Five CAS Standards Every and Follow - National … Five Cost Accounting Standards Every Government Contractor Should Know • CAS 401 – Consistency in Estimating, Accumulating, and

Five CAS Standards Every Government Contractor Should Know and Follow Breakout Session #: CO1

Presented By: Darrell Hineman, CPA CFE Director & Kristen Soles, CPA, Partner

Date: Monday, July 25

Time: 4:00pm-5:15pm

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Objectives

• Understand the History of CAS

• Five Cost Accounting Standard (CAS) that Impact Your Business

• Introduce Key Concepts Used by the CAS Board to Promulgate the CAS Standards and Rules

• Identifying Key Definitions

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Five Cost Accounting Standards Every Government Contractor Should Know

• CAS 401 – Consistency in Estimating, Accumulating, and Reporting Costs

• CAS 402 – Consistency in Allocating Cost Incurred for the Same Purpose

• CAS 405 – Accounting for Unallowable Costs

• CAS 418 – Allocating of Direct and Indirect Costs

• CAS 410 – Allocation of G&A Expenses

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Five Cost Accounting Standards Every Government Contractor Should Know (And The Other Standards) • Basic CAS concepts:

– CAS 401 – Consistency in Estimating, Accumulating, and Reporting Costs

– CAS 402 – Consistency in Allocating Cost Incurred for the Same Purpose

– CAS 405 – Accounting for Unallowable Costs

• Allocation of Costs: – CAS 418 – Allocating of

Direct and Indirect Costs – CAS 410 – Allocation of G&A

Expenses

• Basic CAS Concepts: – CAS 406 — Cost accounting period

• Allocation of Costs: – CAS 403 — Allocation of home office expenses to

segments – CAS 420 — Accounting for IR&D/B&P costs

• Compensation: – CAS 408 — Compensated personal absence – CAS 412 — Composition and measurement of

pension costs – CAS 413 — Adjustment and allocation of pension

costs – CAS 415 — Deferred compensation

• Assets – CAS 404 — Capitalization of tangible capital assets – CAS 409 — Depreciation of tangible capital assets – CAS 414 — Cost of money as an element of the cost

of facilities capital – CAS 417 — Cost of money as an element of the cost

of capital under construction

• Other Standards: – CAS 407 — Use of standard costs – CAS 411 — Accounting for material costs – CAS 416 — Accounting for insurance costs

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Cost Accounting Standards – History

• Originally established to address concerns involving defense contractor cost estimating, accumulating and reporting under negotiated government contracts (and subcontracts), the Cost Accounting Standards (CAS) can now apply to civilian agency contracts and also extend to certain colleges and universities

• The most recent update to CAS requirements went into effect as of December 22, 2011

• There are two levels of CAS coverage: full coverage and modified coverage

Key CAS Concepts

• To Promote: UNIFORMITY and CONSISTENCY

• To Establish:

COST ALLOCATIONS

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CAS 401 - Consistency In Estimating, Accumulating, Reporting Costs (48 CFR Part 9904.401)

• The purpose of this Cost Accounting Standard is to ensure that each contractor's practices used in estimating costs for a proposal are consistent with cost accounting practices used by him in accumulating and reporting costs.

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Ultimately – CASB believes that consistent application of cost accounting practices [i.e. accounting, billing, treatment, measurement, assignment, etc.] will facilitate the preparation of: • Reliable Cost Estimates (Better Proposals)

• Improve Visibility into Contractor’s

Estimating Capabilities (Estimating System’s Reliability)

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• May accumulate and report in greater detail than estimate

• May NOT estimate in greater detail than accumulation and reporting

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• If you’re awarded the contract, you have to be able to compare the actual costs incurred to the estimate!


• If you are not presenting your cost in a manner that it can be compared, your practices are in noncompliance with the standard.


Question: • Is your estimating practice deemed to

be consistent with your cost accounting practices? Yes or No

Real Question:

• To what degree/level is your estimating practices consistent with your cost accounting practices?

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• Consistency between proposal and how the costs are accumulated and reported in the accounting books and records:

1. The classification of elements or functions of cost as direct or indirect (CAS 418);

2. The indirect cost pools to which each element or function of cost is charged (i.e. assigned) or proposed to be charged (CAS 402); and

3. The methods of allocating indirect costs to the contract (CAS 410 and CAS 418)

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• Illustration #1: – A contractor uses labor category averages to estimate/bid

direct labor on future work. However, employees are identified to labor categories and the contractor accumulates and reports direct labor by employee.

• Yes It is Compliant with CAS 401: – Estimated: Category Average Direct Labor Rates – Accumulated: Actual employee’s labor costs – Reports: Actual employee’s labor costs

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• Illustration #2: – Travel costs: Contractor’s disclosed practice is to charge

travel costs indirect – Contractor bids travel as direct costs for direct labor

employees in new proposal

• It is Noncompliant with CAS 401: – Disclosed practice states travel costs are indirect. In this

proposal, they are bid direct to the contract – In order for the contractor to charge travel direct for direct

labor employees, the contractor must change their accounting practice for all contracts and revise their disclosure statement

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CAS 402 - Consistency in Allocating Costs Incurred for the same purpose (48 CFR Part 9904.402)

• The purpose of this standard is to require that each type of cost is allocated only once and on only one basis to any contract or other cost objective.

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• Guard against the overcharging of some cost objectives and to prevent double counting

• Double counting occurs most commonly when cost items are allocated directly to a cost objective without eliminating like cost items from indirect cost pools which are allocated to that cost objective.

