--- title: Cost Accounting Standard (CAS) 418 – Allocation of Direct and Indirect Costs description: Guide for identifying direct vs. indirect costs and for selection of a base using a causal/beneficial relationship between indirect cost pools and cost objectives. image: https://info.redstonegci.com/hubfs/RGCI%20-%20Cost%20Accounting%20Standard%20%28CAS%29%20418%20%E2%80%93%20Allocation%20of%20Direct%20and%20Indirect%20Costs.png --- [ PAY INVOICE](https://redstonegci.com/invoice-payment/) [Call Us Today 256-704-9800](tel:2567049800) [info@redstonegci.com](Mailto:info@redstonegci.com) [![Redstone_Logo](https://info.redstonegci.com/hubfs/redstone%20logo%20version%201%20-%20rgb-1.png)](https://www.redstonegci.com/) # Cost Accounting Standard (CAS) 418 – Allocation of Direct and Indirect Costs [Posted by Redstone Team on Mon, Sep 25, 2023 @ 11:09 AM](https://info.redstonegci.com/blog/author/redstone-team) - [Tweet](https://twitter.com/share) ![RGCI - Cost Accounting Standard (CAS) 418 – Allocation of Direct and Indirect Costs](https://info.redstonegci.com/hs-fs/hubfs/RGCI%20-%20Cost%20Accounting%20Standard%20(CAS)%20418%20%E2%80%93%20Allocation%20of%20Direct%20and%20Indirect%20Costs.png?width=1000&name=RGCI%20-%20Cost%20Accounting%20Standard%20(CAS)%20418%20%E2%80%93%20Allocation%20of%20Direct%20and%20Indirect%20Costs.png) ## Basic Requirements This standard vastly expands on the FAR requirements related to direct and indirect costs. [FAR 31.202](https://www.acquisition.gov/far/31.202) and [FAR 31.203](https://www.acquisition.gov/far/31.203) give a basic definition of each, but little else. CAS 418 provides [guidance on accumulating indirect cost pools, including service centers and overhead costs](https://redstonegci.com/consulting/government-compliance/cas-services/). Furthermore, it requires the costs be allocated on the causal or beneficial relationship between the indirect cost pool and the related cost objective. In addition, CAS 418 requires each business unit to have written policies and practices for classifying costs as direct or indirect. ## Direct Costs Direct labor or material costs shall be recorded at actual cost unless a standard cost system is utilized in accordance with CAS 407 (this standard will be covered in a future blog). Additionally, average/pre-established labor rates may be utilized if: - The functions performed are not materially different and the employees performing these functions are interchangeable or - The functions performed are materially different but the employees either work in a single production unit yielding homogenous outputs or perform their functions as an integral team. If average cost or pre-established labor rates are used, any significant variances shall be disposed of at least annually. This is done by allocating variances to cost objectives in proportion to the costs previously allocated to these cost objectives. ## Indirect Cost Pools CAS 418 requires [indirect cost pools](https://redstonegci.com/consulting/government-compliance/cas-services/) to be homogenous, which means that each significant activity included has the same or a similar causal/beneficial relationship to cost objectives (the base) as the other activities whose costs are included in the cost pool. It is also homogeneous if the allocation of the costs of the activities included in the cost pool results in an allocation to cost objectives which is not materially different from the allocation that would result if the costs of the activities were allocated separately. If one of these two criteria are not met, the cost pool is not homogenous. Additionally, a homogeneous indirect cost pool shall include all indirect costs identified with the activity to which the pool relates. ## Allocation Bases CAS 418 states that pooled costs shall be allocated to cost objectives in a reasonable proportion to the beneficial or causal relationship of the pooled costs to cost objectives as follows: - If the costs in the cost pool are costs of management or supervision of activities involving direct labor or direct material costs, then the base should be representative of the activity being managed or supervised, usually a direct hour or direct labor cost base. However, - A machine-hour base may be used if the costs in the pool are predominately facility-related costs such as depreciation, maintenance and utilities. - If there is a common production of comparable units, a unit-of-production base may be used. - If the activity being managed or supervised is material related, use of a material cost base is appropriate. - Indirect cost pools which include material amounts of the costs of management or supervision of activities involving direct labor or direct material costs shall be allocated to: - Final cost objectives - Inventory - Process cost centers - Good/services produced for other segments - Self-constructed tangible capital assets - If the costs in the cost pool are not costs of management or supervision of activities involving direct labor or direct material costs, then the pooled cost should be allocated based on the specific identifiability of resource consumption with cost objectives, using one of the following allocation bases: - A resource consumption measure, - An output measure, or - A surrogate that is representative of resources consumed. - Cost allocations required by any other CAS standard supersede the provisions of this Standard. - This Standard does not apply if the costs are related to special facilities where costs are collected in separate indirect cost pools. - When indirect cost pools benefit one another, the use of a sequential method or the cross-allocation (reciprocal) method can be used. ***The real emphasis of CAS 418.*** Indirect costs should be accumulated in homogenous cost pools and there must be a causal/beneficial relationship between the pool and base. ## Special Allocation If a particular cost objective receives significantly more or less benefit from an indirect cost pool in relation to other cost objectives using the above-mentioned methods, the Government and the contractor may agree use a special allocation from that cost pool to the cost objective, commensurate with the benefits received. The amount of the special allocation shall be excluded from both the indirect cost pool and the allocation base. Be sure to contact us if you are contemplating use of a special allocation since it will have to be agreed to by the Government. Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and with supporting contractor implementing [CAS standards](https://redstonegci.com/consulting/government-compliance/cas-services/), drafting disclosure statements, evaluating cost accounting practice changes, and negotiating cost impacts with Contracting Officers. We would be happy to be part of your team. Watch for our next blog when we continue our review of the unique CAS standards that comes into effect with full CAS coverage. The next blog will focus on [CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives.](https://info.redstonegci.com/blog/cost-accounting-standard-cas-410-allocation-of-business-unit-ga-expenses-to-final-cost-objectives) [![Learn More About Our Cost Accounting Standards (CAS) Services](https://no-cache.hubspot.com/cta/default/203971/interactive-168706666552.png) ](https://info.redstonegci.com/hs/cta/wi/redirect?encryptedPayload=AVxigLI5bPh5MiB%2BQTjrEXNwVtiMRo4kDqBbtrTBJg0ncQ3csSofJaxQSyj%2BX3iXIT%2FG9haTtde8n%2Fket6%2BEOeHd%2F430Lhg7a%2BB9Ju9rCKe4UgJ1QdBiBaPsb1UiAweYc9ZHTHE9KgfYKcskd6s8RrOgZy%2FBE%2FdcHmSKyjnK5%2FCuWXT8%2FWWAERPHX9WB9B781ISn43DJPzRVNKqVe73DHzFJ4LpWbUsw3J4eL6g%3D&webInteractiveContentId=168706666552&portalId=203971) ### Written by [Redstone Team](https://info.redstonegci.com/blog/author/redstone-team) ## About Redstone GCI Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. 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