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48 CFR Appendix B to 9904.414, Part 9904: Appendix B to 9904.414—Example—ABC Corporation

ABC Corporation has a home office that controls three operating divisions (Business Units A, B & C). The home office includes an administrative computer center whose costs are allocated separately to the business units. The separate allocation conforms to the requirements specified in the Cost Accounting Standard No. 403. Tables I through VI deal with home office expense allocations to business units.
The A Division is a business unit as defined by the CASB, and it uses one engineering and one manufacturing overhead pool to accumulate costs for charging overhead to final cost objectives. In addition, the indirect cost allocation process also uses two “service centers” with their own indirect cost pools: Occupancy and technical computer center.
The costs accumulated in the occupancy pool are allocated among manufacturing overhead, engineering overhead, and the technical computer center on the basis of floor space occupied. The costs accumulated in the technical computer center cost pool are allocated to users on the basis of a CPU hourly rate. Some of these allocations are made to engineering or manufacturing overhead while others are allocated direct to final cost objectives.
At the business unit level, all the indirect expense incurred is regarded either as an engineering or manufacturing expense. Thus the sole item that enters into the business unit G&A expense pool is the allocation received by the A Division from the home office.
Operating results for the A Division are given in Table VII. Facilities capital items for the division are given in Table IX.
The example is based on a single set of illustrative contract cost data given in Table VIII. Since two methods, the “regular” and the “alternative” method, are potentially available for computing cost of money on facilities capital items two sets of different results can be considered.
In addition, total cost input is used in the example as the allocation base for the G&A expense. Two variations of this example have been prepared to illustrate the impact of excluding or including cost of money from total cost input. Variation I, summarized in Table XIII, excludes cost of money from the cost input allocation base. Variation II, summarized in Tables XVII and XVIII, includes cost of money in the cost input allocation base.
Throughout the example, where appropriate, cross references have been made to the text of the relevant parts of the Standard.
Variation I—Total Cost Input Allocation Base Excludes Cost of Money
Table I—Net Book Value of Home Office Facilities Capital
Dec. 31, 1974 Dec. 31, 1975
Administrative computer center facilities capital $550,000 $450,000
Other home office facilities capital 420,000 380,000
Total 970,000 830,000
The assets in the above table generate allowable depreciation or amortization, as explained in Instructions for Form CASB CMF (Basis). Thus they should be included in the asset base for cost of money computation.
Table II—Home Office Facilities Capital Annual Average Balances
Administrative computer center facilities capital $500,000
Other home office facilities capital 400,000
Total 900,000
The above averages are based on data in Table I computed in accordance with the criteria in Instructions for Form CASB CMF (Recorded, Leased Property, Corporate).
$970,000 + $830,000 = $1,800,000 12 = $900,000
Table III—Home Office Depreciation and Amortization for 1975
Administrative computer center facilities capital $100,000
Other home office facilities capital 40,000
Total 140,000
Table IV—Allocation of ABC Home Office Expenses to Divisions (Business Units)
Total expense Allocation of business units
A B C
Administrative computer center $1,800,000 $900,000 $900,000
Other home office 4,800,000 2,400,000 1,200,000 1,200,000
Total 6,600,000 3,300,000 2,100,000 1,200,000
The above allocation is carried out in accordance with CAS 403. The expense allocated to individual business units above includes depreciation and amortization as reflected in Table V.
Table V—Depreciation and Amortization Component of ABC Home Office Expense
Total depreciation and amortization expense Allocation of business units
A B C
Administrative computer center $100,000 $50,000 $50,000
Other home office 40,000 20,000 10,000 10,000
Total 140,000 70,000 60,000 10,000
Table VI—Allocation of Home Office Facilities Capital to Business Units
(a) Depreciation and amortization allocation in Table V converted to percentages.
Total depreciation and amoritzation expense (in percent) Allocation of business units (in percent)
A B C
Administrative computer center 100 50 50
Other home office 100 50 25 25
(b) Application of percentages in (a) to average net book values in Table II, in accordance with criteria in Instructions for Form CASB CMF (Recorded, Leased Property, Corporate).
Total net book value Allocation of business units
A B C
Administrative computer center facilities capital $500,000 $250,000 $250,000
Other home office facilities capital 400,000 200,000 100,000 $100,000
Total 900,000 450,000 350,000 100,000
Table VII—“A” Division 1975 Operating Results
Total cost input and other work G.&A. Fixed-price CAS-covered contract Cost reimbursement CAS-covered contracts Commercial and other work
Direct material:
Purchased parts $2,000,000 $100,000 $100,000 $1,800,000
Subcontract items 21,530,000 11,750,000 7,205,000 2,575,000
Total 23,530,000 11,850,000 7,305,000 4,375,000
Director labor and overhead:
Engineering labor 2,000,000 1,500,000 500,000
Engineering overhead (80 pct of direct engineering labor) 1,600,000 1,200,000 400,000
Manufacturing labor 3,000,000 1,200,000 200,000 1,600,000
Manufacturing overhead (200 pct of direct management labor) 6,000,000 2,400,000 400,000 3,200,000
