CAS 410 – Allocation of Business Unit General and Administrative (G&A) Expenses to Final Cost Objectives (Part 2 of 3)

*This is Part 2 of a 3-part blog.  Each part addresses the fundamental requirements and techniques for application related to the standard, and provides specific examples.

  • Part 1 addressed the overall purpose of the standard, as well as the requirements/techniques related to the G&A expense pool.
  • This Part 2 addresses 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).

G&A Allocation Base

  • 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.

 

  • In accordance with CAS 410-50(g)(2), separate allocations that are significant in amount and are received by the home office for centralized service functions, staff management of specific activities of segments, and central payments or accruals must be allocated to business unit final cost objectives on the basis of a beneficial or causal relationship between the cost objectives and the expense.

EXAMPLE: Business Unit Q receives a home office cost allocation of $600,000.  Of this, $200,000 is for payroll processing and $400,000 for building management of the building where Business Unit Q performs all its work.  The contractor allocates the $200,000 to final cost objectives on the basis of direct labor dollars.  The contractor allocates the $400,000 to final cost objectives on the basis of square footage.  These allocation practices are in accordance with CAS 410, since the costs are allocated to final cost objectives on the basis of a beneficial or causal relationship.

 

  • CAS 410-40(b)(1) and CAS 410-50(d) require that the allocation base for G&A expenses include all significant elements of cost input that represent the total activity of the business unit.  In addition, in accordance with CAS 410-50(d), the allocation base must be either (a) total cost input, (b) value-added cost input, or (c) single element cost input.  The determination of which allocation base best represents total activity of a business unit is determined on the basis of the circumstances of each business unit. 

EXAMPLE:  A contractor whose cost input is 50% labor costs and 50% other costs proposes to use a G&A allocation base of direct labor.  The proposed practice is in noncompliance with CAS 410, since the labor costs do not represent the total activity of the business unit.

 

  • A total cost input base includes all costs of the business unit other than those included in the G&A expense pool (or the combined pool if the G&A expenses are combined with other indirect expenses).  In accordance with CAS 410-50(d)(1) and (2), a total cost base is generally acceptable as an appropriate measure of the total activity of a business unit except when the inclusion of material or subcontract costs would significantly distort the allocation of G&A expenses in relation to benefits received.

EXAMPLE:  A contractor uses a total cost input base for allocating G&A expenses.  The contractor costs for FY 2013 are as follows:

Cost Element Amount
Direct Labor $10,000,000
Indirect Expenses Other than G&A $ 5,000,000
Materials and Subcontract Costs $ 3,000,000
Other Direct Costs $ 2,000,000
G&A Expenses $ 1,000,000

The G&A allocation base of total cost input for FY 2013 is $20,000,000 ($10,000,000 + $5,000,000 + $3,000,000 + $2,000,000).  This represents all of the costs except those in the G&A expense pool.  The G&A rate for FY 2013 is 5.00% ($1,000,000/$20,000,000).

 

EXAMPLE:  A contractor’s cost input for Business Unit R is comprised of 60% direct labor, 10% indirect expenses other than G&A costs, 10% material costs, 10% subcontract costs, and 10% other direct costs.  When material and subcontract costs are plotted for all contracts, all of the contracts fall within a statistical normal distribution.  The contractor chooses a total cost input base.  This base is in compliance with CAS 410, since it represents the total activity of the business unit and the inclusion of materials and subcontract costs does not significantly distort the allocation of G&A expenses relative to benefits received.    

 

  • CAS 410-50(d)(2) states that a value-added cost input base includes all costs of the business unit, other than material costs, subcontract costs, and costs included in the G&A expense pool (or the combined pool if the G&A expenses are combined with other indirect expenses).  A value-added base is used where the inclusion of material and subcontract costs would significantly distort the allocation of G&A expenses in relation to benefits received, and where costs other than direct labor are significant measures of total activity.

EXAMPLE:  A contractor uses a value-added cost input base for allocating G&A expenses.  The contractor costs for FY 2013 are as follows:

Cost Element Amount
Direct Labor $10,000,000
Indirect Expenses Other than G&A $ 5,000,000
Materials and Subcontract Costs $ 3,000,000
Other Direct Costs $ 2,000,000
G&A Expenses $ 1,000,000

The G&A allocation base of value-added cost input for FY 2013 is $17,000,000 ($10,000,000 + $5,000,000 + $2,000,000).  This represents all of the costs except those in the G&A expense pool.  The G&A rate for FY 2013 is 5.88% ($1,000,000/$17,000,000).