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Establish your practices = How are you going to treat this cost incurred for the same purpose under like circumstances?


All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives (C/O).

• For what purpose did you incur the cost?

• What is the circumstance?

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• Illustration # 3: – Planning Costs: A contractor normally allocates

planning costs indirectly over direct labor dollars – A proposal for a new contract requires a

disproportionate amount of planning costs, not related to labor

What can the contractor do? – The contractor must choose a different equitable

allocation method to distribute cost to all final cost objectives

– For example, he may use the number of planning documents processed rather than his former allocation base of direct labor.

– Contractor's Disclosure Statement must be amended

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• Illustration # 4: – IT Help Desk Costs: A contractor normally allocates

general IT Help Desk costs indirect to projects over assigned computers

– A proposal for a new contract requires three dedicated network technicians to maintain 24 hour service beyond the general offered services - IT Help Desk may also provide services in addition to the dedicated three

What should the contractor do? – Allocate the three dedicated IT personnel directly to the

particular contract requiring them and also allocate a portion of the cost of the general IT Services to the same contract

– Only on condition that his disclosed practices indicate that the costs of the separate classes of IT serve different purposes

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CAS 402 - Consistency in Allocating Costs Incurred for the Same Purpose (48 CFR Part 9904.402)

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CAS 405 – Accounting for Unallowable Costs (48 CFR Part 9904.405)

• The purpose of this Cost Accounting Standard is (1) the identification of costs specifically described as unallowable and (2) the cost accounting treatment to be accorded such identified unallowable costs in order to promote the consistent application of sound cost accounting principles covering all incurred costs.

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• It’s about the proper identification and recording of unallowable cost within the contractor’s books and records.

• Unallowable Cost: law, regulation or contract – Written decision furnished by a contracting officer

pursuant to contract disputes procedures

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This Standard does not govern the allowability of costs. This is a function of the appropriate procurement or reviewing authority.


• Directly associated cost means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred.

• In circumstances where these unallowable costs normally would be part of a regular indirect-cost allocation base or bases, they shall remain in such base or bases.

– Unallowable Cost related to a direct project must receive an equitable share of allowable costs, except that the cost associated with the activity/transaction is unallowable

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• The detail and depth of records required as backup support for proposals, billings, or claims shall be that which is adequate to establish and maintain visibility of identified unallowable costs (including directly associated costs)

• It does NOT require detailed cost accounting records, but must be given appropriate consideration in any cost accounting determinations governing the content of allocation bases used to distributing indirect costs

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CAS 405 – accounting for unallowable costs (48 CFR Part 9904.405)

Visibility requirements (3 Options) 1.The segregation of unallowable costs in separate accounts maintained for this purpose in the regular books of account,

2.The development and maintenance of separate accounting records or workpapers, or

3.The use of any less formal cost accounting techniques which establishes and maintains adequate cost identification to permit audit verification of the accounting recognition given unallowable costs.

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CAS 410 - Allocation of Business Unit General and Administrative Expense (48 CFR Part 9904.410)

• To provide criteria on how to allocate Business Unit G&A to Business Unit final cost objectives in an objective manner to be comparable to other similar contractors.

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• COST: The value of resources consumed for a purpose.

And how that cost gets to

• COST OBJECTIVES: The levels at which we desire to measure costs.

– Project/Contracts – Functions – Organizational subdivisions – Other work units

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Home Office

Segment A

Division 1

Division 2

Segment B

Division 3


• G&A: Expenses incurred or allocated for the general administration of a business unit.

• Costs typically include: – Financial – Management – ?????

G&A expenses shall be grouped in a separate indirect cost pool which shall be allocated only to final cost objectives

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• All costs excluding G&A pool costs

Total Cost Input

• Total Cost Input less subcontract and materials

Value-Added

• A factor that represents the total activity of the Business Unit

Single Element


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Did you know?

• G&A expenses of a segment incurred by another segment shall be removed from the incurring segment's G&A expense pool...

• Expenses which are not G&A expenses and are insignificant in amount may be included in the G&A expense pool for allocation to final cost objectives.

CAS 418 - Allocation of Direct and Indirect Costs (48 CFR Part 9904.418)

• To provide criteria for identifying direct vs indirect costs and how to accumulate and equitably allocate indirect costs.

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• An accounting concept • Results from the relationship between a cost and

a cost objective – A beneficial or causal relationship should exist. – A benefiting cost objective should bear all (or an

appropriate portion) of the cost from which it benefits or which it causes.

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• The total cost of specific final cost objectives includes:

– Functions of specific support (overhead services and activities)

– Functions of general support (G&A)

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• What is in a pool of homogenous costs?

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• What is a Causal Beneficial Base?

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• Contains material amounts of costs for the management or supervision of activities

• Measured By: 1. A base shall be used

which is representative of the activity being managed or supervised.

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• Does not contains material amounts of costs for the management or supervision of activities

• Measured By: 1. A resource

consumption measure, 2. An output measure, or 3. A surrogate that is

representative of resources consumed.

Summary - CAS Concepts

Uniformity & Consistency Cost Allocation Concepts • Causal Beneficial Relationship • Direct Identification Is Desirable • The Hierarchy of Preferable Indirect Allocation

Techniques

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Contact Information

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Darrell Hineman - Director

(703) 286-1722

[email protected]

Kristen Soles - Partner

(703) 847-4411

[email protected]

Documents

Five CAS Standards Every and Follow - National … Five Cost Accounting Standards Every Government Contractor Should Know • CAS 401 – Consistency in Estimating, Accumulating, and