*This is Part 1 of a 3-part blog. Each part addresses the fundamental requirements and techniques for application related to the standard, and provides specific examples.
- This Part 1 addresses the overall purpose of the standard, as well as the requirements/techniques related to the G&A expense pool.
- Part 2 will address the requirements/techniques for application related to the G&A allocation base.
- Part 3 will address special allocations of G&A expenses.
Background: To provide criteria for the allocation of business unit general and administrative (G&A) expenses to business unit final cost objectives. The standard also provides criteria for allocating home office expenses received by the business unit segment to business unit final cost objectives (CAS 410-20).
What it covers:
- The allocation of business unit G&A costs to business unit final cost objectives.
- The allocation of home office expenses received by the business unit to business unit final cost objectives.
What it does not cover:
- The allocation of home office expenses to segment (this is covered by CAS 403).
- The allocation of indirect costs other than G&A to business unit final cost objectives (this is covered by CAS 418).
- The allocation of business unit IR&D to business unit final cost objectives (this is covered by CAS 420).
G&A Expense Pool
- A business unit may perform G&A activities for one or more other segments of a company. In such cases, CAS 410-50(a) requires that the G&A expenses be allocated to the other segments on a beneficial or causal relationship. These G&A costs must also be removed from the segment that is performing the G&A activities.
EXAMPLE: Business Unit X performs the payroll function for Business Units Y and Z. The cost of the payroll function total $100,000. In accordance with CAS 410, Business Unit X allocates the $100,000 to Business Units Y and Z on the basis of number of personnel, and Business Unit X removes the $100,000 from its G&A expense pool.
- CAS 410-40(a) requires that G&A expenses of a business unit be grouped in a separate indirect expense pool, and must be allocated only to final cost objectives. However, in accordance with CAS 410-40(d) and CAS 410-50(b), the G&A expense pool may be combined with other indirect expenses for allocation to final cost objectives provided (a) the allocation base is appropriate for both the G&A expenses and the other indirect expenses, and (b) provision is made to identify the components and total of the G&A expense pool separately from the other indirect expenses.
EXAMPLE: A contractor whose business is 95 percent labor costs includes all indirect costs in a single pool that is allocated over direct labor. The contractor has a separate accounting code in its records that distinguishes G&A expense accounts from the other indirect expense accounts. The contractor’s practice is in compliance with CAS 410. The allocation base is appropriate for the G&A expenses and the other indirect expenses, and the contractor has made provisions for separately identifying the G&A expenses.
- In accordance with CAS 410-50(c), costs that are not G&A expenses but are insignificant in amount may be included in the G&A expense pool.
EXAMPLE: A contractor with $30 million of revenues leases all its buildings except for one small facility. The contractor incurs approximately $2,000 per year of building maintenance costs for this facility. The contractor includes the $2,000 in the G&A expense pool. Since this cost is insignificant in amount, this practice is in compliance with CAS 410.
- In accordance with CAS 410-40(c) and 410-50(g)(1), the following allocations received from the home office by the business unit shall be included in the G&A expense pool:
- i. Line management of particular segments or groups of segments (CAS 410-50(g)(1)(i)).
- ii. Residual expenses (CAS 410-50(g)(1)(ii)); and
- iii. Directly allocated expenses related to the management and administration of the receiving segment as a whole (CAS 410-50(g)(1)(iii)).
EXAMPLE: Business Unit Q receives a home office cost allocation of $1,600,000. Of this, $1,500,000 is indirectly allocated, which includes $1,000,000 for line management expenses and $500,000 of residual expenses. The remaining $100,000 is a direct allocation for internal audit. In accordance with CAS 410, Business Unit Q must include all of these costs in the G&A expense pool. The internal audit costs represent a directly allocated expense that relates to the management and administration of the receiving segment as a whole.
- When a business unit performs both home office and operating segment functions, CAS 410-50(h) requires that the costs of the home office functions be segregated from the cost of the operating segment functions. The costs of the home office functions must be allocated in accordance with CAS 403.
EXAMPLE: Business Unit Q performs building maintenance functions for all company buildings. Business Unit Q also performs contract work. During FY 2013, Business Unit Q incurred building maintenance costs of $5,000,000. It also incurred G&A costs associated with the contract work of $2,000,000. Business Unit Q must segregate the $5,000,000 from the $2,000,000. The $5,000,000 is allocated to the company segments on a beneficial or causal relationship as required by CAS 403. The $2,000,000 is allocated to the final cost objectives using a base that is appropriate under this standard, CAS 410.