Other direct charges:
Technical computer center direct charge 2,280 h at $250/h 570,000 200,000 370,000
Total cost input (excluding cost of money) 36,700,000 18,350,000 9,175,000 9,175,000
G. & A. (8.99 pct of cost input) 3,300,000 1,650,000 825,000 825,000
Total 40,000,000 20,000,000 10,000,000 10,000,000
Table VIII—Cost Data for the Contract
Purchased parts $85,000
Subcontract items 990,000
Technical computer time 280 h at $250/h 70,000
Engineering labor 330,000
Engineering overhead at 80 pct 264,000
Manufacturing labor 1,210,000
Manufacturing overhead at 200 pct 2,420,000
Total cost input (excluding cost of money) 5,369,000
G & A. at 8.99 pct 483,000
Total cost input and G. & A. (excluding cost of money) 5,852,000
Table IX—Division A Facilities Capital
Average net book values are computed in accordance with Instructions to Form CASB CMF. Average figures only are given, the underlying beginning and ending balances for 1975 have not been reproduced.
Name of indirect cost pool the asset is associated with Average net book value Annual depreciation
Engineering overhead $320,000 $40,000
Manufacturing overhead 4,500,000 900,000
Technical computer center 450,000 90,000
Occupancy 3,000,000 200,000
Facilities capital recorded by division A (see Form CASB CMF instructions for description of recorded) 8,270,000 1,230,000
Allocated from home office, table VI 450,000
Total division A 8,720,000
Table X—Allocation of Undistributed Facilities Capital
(a) Occupancy Pool Assets. Total occupancy pool expenses are assumed to be $1,000,000 of which $200,000 is depreciation per Table IX. Allocation of the $3,000,000 net book value of assets per Table IX is performed on the basis of floor space utilization.
Indirect cost pool Occupancy expense and depreciation allocation Percent of total floor space utilized Asset allocation
Engineering $200,000 20 $600,000
Manufacturing 750,000 75 2,250,000
Technical computer 50,000 5 150,000
Total 1,000,000 100 3,000,000
(b) Technical Computer Center Assets. Total technical computer center expenses for the year are assumed to be $770,000 including $90,000 depreciation per Table IX and $50,000 charge from the occupancy pool per paragraph (a) of this table. A charging rate of $250 per hour is computed assuming a total of 3,080 chargeable CPU hours per annum. The net book value of assets amounting to $600,000 ($450,000 per Table IX plus the $150,000 allocated per (a) above) is allocated on the basis of CPU hours utilized.
Overhead pool or cost objective Hours charged Amount charged Percent Asset allocation
Fixed price contracts, table VII 800 $200,000 26 $156,000
Cost reimbursement contracts, table VII 1,480 370,000 48 288,000
Engineering overhead pool 800 200,000 26 156,000
Total 3,080 770,000 100 600,000
(c) Summary of Undistributed Facilities Capital Allocation. Undistributed (per Table IX).
Technical computer center $450,000
Occupancy 3,000,000
Total 3,450,000
Distribution per paragraph (a) or (b) of this table of balances to overhead pools that result in charges direct to final cost objectives.
Overhead pool (a) (b) Total
Engineering $600,000 $156,000 $756,000
Manufacturing 2,250,000 2,250,000
Technical computer center (direct charge to contracts) 444,000 444,000
Total 2,850,000 600,000 3,450,000
Table XIII—Summary of Cost of Money Computation on Facilities Capital
[Cost of money excluded from total cost input]
Allocation base Allocated to contract, table VIII Computation using regular facilities, capital cost of money factor, table XI Amount Computation using alternative facilities capital, cost of money factor, table XI Amount
Engineering labor $330,000 0.04304 $14,203 0.0128 $4,244
Manufacturing labor 1,210,000 .18 217,800 .12 145,200
Technical computer time 1 280 15.57895 4,362
Cost input $5,369,000 .00098 5,261 .00850 45,636
Total cost of money on facilities capital 241,626 195,060
1 Hours.
Variation II—Total Cost Input Allocation Base Includes Cost of Money
Table XIV—Recomputation of “A” Division Total Cost Input To Reflect Inclusion of Cost of Money
(a) Regular method:
Total cost input per table VII $36,700,000
Cost of money applicable to facilities capital identified with overhead pools per subtotal in column 5, table XV 661,600
Total cost input including cost of money 37,361,600
(b) Alternative method:
Total cost input per table VII 36,700,000
Cost of money applicable to facilities capital identified with overhead pools per subtotal in column 5, table XVI 385,600
Total cost input including cost of money 37,085,900
Table XVII—Summary of Cost of Money Computation on Facilities Capital
[Cost of money included in total cost input—regular method]
Allocation base Allocated to contract, table VIII Computation using regular facilities, capital cost of money factor, table XV Amount
Engineering labor $330,000 0.04304 $14,203
Manufacturing labor 1,210,000 .18 217,800
Technical computer time 1 280 15.57895 4,362
Cost of money related to overheads 236,365
Cost of money above to be included in cost input 236,365
Cost input, table VIII 5,369,000
Cost input including cost of money 5,605,365 .00096 5,381
Total cost of money on facilities capital 241,674
1 Hours.
Table XVIII—Summary of Cost of Money Computation on Facilities Capital
[Cost of money included in total cost input—alternative method]
Allocation base Allocated to contract, table VIII Computation using alternative facilities, capital cost of money factor, table XVI Amount
Engineering labor $330,000 0.0128 $4,224
Manufacturing labor 1,210,000 .12 145,200
Cost of money related to overheads 149,424
Cost of money above to be included in cost input 149,424
Cost input, table VIII 5,369,000
Cost input including cost of money 5,518,424 .00841 46,410
Total cost of money on facilities capital 5,518,424 195,834