 

EXAMPLE:  A contractor’s cost input for Business Unit R is comprised of 50% direct labor, 10% indirect expenses other than G&A costs, 20% materials, 10% subcontract costs, and 10% other direct costs.  An analysis of the material costs indicates that, of the 400 contracts, 99% of the material costs are incurred on 30 of those contracts.  An analysis of subcontract costs shows that these costs are normally distributed among the 400 contracts.  Since the material costs will distort the allocation of G&A expenses in relation to benefits received (30 contracts will receive a much larger share of G&A while 370 will receive a much smaller share), CAS 410 requires the contractor to use a value-added base.  Note that while the distortion is caused only by the material costs, the value-added base must exclude both the material and subcontract costs.

 

  • In accordance with CAS 410-50(d)(3), a single-element base includes all costs of the chosen element (e.g., all direct labor costs) except those included in the G&A expense pool (or the combined pool if the G&A expenses are combined with other indirect expenses).  A single-element base may be used when it produces equitable results.  However, a single-element cost input base is inappropriate where there that element is an insignificant part of the total cost of some of the final cost objectives.

EXAMPLE:  A contractor uses a single-element cost input base consisting of direct labor costs for allocating G&A expenses.  The contractor costs for FY 2013 are as follows:

Cost Element Amount
Direct Labor $10,000,000
Indirect Expenses Other than G&A $ 5,000,000
Materials and Subcontract Costs $   100,000
Other Direct Costs $   300,000
G&A Expenses $ 1,000,000

The G&A allocation base of direct labor cost input for FY 2013 is $10,000,000 (the amount of direct labor costs).  The G&A rate for FY 2013 is 10.00% ($1,000,000/$10,000,000).

 

EXAMPLE:  A contractor’s cost input for Business Unit T is comprised of 65% direct labor, 5% indirect expenses other than G&A costs, 5% materials, 5% subcontract costs, and 20% other direct costs.  The business unit has 100 contracts.  For 15 of these contracts, direct labor comprises between 10 and 12 percent of the cost input for the contract (most of the costs on these contracts are other direct costs, such as computer usage and reproduction center charges).  The contractor proposes to use a single-element direct labor cost base.  This practice is in noncompliance with CAS 410, since direct labor is an insignificant part of the total cost of some of the final cost objectives.

  • CAS 410-50(i)(1) states that when the contractor applies G&A expense to items produced or worked on for stock or product inventory, the cost input of these items for the period shall be included in the G&A allocation base in that period..

EXAMPLE: A contractor has a policy of including G&A costs when valuing inventory.  During FY 2011, the contractor began work on Product A, with cost input of $2,000,000.  The contractor began and completed work on Products B and C, with cost input of $1,000,000 and $500,000 respectively.  During FY 2012, the contractor completed work on Product A.  Total cost input for Product A (other than G&A) was $5,000,000.  The contractor also began Product D, with cost input of $4,000,000. In FY 2013, the contractor completed work on Product D, with the total cost input (other than G&A) totaling $10,000,000. The contractor also began and completed work on Product E, with cost input of $3,000,000.

A summary of the costs that are included in the allocation base is shown below:

FISCAL YEAR 2011:

Product Cost Input in Allocation Base
A $2,000,000
B $1,000,000
C $  500,000
Total $3,500,000

 

FISCAL YEAR 2012:

Product Cost Input in Allocation Base
A $3,000,000 (the $5,000,000 total less the $2,000,000 included in FY 2011)
D $4,000,000
Total $7,000,000

 

FISCAL YEAR 2013:

Product Cost Input in Allocation Base
D $6,000,000 (the $10,000,000 total less the $4,000,000 included in FY 2012)
E $3,000,000
Total $9,000,000

 

 

  • In accordance with CAS 410-50(i)(3), when the contractor does not apply G&A expense to items produced or worked on for stock or product inventory, G&A shall be applied to the cost input of those inventory items at the time they are issued to final cost objectives.

EXAMPLE: A contractor has a policy of including G&A costs to inventory items at the time they are issued to final cost objectives.  During FY 2011, the contractor began work on Product A, with cost input of $2,000,000.  The contractor began and completed work on Products B and C, with cost input of $1,000,000 and $500,000 respectively.  During FY 2012, the contractor completed work on Product A.  Total cost input for Product A (other than G&A) was $5,000,000.  The contractor also began Product D, with cost input of $4,000,000. In FY 2013, the contractor completed work on Product D, with the total cost input (other than G&A) totaling $10,000,000. The contractor also began and completed work on Product E, with cost input of $3,000,000.

A summary of the costs that are included in the allocation base is shown below:

FISCAL YEAR 2011:

Product Cost Input in Allocation Base
A $—-0—-
B $1,000,000
C $  500,000
Total $1,500,000

 

FISCAL YEAR 2012:

Product Cost Input in Allocation Base
A $5,000,000 (the $5,000,000 total input incurred for Product A in FY 2011 and 2012)
D $—-0—-
Total $5,000,000

 

FISCAL YEAR 2013:

Product Cost Input in Allocation Base
D $10,000,000 (the $10,000,000 total input incurred for Product D in FY 2012 and 2013)
E $ 3,000,000
Total $13,000,000

 

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