Cost Accounting Standard (CAS) 402 - Consistency in Allocating Costs Incurred for the Same Purpose

Comparison to FAR

Like CAS 401, CAS 402 is part of modified CAS coverage and is one of the first CAS standards a company encounters. It likely will not call for any changes to the company’s cost accounting system because Federal Acquisition Regulations (FAR) 31.202 (Direct costs) and 31.203 (Indirect costs) give us words very similar to the CAS words.

FAR 31.202 Direct Costs says:

“No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. Direct costs of the contract shall be charged direct to the contract specifically.”

FAR 31.203 Indirect Costs says.

“…No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost to be allocated to that or any other final cost objective.”

CAS 402-40 says:

“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. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective.”

In essence, CAS 402 combines FAR 31.202 and 31.203.

Crux of the Problem

CAS goes on to provide examples of what is meant by “same purpose in like circumstances.” This is really the crux of this standard. For example, travel can be allocated as direct or as indirect. If travel is related to work on a specific contact, it is generally charged direct. However, if travel is related to training on how to use a new accounting system that is used on all jobs, then it is allocated as indirect. The company’s disclosure statement (a CAS requirement under FAR 9903.202) is designed to provide the specific criteria for direct charging vs. indirect charging.

The biggest problem comes when a contract calls for a specific type of cost to be expended on the contract. For example, if a cost-plus-fixed-fee (CPFF) contract requires 100 hours of program management (PM) per month or 1200 hours per year. Most companies want to charge program management for that specific contract direct even if the disclosed practice of the company is to charge program management indirect. The company’s argument is that it is a different circumstance because the contract specifically calls for the program management and they need to be able to track the number of hours used. However, the real test is whether the program management functions being performed on that contract are the same functions being performed on the other contracts. Double counting is when costs are charged to a contract as direct and then those same or similar cost are also charged to that same contract as indirect (in this instance as OH).

Example of Double Counting

An example of double counting for a year and why it is a problem is as follows:

If the 1200 hours per year, noted above, were charged direct to the CPFF contract that would result in the CPFF contract receiving an increase in hours of 630 hours due to double counting of program management as both direct and indirect (noted in column 2 of 106,230 hours.) However, if all program management was charged indirect, consistent with company policy and PM charging practices of other ongoing contract efforts, the resulting hours on the CPFF contract would be less (noted in column 5 of 105,600 hours.)

Defining When Costs are Direct vs. Indirect

One of the key concepts in CAS 402 is the distinction between when a particular type of cost is considered direct and when it is indirect – basically defining when costs are incurred for the same purpose. When a type of cost, such as travel, is sometimes accounted for as direct and sometimes accounted for as indirect, the company must define the circumstances for each. If the company has enough sales to require a Disclosure Statement ($50 million or more in CAS-covered prime or subcontracts), the criteria and circumstances for allocating those items which are sometimes direct and sometimes indirect, will be determinative as to whether or not costs are incurred for the same purpose.

Lacking a Disclosure Statement, the determination of whether specific costs are direct or indirect shall be based upon the contractor's cost accounting practices used at the time of contract proposal.

The real emphasis of CAS 402 is consistency. The company cannot change its accounting methodology just because a contract calls for a specific type of cost. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective or vice versa. If for some reason it is necessary for your company to change your accounting methodology, give us a call to see what needs to be done. Even if you have questions on whether you’re double counting, we can help! Watch for our next blog on another CAS standard that comes into effect with modified CAS coverage, 405, Accounting for Unallowable Costs.