Functions and activities. Indirect cost pools are composed of "activities" (e.g. machining supervision, purchasing, security, inspection, insurance administration) and functions that are defined as "an activity or group of activities that are identifiable in scope and has a purpose or end to be accomplished." A change to the composition of a cost pool occurs when a contractor changes the functions or activities that compose the indirect cost pool.

Combining indirect cost pools. When two or more pools are combined, there is a change in the composition if the functions or activities of the previously separate pool(s) are not generally the same as the functions or activities of the new combined pool.

For example, Segment A of Company 1 has an assembly overhead pool where functions and activities consist of assembly supervision, materials inspection and machine maintenance. Company 1 purchases Company 2 which becomes Segment B. Company 2, which used to perform fabrication for Company 1, has a fabrication pool including fabrication supervision and tool calibration. After the sale, the fabrication pool of Segment B is combined with the assembly pool of Segment A. This is a change for both segments – the functions and activities of the two prior pools have been substantially changed with the combination.

Dividing indirect cost pools. When a company divides a single indirect cost pool into two or more pools, a change occurs in pool composition because the functions and activities in the divided pool(s) are not generally the same as the functions and activities of the former single pool. For example, an accounting change has occurred when a single overhead pool includes two functions, building maintenance and security and then divides the single overhead pool into two separate cost pools consisting of maintenance and security functions.

Transfer of functions. A transfer of a function or activity from one pool to another is not considered a change in pool composition if the transferring pool (i.e. the pool from which the function or activity is transferred) receives an allocable cost of the function or activity from the receiving pool. Otherwise, the transfer represents a change for the transferring pool. If the receiving pool contained that function or activity prior to the transfer then a change has not occurred.

For example, the engineering overhead pool contains a production engineering supervision function while its production overhead pool does not. If the production engineering function is moved from the engineering overhead pool to the production pool a change to both pools has occurred because the engineering overhead pool no longer contains the supervision costs while the production overhead pool now contains the supervision costs.

Disclosed and established practices. When determining whether a change has occurred, the ACO and auditor are instructed to focus on the disclosed and established practices that define and describe the significant functions and activities of the indirect cost pools. They are warned that the disclosed practices, whether in the form of a disclosure statement or other policies, my not identify all functions and activities.

Variations in costs. Costs that are associated with a function of a pool may vary, even significantly, from one point in time to another. These variations do not result in an accounting change as long as the defined pool functions do not change. For example, if a contractor buys a building and the maintenance costs fall within the defined building maintenance function of the pool the increase in size of the pool does not affect its composition and hence no change has occurred.

{TAG_FORM_TITLE}