Direct Costs

1
LACCD Contractors Overview of Federal Acquisition
Regulation (FAR) Part 31 Contract Cost
Principles and Procedures
2
Presenter James J. Check, CPA Managing
Director, Kroll Government Contractor Advisory
Services jcheck_at_kroll.com 703-796-2870
3
Government Contractor Advisory Services provided
by Kroll

• Contract Cost Accounting and Pricing
• Claims Pricing and Support
• Regulatory Compliance Reviews
• Special Investigations
• Financial Accounting and Reporting Consultation
• Process and Control Assessments
• Commercial Pricing and GSA Multiple Award
  Schedule Contracting
• Expert Testimony

4
Agenda

• Applicability of FAR Part 31
• Cost Allowability / Allocability
• Direct / Indirect Costs
• Selected Cost Principles
• Indirect Rates

5
Applicability of FAR Part 31

• Fixed-price contracts
• Applicable subparts of FAR Subpart 31 used when
  cost analysis is performed or a specific contract
  clause requires the determination or negotiation
  of costs
• Cost-type contracts
• In general, applicable principles and procedures
  in FAR Subpart 31.2 should be used for
  cost-reimbursement contracts to
• Determine reimbursable costs
• Negotiate indirect cost rates
• Settle costs of cost-reimbursement terminated
  contracts
• Other price revisions or contract modifications

Ref FAR 31.102, 31.103 and 31.105
6
Composition of Total Cost

• Total cost of a contract includes
• Standard costs properly adjusted for applicable
  variances
• Direct costs
• Indirect costs allocable to the contact
• Allocable cost of money pursuant to FAR 31.205-10
• Allocable credits deducted
• Allowable costs are limited to those defined
  under FAR Part 31
• In ascertaining what constitutes a cost, any
  generally accepted method of determining or
  estimating costs that is equitable and is
  consistently applied may be used.

Ref FAR 31.201-1
7
Allowability vs. Allocability

• Costs are allowable to the extent they are
  reasonable, allocable and determined to be
  allowable under FAR 31.201 Composition of Total
  Cost, FAR 31.201-2 Determining Allowability,
  FAR 31.201-3 Determining Reasonableness and as
  specifically determined under FAR 31.205
  Selected Costs.
• Allowability refers to whether or not the
  Government will pay for a particular cost
  incurred in connection with government contracts.
• Allocability refers to how costs are assigned
  to a contractors work all costs are either
  directly allocable or indirectly allocable to a
  particular cost objective.

8
Determining Allowability

• Characteristic of a cost that permits its
  inclusion in a contract, and depends on
• Reasonableness
• Allocability
• CAS, GAAP, appropriate under circumstances
• Terms of the contract
• Any FAR Subpart 31.2 limitations

Ref FAR 31.201-2
9
Determining Reasonableness

• Recognized as ordinary and necessary
• Accepted sound business practices, arms length
  bargaining, and Federal and State laws and
  regulations
• Contractors responsibilities to the Government,
  other customers, owners of the business,
  employees, the public at large
• Significant deviations from contractors
  established practices

Ref FAR 31.201-3
10
Determining Allocability

• Cost is incurred specifically for the contract
• Benefits both the contract and other
  work-distributed in reasonable proportion to the
  benefits received
• Cost is necessary to the overall operation of the
  business
• Although no direct relationship to any particular
  cost objective can be shown

Ref FAR 31.201-4
11
Credits

• Applicable portion shall be credited to the
  Government as a cost reduction or cash refund
• Income
• Rebate
• Allowance
• Other credit

Ref FAR 31.201-5
12
Advance Agreements

• Advance agreements on the treatment of special or
  unusual costs, including statistical sampling
  methodologies at 31.201-6(c) are preferred but
  not required nor affect the reasonableness,
  allocability or the allowability under the
  specific cost principles in FAR Subparts 31.2,
  31.3, 31.6 and 31.7
• Advance agreements may be negotiated either
  before or during a contract but should be
  negotiated before incurrence of the costs
  involved.
• An agreement cannot contradict the treatment of
  costs as set out in FAR Part 31

Ref FAR 31.109
13
Direct vs. Indirect Cost

• Direct cost Related to a particular cost
  objective and can be traced to it in an
  economically feasible way.
• Defined as any cost that is identified
  specifically with a particular final cost
  objective. (FAR 2.101)
• Direct Labor
• Direct Materials
• Other Direct Costs
• Indirect cost Costs remaining to be allocated
  after direct costs have been determined and
  charged directly to the contract or other work.
• Defined as any cost not directly identified
  with a single, final cost objective, but
  identified with two or more final cost objectives
  or with at least one intermediate cost
  objective. (FAR 2.101)
• Allocated to the cost objective.

