cost Principles (see FAR Subpart 31.1 for applicability of Cost Principles) may be applicable to the Government contract in question. The FAR Contract Cost Principles, at FAR 31.203, incorporate some of the same and  similar cost accounting concepts as provided for in CAS, but of significance here, it specifically requires indirect costs to be accumulated in “logical cost groupings”  and require the use of “ an allocation base that is common to all cost objectives to which the grouping is to be allocated  (see FAR 31.203 (c ).  
     
    In sum, after application of relevant cost accounting rules it is possible, but not obvious, that a Government contractor may be appropriately utilizing different rates and factors to allocate different groupings of indirect costs, but a compliance determination is very fact specific and likely requires input from those most highly familiar with that particular contractor’s cost accounting practices. 

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