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    Current accounting practice is to apply overhead & G&A to material transfers, in the year of procurement receipt. A disclosure statement revision is requesting to keep OH the same in all cases but if the material transfer happens in a future year, to change the G&A applied to the rate in that future year. Is this a CAS 406 concern?


    There is always CAS 406 compliance concern when CAS 406 is applicable to the subject contract.  But it appears that the risk of CAS 406 noncompliance is fairly low based on this fact pattern. 

    It sounds as though we are talking about transfers of material costs from one final cost objective to another final cost objective.  This type of transaction is sometimes a reasonable response to changed circumstances such as unexpected production schedule or work load priority changes.   

    The CAS 406 stated purpose “is to provide criteria for the selection of the time periods to be used as cost accounting period for contract cost estimating, accumulating, and reporting” (CFR 9904.406-20). The fundamental requirements of CAS 406 seem to make a potential non-compliance with CAS 406 even more remote. 

    The fundamental requirements of CAS 406 are summarized as follows:

      -  A contractor shall use the fiscal year as his cost accounting period, except for the limited exceptions noted
      -  A contractor shall follow consistent practices in his selection of the cost accounting period in which any types of adjustment to expense are accumulated and allocated
      -  The same cost accounting period shall be used for accumulating costs in an indirect cost pool as for establishing its allocation base, except that the contracting parties may agree to use a different period for establishing an allocation base as provided in 9904.406-50(e )

    So, any CAS 406 issue would more likely than not be in the context of the composition/content of the indirect cost pool or base. 

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