Where this section sits in the code

Title 48—Federal Acquisition Regulations System
CHAPTER 99—COST ACCOUNTING STANDARDS BOARD, OFFICE OF FEDERAL PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET
SUBCHAPTER B—PROCUREMENT PRACTICES AND COST ACCOUNTING STANDARDS
PART 9904—COST ACCOUNTING STANDARDS

The A Division is a business unit as defined by the CASB, and it uses one engineering and one manufacturing overhead pool to accumulate costs for charging overhead to final cost objectives. In addition, the indirect cost allocation process also uses two “service centers” with their own indirect cost pools: Occupancy and technical computer center.

The costs accumulated in the occupancy pool are allocated among manufacturing overhead, engineering overhead, and the technical computer center on the basis of floor space occupied. The costs accumulated in the technical computer center cost pool are allocated to users on the basis of a CPU hourly rate. Some of these allocations are made to engineering or manufacturing overhead while others are allocated direct to final cost objectives.

At the business unit level, all the indirect expense incurred is regarded either as an engineering or manufacturing expense. Thus the sole item that enters into the business unit G&A expense pool is the allocation received by the A Division from the home office.

Operating results for the A Division are given in Table VII. Facilities capital items for the division are given in Table IX.

The example is based on a single set of illustrative contract cost data given in Table VIII. Since two methods, the “regular” and the “alternative” method, are potentially available for computing cost of money on facilities capital items two sets of different results can be considered.

In addition, total cost input is used in the example as the allocation base for the G&A expense. Two variations of this example have been prepared to illustrate the impact of excluding or including cost of money from total cost input. Variation I, summarized in Table XIII, excludes cost of money from the cost input allocation base. Variation II, summarized in Tables XVII and XVIII, includes cost of money in the cost input allocation base.

Throughout the example, where appropriate, cross references have been made to the text of the relevant parts of the Standard.