Ref FAR 2.101, 31.202 and 31.203
14
Direct vs. Indirect Cost (cont.)

• Direct Costs FAR 31.202
• The contractor is responsible for defining the
  types of costs that it will account for as direct
  costs
• Costs normally defined as direct costs
• Material and subcontract costs
• Manufacturing direct labor and direct project
  performance labor for service firms
• Costs defined as direct costs by some companies,
  yet as indirect by others
• Manufacturing engineering labor
• Project management labor
• Quality Assurance
• Defining what is accounted for as a direct cost
  involves balancing the accuracy of the cost
  accounting and the administrative burden/cost

15
Direct vs. Indirect Cost (cont.)

• Indirect Costs FAR 31.203
• Indirect costs are normally allocated to the
  products or projects that benefit from these
  costs
• Usually grouped into common pools and charged to
  benefiting objectives through an allocation or
  indirect cost rate
• The allocation base attempts to allocate indirect
  costs to the product or project based on the
  relative benefit received

16
Accounting for Indirect Costs

• Allocation of Indirect Costs Understanding the
  Balancing Act
• The best form of cost accounting must reflect a
  cost-benefit analysis
• The required level of accuracy of the cost
  accounting approach
• The cost and complexity of achieving the various
  levels of accuracy
• The materiality of the cost to the total cost of
  the product or service
• Written policy
• Policy defines what is a direct or an indirect
  cost
• Policy must be applied consistently

17
Accounting for Indirect Costs (cont.)

• Homogeneity
• Accumulate indirect costs in homogeneous pools
• Indirect costs are homogeneous if the activity
  they represent has the same (or similar) casual
  or beneficial relationship to the final cost
  objective
• Allocation in reasonable proportion to causal or
  beneficial relationship
• Costs in an indirect cost pool shall be allocated
  to a cost objective based on an appropriate
  measure of resource consumption

18
Accounting for Unallowable Costs

• Expressly unallowable mutually agreed cost,
  directly associated cost
• Exclude from billing, claim or proposal
• When an unallowable cost is incurred,
• Directly associated costs are unallowable
• Costs specifically designated as unallowable
• Written decision of the contracting officer
• FAR 31.201-6 (c)(1) reads The practices for
  accounting for and the presentation of
  unallowable costs must be those described in CAS
  405, Accounting for Unallowable Costs.
• Statistical sampling may be acceptable
• Unbiased sample, reasonable representation of the
  sampling universe
• High dollar or high risk transaction separately
  reviewed
• Statistical sampling permits audit verification

Ref FAR 31.201-6
19
Accounting for Unallowable Costs (cont.)

• Penalties for unallowable indirect costs for
  contracts over 650,000
• Amount of the disallowed costs allocated to
  contracts
• Penalty is two times the amount if the indirect
  cost is determined unallowable before proposal
  submission
• Interest on the paid portion of the disallowance
• Additional administrative, civil, and criminal
  penalties
• Not necessary for unallowable costs to have been
  paid to the contractor in order to assess a
  penalty
• All costs allocated to a CAS contract must comply
  with CAS 405 including
• Home office costs
• Service center costs
• Costs charged from other segments
• GA departments

Ref FAR 42.709
20
Categorization of Selected Costs

• Expressly unallowable
• Generally allowable if reasonable and allocable
• Generally allowable to or thresholds
  specified
• Allowable or unallowable based on purpose of
  expenditure

21
Expressly Unallowable Costs
Exceptions/Other Reference
Cost Principle
Bad Debts Contributions or donations Entertainme
nt costs Fines and penalties Interest other
financial costs Losses on other
contracts Goodwill Executive lobbying
costs Costs of alcoholic beverages
None Community service activities (FAR
31.205-1(e)(3)) None When required by the
contract (FAR 31.205-15) Interest on tax
penalties caused by the Gov't. (FAR
31.205-41(a)(3)) None None None None
22
Construction and architect-engineer contracts

