*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 for the accumulation of IR&D and B&P costs.
- Part 2 will address the allocation of IR&D and B&P costs, except for special allocations.
- Part 3 will address special allocations of IR&D and B&P costs.
Background: As stated at CAS 420-20, the purpose of the standard is to provide criteria for the accumulation of IR&D and B&P costs, and for the allocation of such costs to cost objectives based on the beneficial or causal relationship between such costs and cost objectives
What it covers:
- The accumulation and allocation of IR&D and B&P costs.
What it does not cover:
- The allocation of home office expenses to segment (this is covered by CAS 403).
- The allocation of G&A to business unit final cost objectives (this is covered by CAS 410).
- The allocation of indirect costs other than G&A to business unit final cost objectives (this is covered by CAS 418).
General
- In accordance with CAS 420-50(a), IR&D and B&P project costs shall include all costs that, if incurred in like circumstances for a final cost objective, would be treated as direct costs of that final cost objective.
EXAMPLE: A contractor has a policy that any travel that can be identified specifically to a contract is charged as a direct cost to that contract. However, for B&P and IR&D costs, all travel is charged as an indirect cost. This practice is in noncompliance with CAS 420. The contractor’s practice for charging travel costs to B&P and IR&D projects must be consistent with its practice for charging travel costs to final cost objectives (contracts). Thus, the contractor must charge travel costs that can be identified specifically to a B&P and IR&D project as a direct cost.
- CAS 420-50(a) also requires an allocation of overhead costs of productive activities and other indirect costs related to the project based on the contractor’s cost accounting practice or applicable Cost Accounting Standards.
EXAMPLE: A contractor that maintains a general overhead pool with a base of direct labor dollars. The contractor incurs the following during FY 2014:
Cost Objective |
FY 2014 Labor Dollars |
| Contract A | $100,000 |
| Contract B | $200,000 |
| Contract C | $200,000 |
| Subtotal – Contract Direct Labor | $500,000 |
| B&P Projects | $ 50,000 |
| IR&D Projects | $ 25,000 |
| Total | $575,000 |
In accordance with the provisions of CAS 420, the allocation base for the general overhead pool must include the $50,000 of B&P labor and $25,000 of IR&D labor. Therefore, the allocation base for the General Overhead Pool is $575,000.
Cost Accumulation
- CAS 420-50(b) states that the IR&D and B&P cost pools for a segment consist of the project costs plus allocable home office IR&D and B&P costs.
EXAMPLE: Segment A incurs the following costs during FY 2014:
| Element | IR&D Projects | B&P Projects |
| Direct Labor – Segment A | $50,000 | $30,000 |
| Overhead (50%) | $25,000 | $15,000 |
| Materials | $10,000 | $10,000 |
| Subtotal | $85,000 | $55,000 |
| Allocation from Corporate Home Office | $15,000 | $ 5,000 |
| Total | $100,000 | $60,000 |
In accordance with CAS 420, the total IR&D costs for Segment A are $100,000, while the total B&P costs are $60,000.
- In accordance with CAS 420-50(c), when the cost of individual IR&D or B&P efforts are not material in amount, these costs may be accumulated in one or more project(s) within each of these two types of effort.
EXAMPLE: The contractor has an established policy of accumulating B&P costs by project if the project is anticipated to cost more than $2,000. The costs of all B&P projects that are anticipated to cost less than $2,000 are accumulated in a single B&P project account. This practice complies with CAS 420, since the costs of any individual B&P project that are accumulated in the single project account are not material.
EXAMPLE: The contractor has an established policy of accumulating B&P and IR&D costs by project if the project is anticipated to cost more than $2,000. The costs of all B&P and IR&D projects that are anticipated to cost less than $2,000 are accumulated in a single project account. The single project account includes both the B&P and IR&D projects that are anticipated to be less than $2,000. This practice is in noncompliance with CAS 420. The contractor is required to set up two accounts, one for the B&P projects that are under $2,000 and one for the IR&D projects that are under $2,000.
- In accordance with CAS 420-50(d), the costs of any work performed by one segment for another segment is not treated as IR&D costs or B&P costs of the performing segment unless the work is a part of the IR&D or B&P project of the performing segment.
EXAMPLE: Segment T has an IR&D project to develop a prototype for a new vehicle. As part of the project, Segment S provides Segment T with wheels and axles that are used on an existing production vehicle for use in developing the prototype vehicle. Segment S charges Segment T $15,000, which includes the direct labor, overhead, and material costs of the wheels and axles. Segment S classifies the wheels and axles as an IR&D project and thus does not add G&A to the cost. This practice is in noncompliance with CAS 420. The production of the wheels and axles is not an IR&D project for Segment T. The sale to Segment S is therefore a subcontract that must be burdened with all costs applicable to final cost objectives, including G&A expenses. As a result, the cost of the wheels and axles must be included in Segment S’s G&A base.