Variation I—Total Cost Input Allocation Base Excludes Cost of Money

Table I—Net Book Value of Home Office Facilities Capital

Dec. 31, 1974 Dec. 31, 1975

Administrative computer center facilities capital $550,000 $450,000

Other home office facilities capital 420,000 380,000

Total 970,000 830,000

The assets in the above table generate allowable depreciation or amortization, as explained in Instructions for Form CASB CMF (Basis). Thus they should be included in the asset base for cost of money computation.

Table II—Home Office Facilities Capital Annual Average Balances

Administrative computer center facilities capital $500,000

Other home office facilities capital 400,000

Total 900,000

The above averages are based on data in Table I computed in accordance with the criteria in Instructions for Form CASB CMF (Recorded, Leased Property, Corporate).

$970,000 + $830,000 = $1,800,000 12 = $900,000

Table III—Home Office Depreciation and Amortization for 1975

Administrative computer center facilities capital $100,000

Other home office facilities capital 40,000

Total 140,000

Table IV—Allocation of ABC Home Office Expenses to Divisions (Business Units)

Total expense Allocation of business units

A B C

Administrative computer center $1,800,000 $900,000 $900,000

Other home office 4,800,000 2,400,000 1,200,000 1,200,000

Total 6,600,000 3,300,000 2,100,000 1,200,000

The above allocation is carried out in accordance with CAS 403. The expense allocated to individual business units above includes depreciation and amortization as reflected in Table V.

Table V—Depreciation and Amortization Component of ABC Home Office Expense

Total depreciation and amortization expense Allocation of business units

A B C

Administrative computer center $100,000 $50,000 $50,000

Other home office 40,000 20,000 10,000 10,000

Total 140,000 70,000 60,000 10,000

Table VI—Allocation of Home Office Facilities Capital to Business Units

(a) Depreciation and amortization allocation in Table V converted to percentages.

Total depreciation and amoritzation expense (in percent) Allocation of business units (in percent)

A B C

Administrative computer center 100 50 50

Other home office 100 50 25 25

(b) Application of percentages in (a) to average net book values in Table II, in accordance with criteria in Instructions for Form CASB CMF (Recorded, Leased Property, Corporate).

Total net book value Allocation of business units

A B C

Administrative computer center facilities capital $500,000 $250,000 $250,000

Other home office facilities capital 400,000 200,000 100,000 $100,000

Total 900,000 450,000 350,000 100,000

Table VII—“A” Division 1975 Operating Results

Total cost input and other work G.&A. Fixed-price CAS-covered contract Cost reimbursement CAS-covered contracts Commercial and other work

Direct material:

Purchased parts $2,000,000 $100,000 $100,000 $1,800,000

Subcontract items 21,530,000 11,750,000 7,205,000 2,575,000

Total 23,530,000 11,850,000 7,305,000 4,375,000

Director labor and overhead:

Engineering labor 2,000,000 1,500,000 500,000

Engineering overhead (80 pct of direct engineering labor) 1,600,000 1,200,000 400,000

Manufacturing labor 3,000,000 1,200,000 200,000 1,600,000

Manufacturing overhead (200 pct of direct management labor) 6,000,000 2,400,000 400,000 3,200,000

Other direct charges:

Technical computer center direct charge 2,280 h at $250/h 570,000 200,000 370,000

Total cost input (excluding cost of money) 36,700,000 18,350,000 9,175,000 9,175,000

G. & A. (8.99 pct of cost input) 3,300,000 1,650,000 825,000 825,000

Total 40,000,000 20,000,000 10,000,000 10,000,000

Table VIII—Cost Data for the Contract

Purchased parts $85,000

Subcontract items 990,000

Technical computer time 280 h at $250/h 70,000

Engineering labor 330,000

Engineering overhead at 80 pct 264,000

Manufacturing labor 1,210,000

Manufacturing overhead at 200 pct 2,420,000

Total cost input (excluding cost of money) 5,369,000

G & A. at 8.99 pct 483,000

Total cost input and G. & A. (excluding cost of money) 5,852,000

Table IX—Division A Facilities Capital

Average net book values are computed in accordance with Instructions to Form CASB CMF. Average figures only are given, the underlying beginning and ending balances for 1975 have not been reproduced.