• Generally, follows the cost principles detailed
  in FAR 31.2
• Specifically noted in paragraph (d)
• Advance agreements as set in FAR 31.109 are
  preferred to set expectations between the
  contractor and the government
• Actual cost data for ownership and operation cost
  of equipment should be used, if available. If
  not
• Use predetermined schedules of construction
  equipment use rates
• Maintenance and repairs to rental equipment is
  unallowable
• Costs incurred at the job site incident to
  performing the work are allowable as direct or
  indirect costs

Ref FAR 31.105
23
Selected Cost Principles

• Costs Reviewed
• 31.205-1 Public Relations Advertising Costs
• 31.205-6 Compensation for Personal Services
• 31.205-7 Contingencies
• 31.205-10 Cost of Money
• 31.205-13 Employee Morale, Health Welfare
• 31.205-14 Entertainment Costs
• 31.205-17 Idle Facilities Idle Capacity Costs
• 31.205-18 IRD and BP Costs
• 31.205-20 Interest Other Financial Costs
• 31.205-22 Lobbying Political Activity Costs
• 31.205-25 Manufacturing Production Engineering
  Costs

• 31.205-26 Material Costs
• 31.205-32 Precontract Costs
• 31.205-33 Professional Consultant Service
  Costs
• 31.205-34 Recruitment Costs
• 31.205-35 Relocation Costs
• 31.205-36 Rental Costs
• 31.205-38 Selling Costs
• 31.205-40 Special Tooling Special Test
  Equipment Costs
• 31.205-43 Trade, Business, Technical
  Professional Activity Costs
• 31.205-46 Travel Costs
• 31.205-47 Costs Related to Legal Other
  Proceedings
• 31.205-52 Asset Valuations from Business
  Combinations

24
Public Relations Advertising (FAR 31.205-1)

• Generally UNALLOWABLE except the following areas
• Specific job recruiting
• Acquiring scarce items or disposing of scrap
• Costs required by contract
• Responding to inquiries on company policies and
  activities
• Communication with public, press, stockholders,
  etc.
• Liaison with media re matter of public concern
• Other minor areas (community service drives,
  plant tours, etc.)
• Costs to Promote Aerospace Exports (PL 100-202)
• UNALLOWABLE costs include
• Models, gifts, souvenirs
• Entertainment
• Hospitality suites for entertainment
• Alcoholic beverages

25
Compensation For Personal Services (FAR 31.205-6)

• Compensation is generally ALLOWABLE if reasonable
  and includes
• Salaries and wages
• Fringe benefits
• Bonus and incentive compensation
• Stock options
• Pension plans
• Deferred compensation
• Severance pay
• Compensation incidental to business acquisitions

26
Compensation For Personal Services (FAR
31.205-6) (cont.)

• Compensation must be reasonable
• Tests of reasonableness include
• Firms of the same size
• Firms in the same industry
• Firms in the same geographic area
• Firms which engage in non-Government work
• Costs for comparable services from outside
  sources
• Closely held business scrutinized for
  distribution of profits to owners
• When challenged - offsets considered between
  allowable elements of compensation package within
  same job grade or level
• The Office of Management and Budget (OMB)
  annually sets maximum allowable median
  compensation amounts for all senior executives.
  For fiscal 2008, this is set at 612,196.

27
Compensation For Personal Services (FAR
31.205-6) (cont.)

• Must be based on an established plan, policy or
  employer/employee agreement
• When paid in stock
• Valued at fair market value on measurement date
• May be deferred
• Based on current or future services
• Based on production, cost reduction or efficient
  performance

Bonuses, Incentive Pay Stock Options
28
Compensation For Personal Services (FAR
31.205-6) (cont.)

