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Comparison to FAR
Like CAS 401 and CAS 402 (see previous blog posts on these CAS Standards), CAS 405 is part of modified CAS coverage and is one of the first CAS standards a company encounters. Compliance with this standard will likely not call for any changes to the company’s cost accounting system if the company is compliant with FAR 31.201-6 (Accounting for Unallowable Costs) because the FAR clause has more requirements than CAS 405.
FAR 31.201-6 and CAS 405-20 read:
(a) Costs expressly unallowable or mutually agreed to be unallowable, including costs mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract.
(b) Costs which specifically become designated as unallowable as a result of a written decision furnished by a contracting officer pursuant to contract disputes procedures shall be identified if included in or used in the computation of any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this paragraph or paragraph (a) of this subsection.
Note: There are minor difference in the way these clauses are written in FAR 31.201-6 and CAS 405-20, but no material difference.
CAS Specific
CAS 405 provides definitions for several key terms:
- 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.
- Expressly unallowable cost means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable.
- Unallowable cost means any cost which, under the provisions of any pertinent law, regulation, or contract, cannot be included in prices, cost reimbursements, or settlements under a Government contract to which it is allocable.
There are several ways that costs can be deemed unallowable:
- Under the provisions of FAR 31.205
- Written decision of a contracting officer pursuant to a contract dispute
- Be directly associated with any unallowable cost
- Mutually agreed to be unallowable
- Direct costs not contractually authorized – may later become allowable if authorized but must be accounted for in a manner which permits it to be readily separated from costs that are contractually authorized
- Cost overrun - shall be identified in terms of the excess of allowable costs over the ceiling amount, rather than through specific identification of particular cost items or cost elements.
Key Point - Allocability
All unallowable costs, including directly associated unallowable costs, must be accounted for using the same cost accounting principles governing the allocability of allowable costs. If the unallowable costs would normally be part of an indirect cost (pool) allocation base, then that unallowable cost shall remain in the base. This also holds true for directly associated costs. If a directly associated cost would normally be part of an indirect cost pool to be allocated over a base which includes the associated unallowable costs, such directly associated cost shall be retained in the indirect cost pool and be allocated through the regular allocation process. This results in the directly associated costs being allocated over the base containing the unallowable cost with which it is associated.
Example of Accounting for Unallowable Costs in an Overhead Pool
The company’s disclosed practice is to charge all costs related to the purchase of manufacturing equipment to the manufacturing overhead pool, which is allocated based on direct manufacturing labor. The company’s consultant determined the manufacturing overhead pool included $150,000 of unallowable interest on the latest purchase of equipment. This $150,000 was included in the $1,200,000 proposed manufacturing overhead.
|
|
|
Proposed Total Company |
Total Unallowable Cost |
Allowable Total Company |
|
Direct Labor |
a |
$1,000,000 |
|
$1,000,000 |
|
Mfg. overhead @120% |
b |
$1,200,000 |
$150,000 |
$1,050,000 |
|
Total cost input (a+b) |
c |
$2,200,000 |
$150,000 |
$2,050,000 |
|
G&A expense |
d |
$ 100,000 |
$6,825* |
93,275* |
|
G&A (d/c) |
e |
4.545 % |
4.545% |
4.545% |
|
Total Cost |
|
$2,300,000* |
$156,825 |
$2,143,275 |
*rounding difference
Although the company identified $150,000 of expressly unallowable cost, the true impact of the unallowable costs on the proposed contract was more due to directly associated cost. If the company simply reduced the proposed total price by $150,000 to $2,150,000, then it would be in noncompliance with CAS 405 because it failed to identify the directly associated $6,825 of unallowable G&A expense as required by CAS 405.
The real emphasis of CAS 405. The company must exclude all unallowable costs, including directly associated costs, from all proposals and billings. Be sure to contact us if you have any questions about what are directly associated costs. Watch for our next blog on another CAS standard that comes into effect with modified CAS coverage, 406 - Cost Accounting Period.