Name of indirect cost pool the asset is associated with Average net book value Annual depreciation

Engineering overhead $320,000 $40,000

Manufacturing overhead 4,500,000 900,000

Technical computer center 450,000 90,000

Occupancy 3,000,000 200,000

Facilities capital recorded by division A (see Form CASB CMF instructions for description of recorded) 8,270,000 1,230,000

Allocated from home office, table VI 450,000

Total division A 8,720,000

Table X—Allocation of Undistributed Facilities Capital

(a) Occupancy Pool Assets. Total occupancy pool expenses are assumed to be $1,000,000 of which $200,000 is depreciation per Table IX. Allocation of the $3,000,000 net book value of assets per Table IX is performed on the basis of floor space utilization.

Indirect cost pool Occupancy expense and depreciation allocation Percent of total floor space utilized Asset allocation

Engineering $200,000 20 $600,000

Manufacturing 750,000 75 2,250,000

Technical computer 50,000 5 150,000

Total 1,000,000 100 3,000,000

(b) Technical Computer Center Assets. Total technical computer center expenses for the year are assumed to be $770,000 including $90,000 depreciation per Table IX and $50,000 charge from the occupancy pool per paragraph (a) of this table. A charging rate of $250 per hour is computed assuming a total of 3,080 chargeable CPU hours per annum. The net book value of assets amounting to $600,000 ($450,000 per Table IX plus the $150,000 allocated per (a) above) is allocated on the basis of CPU hours utilized.

Overhead pool or cost objective Hours charged Amount charged Percent Asset allocation

Fixed price contracts, table VII 800 $200,000 26 $156,000

Cost reimbursement contracts, table VII 1,480 370,000 48 288,000

Engineering overhead pool 800 200,000 26 156,000

Total 3,080 770,000 100 600,000

Technical computer center $450,000

Occupancy 3,000,000

Total 3,450,000

Distribution per paragraph (a) or (b) of this table of balances to overhead pools that result in charges direct to final cost objectives.

Overhead pool (a) (b) Total

Engineering $600,000 $156,000 $756,000

Manufacturing 2,250,000 2,250,000

Technical computer center (direct charge to contracts) 444,000 444,000

Total 2,850,000 600,000 3,450,000

Table XIII—Summary of Cost of Money Computation on Facilities Capital

[Cost of money excluded from total cost input]

Allocation base Allocated to contract, table VIII Computation using regular facilities, capital cost of money factor, table XI Amount Computation using alternative facilities capital, cost of money factor, table XI Amount

Engineering labor $330,000 0.04304 $14,203 0.0128 $4,244

Manufacturing labor 1,210,000 .18 217,800 .12 145,200

Technical computer time 1 280 15.57895 4,362

Cost input $5,369,000 .00098 5,261 .00850 45,636

Total cost of money on facilities capital 241,626 195,060

1 Hours.

Variation II—Total Cost Input Allocation Base Includes Cost of Money

Table XIV—Recomputation of “A” Division Total Cost Input To Reflect Inclusion of Cost of Money

(a) Regular method:

Total cost input per table VII $36,700,000

Cost of money applicable to facilities capital identified with overhead pools per subtotal in column 5, table XV 661,600

Total cost input including cost of money 37,361,600

(b) Alternative method:

Total cost input per table VII 36,700,000

Cost of money applicable to facilities capital identified with overhead pools per subtotal in column 5, table XVI 385,600

Total cost input including cost of money 37,085,900

Table XVII—Summary of Cost of Money Computation on Facilities Capital

[Cost of money included in total cost input—regular method]

Allocation base Allocated to contract, table VIII Computation using regular facilities, capital cost of money factor, table XV Amount

Engineering labor $330,000 0.04304 $14,203

Manufacturing labor 1,210,000 .18 217,800

Technical computer time 1 280 15.57895 4,362

Cost of money related to overheads 236,365

Cost of money above to be included in cost input 236,365

Cost input, table VIII 5,369,000

Cost input including cost of money 5,605,365 .00096 5,381

Total cost of money on facilities capital 241,674

1 Hours.

Table XVIII—Summary of Cost of Money Computation on Facilities Capital

[Cost of money included in total cost input—alternative method]

Allocation base Allocated to contract, table VIII Computation using alternative facilities, capital cost of money factor, table XVI Amount

Engineering labor $330,000 0.0128 $4,224

Manufacturing labor 1,210,000 .12 145,200

Cost of money related to overheads 149,424

Cost of money above to be included in cost input 149,424

Cost input, table VIII 5,369,000

Cost input including cost of money 5,518,424 .00841 46,410

Total cost of money on facilities capital 5,518,424 195,834

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