• For involuntary termination
• ALLOWABLE if required by
• Law
• Employer-employee agreement
• Established policy
• Circumstances of the particular employment
• Normal turnover allocable to ALL contractors
  work
• Accruals for abnormal or mass severance pay are
  NOT allowed but actual payments are judged on a
  case by case basis

Severance Pay (Dismissal Pay)
29
Contingencies (FAR 31.205-7)

• Historical costing
• Generally UNALLOWABLE
• May be ALLOWABLE in some cases (e.g.,
  terminations) to recognize minor unsettled
  factors
• Future costing
• Includable in cost estimates if conditions are
  known and foreseeable (e.g., cost of
  rejects/defective work)
• Must exclude if not measurable (e.g., outcome of
  pending litigation)
• Should be separately disclosed for negotiation
  purposes

30
Cost of Money (FAR 31.205-10)

• Generally ALLOWABLE provided it is measured,
  assigned, and allocated to contracts, or measured
  and added to the cost of capital assets under
  construction.
• Actual interest cost in lieu of the calculated
  imputed cost of money is UNALLOWABLE.
• ALLOWABLE imputed cost determined by applying a
  cost-of-money rate to facilities capital under
  construction or employed in contract performance.
• Cost-of-money rate is based on interest rates
  specified by the Secretary of the Treasury under
  Public Law 92-41.
• Cost-of-money need not be entered on contractors
  books of account - memorandum records should be
  utilized.
• Must be specifically identified or proposed in
  cost proposal.

31
Employee Morale, Health Welfare (FAR 31.205-13)

• Activities designed to improve working
  conditions, employer-employee relations, employee
  morale and performance
• ALLOWABLE costs can include
• House publications health clinics and
  wellness/fitness centers
• Company-sponsored sports teams employee
  counseling services
• Certain food and dormitory services losses award
  dinners, compensation or recognition awards
• UNALLOWABLE costs include gifts to employees,
  tickets to sports events, greens fees, membership
  dues and most recreation costs

32
Entertainment Costs (FAR 31.205-14)

• Entertainment includes
• Amusement
• Diversions
• Social activities
• Any other directly associated costs
• Tickets to shows or sports events
• Meals
• Lodging
• Rentals
• Transportation
• Gratuities
• Membership in social, dining, or country clubs or
  other organizations having the same purposes
• Entertainment Costs are expressly UNALLOWABLE.
  These costs are NOT ALLOWABLE under any other
  cost principle.

33
Idle Facilities Idle Capacity Costs (FAR
31.205-17)

• Costs of idle facilities or idle capacity
  include
• Maintenance
• Repair
• Housing
• Rent
• Other related costs
• Property taxes
• Insurance
• Depreciation
• "Facilities" means plant or any portion thereof
  (including land integral to the operation),
  equipment, individually or collectively, or any
  other tangible capital asset, wherever located,
  and whether owned or leased by the contractor.
• "Idle capacity" means the unused capacity of
  partially used facilities.
• "Idle facilities" means completely unused
  facilities that are excess to the contractor's
  current needs.

34
Idle Facilities Idle Capacity Costs (FAR
31.205-17) (cont.)

• Costs of idle facilities are UNALLOWABLE unless
  the facilities
• Are necessary to meet fluctuations in workload
• Were necessary when acquired and are now idle
  because of changes in
• Requirements
• Production economies
• Reorganization
• Termination
• Other causes which could not have been reasonably
  foreseen
• Costs of idle facilities are ALLOWABLE for a
  reasonable period, ordinarily not to exceed 1
  year
• Costs of idle capacity are ALLOWABLE provided the
  capacity is necessary or was originally
  reasonable and is not subject to reduction or
  elimination by subletting, renting, or sale, in
  accordance with sound business, economics, or
  security practices.
• Note Any costs to be paid directly by the
  Government for idle facilities or idle capacity
  reserved for defense mobilization production
  shall be the subject of a separate agreement.

35
IRD and BP Costs (FAR 31.205-18)

• Independent research development (IRD) costs
  include
• Basic research
• Applied research
• Development
• Systems and other concept formulation studies
• Bid proposal (BP) costs are the costs
  incurred in preparing, submitting, and supporting
  bids and proposals on potential contracts
• IRD and BP costs are generally ALLOWABLE if
  allocable and reasonable
• Exceptions include
• Deferred IRD costs
• Cooperative arrangements

36
Interest Other Financial Costs (FAR 31.205-20)

• The following interest other financial costs
  are UNALLOWABLE
• Interest on borrowings
• Bond discounts
• Costs of financing and refinancing capital
• Legal and professional fees paid in connection
  with preparing prospectuses
• Costs of preparing and issuing stock rights
• Exception interest assessed by State or local
  taxing authorities under the conditions specified
  in the FAR is ALLOWABLE.

