CAS Board Rescinds CAS 407 and Moves Retained Requirements to CAS 418

Effective October 1, 2026, the CAS Board rescinds CAS 407 and transfers retained standard costing requirements to CAS 418. Greater reliance on GAAP reduces duplicative requirements, but government contractors must continue to follow consistent accounting practices and evaluate disclosure and cost impact obligations before making changes.

Once again, the Cost Accounting Standards Board (CASB) has taken steps to streamline CAS requirements, rescinding CAS 407 as a standalone standard and transferring its retained requirements into CAS 418 and relying more heavily on Generally Accepted Accounting Principles (GAAP). This change is intended to simplify CAS administration, reduce burdens for contractors and reduce barriers for non‑traditional contractors entering government contracting.

On September 1, 2026, The Cost Accounting Standards Board (CASB) published a final rule rescinding CAS 407, “Use of Standard Costs for Direct Material and Direct Labor,” to conform to GAAP with the exception of certain limited requirements (i.e., CAS 407-30(a)(7), CAS 407-40(b), CAS 407-50(a)(4)(i) and (ii), CAS 407-50d)(1) and (2), CAS 407-50(e), and CAS 407-60(b)). However, the requirements being retained from CAS 407 that are not addressed in GAAP will be transferred to CAS 418, “Allocation of direct and indirect costs.” The changes become effective October 1, 2026.

CAS 407 Changes and Impact

The CASB determined that, except for the requirements addressing standard costs and related variances at the production unit level, the requirements of CAS 407 are already addressed by GAAP. While the CASB is eliminating CAS 407 as a standalone standard: the portions that are duplicative of GAAP have been removed, and the remaining requirements have been incorporated into CAS 418, “Allocation of direct and indirect costs.”

The CAS 407 requirements that will be retained and incorporated into other sections of CAS are as follows:

9903.301(a) Definition for “Actual cost” was revised and definitions for “Labor cost at standard,” “Labor-rate standard,” “Labor-time standard,” “Material cost at standard,” “Material-price standard” and “Material-quantity standard” have been removed.

CAS 401-30 “Actual cost” definition was revised.

CAS 407-30(a)(7) was moved to CAS 418-30(a)(5) as follows:

Production unit means a grouping of activities which either uses homogeneous inputs of direct material and direct labor or yields homogeneous outputs such that the costs or statistics related to these homogeneous inputs or outputs are appropriate as bases for allocating variances.

CAS 407-40(b) was moved to CAS 418-50(2)(i) as follows:

Standard costs may be used for estimating, accumulating, and reporting costs of direct material and direct labor only when standard costs and related variances are appropriately accounted for at the level of the production unit and paragraph (h) of this section; or

CAS 407-50(a)(4)(i) and (ii) were moved to CAS 418-50(h)(1)(i) and (ii) as follows:

(h) Standard costing. (1) A labor-rate standard may be set to cover a group of direct labor workers who perform disparate functions only under the conditions in either paragraph (h)(1)(i) or (ii) of this section:

(i) Where that group of workers all work in a single production unit yielding homogeneous outputs (in this case, the same labor-rate standard shall be applied to each worker in that group).

(ii) Where that group of workers, in the performance of their respective functions, forms an integral team (in this case, a labor-rate standard shall be set for each integral team)

CAS 407-50(d)(1), (2) and (3) were moved to CAS 418-50 (h)(2) and (3) as follows:

(2) A contractor's established practice with respect to the disposition of variances accumulated by production unit shall be in accordance with paragraph (h)(2)(i) or (ii) of this section:

(i) Variances are allocated to cost objectives (including ending in-process inventory) at least annually. Where a variance related to material is allocated, the allocation shall be on the basis of the material cost at standard, or, where outputs are homogeneous, on the basis of units of output. Similarly, where a variance related to labor is allocated, the allocation shall be on the basis of the labor cost at standard or labor hours at standard or, where outputs are homogeneous, on the basis of units of output; or

(ii) Variances which are immaterial may be included in appropriate indirect cost pools for allocation to applicable cost objectives.