37
Lobbying Political Activity Costs (FAR
31.205-22)

• Costs associated with the following lobbying
  activities are UNALLOWABLE
• Attempts to influence elections through
  contributions, endorsements or publicity
• Attempts to influence Federal or state
  legislation through publicity, propaganda or
  liaison activities
• The following activities are exceptions to above
  rules
• Presenting technical and factual information on a
  topic directly related to performance of contract
• Any activity specifically authorized by statute
  to be undertaken with funds from contract
• Lobbying to directly reduce contract costs

38
Manufacturing Production Engineering Costs
(FAR 31.205-25)

• ALLOWABLE costs of manufacturing and production
  engineering include
• Developing and deploying new or improved
  materials, systems, processes, methods,
  equipment, tools and techniques that are or are
  expected to be used in producing products or
  services
• Developing and deploying pilot production lines
• Improving current production functions
• Material and manufacturing producibility analysis
  for production suitability and to optimize
  manufacturing processes, methods, and techniques
• Costs NOT included in this cost principle are the
  following
• Basic and applied research effort related to new
  technology, materials, systems, processes,
  methods, equipment, tools and techniques
• Development effort for manufacturing or
  production materials, systems, processes,
  methods, equipment, tools, and techniques
  intended for sale
• Where manufacturing or production development
  costs are capitalized or required to be
  capitalized under the contractor's capitalization
  policies

39
Material Costs (FAR 31.205-26)

• Material Costs are ALLOWABLE subject to the
  following requirements
• Costs adjusted for credits (e.g., trade
  discounts, rebates, refunds)
• Reasonable Inventory adjustments
• Interorganizational transfers -- at actual cost
  or price -- using the following limitations
• Meets FAR 15.403-1(b) exemption
• Established practice of price transfer
• Contracting officer determines reasonable

40
Precontract Costs (FAR 31.205-32)

• Incurred before effective date of contract
• Pursuant to the negotiation
• Activity is necessary to comply with proposed
  delivery schedule
• Precontract costs are ALLOWABLE to the extent
  that they would have been ALLOWABLE if incurred
  after the date of the contract

41
Professional Consultant Service Costs (FAR
31.205-33)

• Costs are ALLOWABLE except for
• Services to improperly obtain information or data
• Services to improperly influence the selection of
  sources for contract awards
• Services resulting in violation of any statute or
  regulation prohibiting improper business
  practices
• Services which are not consistent with the scope
  of the services contracted
• Services associated with defense or prosecution
  of claims against the Government
• Services connected with patent infringement
  litigation (unless provided for in contract)

42
Professional Consultant Service Costs (FAR
31.205-33) (cont.)

• The following should also be considered in
  determining allowability of service costs
• Nature of service rendered in relation to that
  required
• Necessity of contracting for service
• Past pattern of acquiring services
• Impact of Government contracts on contractors
  business
• Whether services can be performed more
  economically by employment rather than
  contracting
• The qualifications of the individual rendering
  the service and adequacy of the contractual
  agreement for the service
• Adequate support of work performed
• Details of agreement
• Invoices supporting time spent and nature of
  services provided
• Work product

43
Recruitment Costs (FAR 31.205-34)

• ALLOWABLE costs include
• Help-wanted advertising
• Employment offices
• Educational testing programs
• Travel costs for employees to recruit personnel
• Employment agency fees - not in excess of
  standard commercial rates
• UNALLOWABLE costs include
• Advertising which does not describe specific
  positions or is not relevant to recruitment

44
Relocation Costs (FAR 31.205-35)

• Certain costs ALLOWABLE with certain limitations
• Travel for family and effects
• Closing costs on disposition of old home
• House hunting costs not to exceed 60 days for
  employee and 45 days for spouse/dependants, etc.
• Certain costs UNALLOWABLE
• Loss on sale
• Costs related to purchasing a new home
• Continuing mortgage principal payments on old
  residence being sold, etc.
• Note If the relocated employee resigns within
  12 months, the contractor must credit or refund
  the relocation costs to the Government.

45
Rental Costs (FAR 31.205-36)

• The following costs are ALLOWABLE
• Rental costs under operating lease if rates are
  reasonable considering
• Rental costs of comparable property
• Market conditions in the area
• Type, life expectancy, condition and value of
  property rented
• Alternatives available
• Rental costs under sale and leaseback arrangement
  - cost of ownership
• Related party rent - cost of ownership

46
Selling Costs (FAR 31.205-38)

• Direct selling costs are ALLOWABLE if reasonable.
• Direct selling efforts are those acts or actions
  to induce particular customers to purchase
  particular products or services of the
  contractor.
• The costs of direct selling efforts incurred in
  connection with a significant effort to promote
  export sales of products normally sold to the
  U.S. government are allowable.
• Costs UNALLOWABLE under another cost principle
  are NOT ALLOWABLE as selling costs

47
Special Tooling Special Test Equipment
Costs(FAR 31.205-40)

• The cost of special tooling and special test
  equipment used in performing one or more
  Government contracts is ALLOWABLE and shall be
  allocated to the specific Government contract or
  contracts for which acquired, except that the
  cost of
• Items acquired by the contractor before the
  effective date of the contract (or replacement of
  such items) and
• Items which the contract schedule specifically
  excludes, shall be ALLOWABLE only as depreciation
  or amortization

48
Trade, Business, Technical Professional
Activity Costs(FAR 31.205-43)

• The following types of costs are ALLOWABLE
• Memberships in trade, business, technical,
  professional organizations
• Subscriptions to trade, business, professional,
  or other technical periodicals
• When the principal purpose of a meeting,
  convention, conference, symposium, or seminar is
  the dissemination of trade, business, technical
  or professional information or the stimulation of
  production or improved productivity, costs of
• Organizing, setting up, and sponsoring the
  meetings, conventions, symposia, etc.
• Attendance by contractor employees, including
  travel costs and
• Attendance by individuals who are not employees
  of the contractor, provided -- (i) Such costs
  are not also reimbursed to the individual by the
  employing company or organization and(ii) The
  individual's attendance is essential to achieve
  the purpose of the conference, meeting,
  convention, symposium, etc.

49
Travel Costs (FAR 31.205-46)

• Generally ALLOWABLE if reasonable (meet Federal
  Travel Regulation per diems)
• Advance agreements must be obtained for costs
  above federal rates
• General travel expenses are ALLOWABLE as an
  indirect cost - contract travel is a direct
  charge
• Costs of contractor owned or leased aircraft are
  limited to standard airfare - must be fully
  documented and justified

50
Costs Related to Legal Other Proceedings(FAR
31.205-47)

• Costs incurred in connection with any proceeding
  brought by Federal, state, local or foreign
  government for failure to comply with laws or
  regulations are UNALLOWABLE if
• The proceeding results in a criminal conviction
• The contractor if found liable
• The contractor is debarred or suspended
• A contract is voided, rescinded, or terminated
  for default
• Disposition by consent or compromise if the
  proceeding could have resulted in any of the
  above.

51
Asset Valuations from Business Combinations(FAR
31.205-52)

• For tangible capital assets, when the purchase
  method of accounting for a business combination
  is used, whether or not the contract or
  subcontract is subject to CAS, the ALLOWABLE
  depreciation and cost of money shall be based on
  the capitalized asset values measured and
  assigned, if allocable, reasonable, and NOT
  otherwise UNALLOWABLE.
• For intangible capital assets, when the purchase
  method of accounting for a business combination
  is used, ALLOWABLE amortization and cost of money
  shall be limited to the total of the amounts that
  would have been allowed had the combination not
  taken place.

52
Other Selected Costs
53
Indirect Rates
54
The Basic Approach

• Indirect Costs
• Indirect costs are identified with two or more
  final cost objectives OR an intermediate cost
  objective. Allocated to the cost object.
• Usually grouped into common pools and charged to
  benefiting objectives through an allocation or
  indirect cost rate.
• Indirect cost rate determines the proportion of
  general (non-direct) expenses that each project
  will bear.

Indirect Cost Pool
Indirect Cost Base
Direct Cost Base
55
The Basic Approach (cont.)