(3) Where variances applicable to covered contracts are allocated by memorandum worksheet adjustments rather than in the books of account, the bases used for adjustment shall be in accordance with those stated in this paragraph (h).

Note: CAS 407-50(d)(3) was moved to CAS 418-50(h)(3) but wasn’t listed in the introduction of the final rule.

CAS 407-60(b) was moved to CAS 418-60(j) as follows:

(j) Contractor J accumulates, in one account, labor cost at standard for a department in which several categories of direct labor of disparate functions, in different combinations, are used in the manufacture of various dissimilar outputs of the department. Contractor J's department is not a production unit as defined in 9904.418-30(a)(5) of this Cost Accounting Standard. Modifying its practice so as to comply with the definition of production unit in 9904.418-30(a)(5), it could accumulate the standard costs and variances separately,

(1) For each of the several categories of direct labor; or

(2) For each of several subdepartments, with homogeneous output for each of the subdepartments

Disclosure and Cost Impact Expectation

The CASB expects contractors to continue to consistently disclose and follow their cost accounting practices related to standard costs which will be covered by GAAP and CAS 418. The CASB states the following:

“…all contractors, whether subject to full or modified CAS coverage, are subject to CAS 401 and will continue to be required to consistently follow their disclosed or actual cost accounting practices. In addition, they will continue to be bound by the 9903.201-4 CAS contract clauses requiring disclosure and consistency in cost accounting practices, regardless of whether a specific standard exists. These contract clauses implement the statutory requirements for disclosure of 41 U.S.C. 1502(f)(1) and protections from payment of increased costs as a result of changes to the contractor’s cost accounting practices, as required by 41 U.S.C. 1502(f)(2).”

The CAS Board makes clear that removing CAS requirements that are already addressed in GAAP does not change the contractor’s requirement that they must notify the Cognizant Federal Agency Official (CFAO) in advance of any accounting practice changes impacting the assignment, measurement, or allocation of cost to its CAS-covered contracts and subcontracts-even when those practices are governed by GAAP. We discuss the CASB's apparent expansion of the “disclosure and consistency in cost accounting practices” to all GAAP accounting practices in our article, “An Update on the Cost Accounting Standards (CAS) Board’s Shift Toward GAAP.”

The long-awaited conformance of CAS to GAAP has come with what appears to be an expansion of the Government’s ability to recover increased costs in the aggregate from cost accounting practice changes governed by cost accounting standards to all financial accounting practices governed by GAAP as well.

Takeaways

The Government auditors are not going to expect contractors to make any changes to their current accounting practices as a result of this change. If you do make any changes, the auditor will want to review them. Contractors using standard costs will now rely on the requirements in GAAP and CAS 418 when accounting for standard costs and related variances at the production unit level. Contractors should ensure cost estimating and accumulation practices are consistent and aligned with their disclosure statements, where required.

Expect DCAA auditors to scrutinize your financial accounting practices far more strictly than your external financial auditors. Financial auditors are very likely to view your compliance with GAAP with a much greater level of materiality than DCAA auditors will. So, be prepared for when your financial auditors say your accounting practice is close enough for compliance with GAAP and your DCAA auditors question the practice as non-compliant or material. Read our article, “Cost Accounting Standards Board (CASB) Makes Progress on Conforming CAS to GAAP” on how we believe financial auditors will address accounting changes based on Accounting Standards Codification (ASC) 250.

Maintaining Consistency as CAS Requirements Change

The rescission of CAS 407 makes it important for government contractors to understand which standard costing requirements remain and how proposed accounting changes could affect their CAS-covered contracts. Our team helps contractors evaluate accounting and estimating procedures, review and update Disclosure Statements, and assess whether proposed changes create cost impact obligations. When needed, our subject matter experts assist with General Dollar Magnitude and detailed cost impact proposals, helping contractors address the financial and compliance implications before implementing changes.