• The data accumulated in the direct cost
  accounting system is used for two purposes
• Track actual direct costs of each project or
  contract
• Track the total amount of certain types of direct
  costs so those total amounts can be used as an
  allocation base for indirect costs
• Home Office Costs
• Incurred by corporate group or intermediate
  management group and allocated to the benefiting
  business units
• Allocation hierarchy (under CAS)
• Directly identified to the benefiting unit
• Homogenous pool allocated on a causal/beneficial
  relationship
• Residual on a three factor formula

56
The Basic Approach (cont.)

• General Management and Administration Costs
• Cost for the general management and
  administration of the entire business unit
• Includes general business unit expenses and
  general home office costs allocated to the
  business unit
• Overhead Costs
• All other costs that are not accounted for as
  direct costs of the contract
• Pooled homogeneously and allocated on a
  causal/beneficial relationship

57
ABC CORPORATIONAccounting Information for
Indirect Cost Rates

Category of Costs
Amount
Direct Materials
2,500,000
Other Direct Costs
250,000
Direct Labor - Engineering
550,000
Direct Labor - Manufacturing
1,200,000
Indirect Labor Engineering 150,000 Manufacturi
ng 300,000
450,000
Fringe Benefits (direct and indirect labor)
612,500
Purchasing Costs
250,000
Engineering Overhead
385,000
Manufacturing Overhead
2,700,000
General Administrative
1,012,500
Home Office Expense
90,000
10,000,000
No unallowable costs included.
58
ABC CORPORATIONFringe Benefit Rate
Amount
Elements of the Cost Pool
Fringe Benefits
612,500
Elements of the Base

Direct Labor - Engineering
550,000
Direct Labor - Manufacturing
1,200,000
450,000
Indirect Labor
Total Base Costs
2,200,000
Fringe Benefit Rate Calculation
Fringe Benefits Pool
612,500
27.84
Labor Base
2,200,000
59
ABC CORPORATIONSingle Indirect Rate
Elements of the Cost Pool
Amount 450,000 612,500 250,000
385,000 2,700,000 1,012,500
90,000 5,500,000 550,000 1,200,000 1,750,000
5,500,000 1,750,000
Indirect Labor Fringe Benefits Purchasing
Cost Engineering Overhead Manufacturing
Overhead General Administrative Home Office
Expenses Total Indirect Expenses Pool Elements
of the Base Direct Labor- Engineering Direct
Labor- Manufacturing Total Base Cost Indirect
Rate Calculation Indirect Expense Pool
Direct Labor Base
314.29
60
ABC CORPORATIONMultiple Indirect Rates
Fringe Benefits Included in the Allocation Base
Elements of the Engineering Cost Pool
Amount
Engineering Overhead
385,000
150,000
Engineering Indirect Labor
Fringe Benefits at 27.84
41,760
Total Engineering Pool
576,760
Elements of the Base
Direct Labor - Engineering
550,000
153,120
Related Fringe Benefits _at_ 27.84
Total Base Costs
703,120
Engineering Overhead Rate Calculation
576,760
Indirect Expense Pool
82.03
Direct Labor Base
703,120
61
ABC CORPORATIONMultiple Indirect Rates
Fringe Benefits Included in the Allocation Base
Elements of the Manufacturing Cost Pool
Amount
Manufacturing Overhead
2,700,000
300,000
Manufacturing Indirect Labor
83,520
Fringe Benefits at 27.84
Total Manufacturing Pool
3,083,520
Elements of the Base
Direct Labor - Manufacturing
1,200,000
Related Fringe Benefits _at_ 27.84
334,080
Total Base Costs
1,534,080
Manufacturing Overhead Rate Calculation
3,083,520
Indirect Expense Pool
201.00
Direct Labor Base
1,534,080
62
ABC CORPORATIONMultiple Indirect Rates
Material Handling
Elements of the Pool
Purchasing Costs
250,000
Base Elements
Direct Materials
2,500,000
Rate
Expense Pool
10.00
Base
63
ABC CORPORATIONMultiple Indirect Rates
General and Administrative Rate
Elements of the Cost Pool
Amount
General Administrative Costs
1,012,500
Home Office Allocations
90,000
Total Expense Pool
1,102,500
Elements of the Base
Direct Materials
2,500,000
Materials Handling Costs _at_ 10
250,000
Direct Labor -- Eng. Manuf.
1,750,000
Overheads, Fringes Indirect Labor
4,147,500
Other Direct Costs
250,000
Total Cost Input Base
8,897,500
GA Rate Calculation
1,102,500
Total GA Expense Pool
12.39
8,897,500
Total Cost Input Base
64
Any questions?