Much of the decision centered on whether or not the contracts were actually covered by CAS, the relevant discussion addressed whether AM’s practices were compliant with CAS 418. The Board summarized the requirements of CAS 418 by quoting from certain passages. The purpose of the standard is to provide (1) consistent determinations of what is direct and indirect costs (2) criteria for what is to be included in indirect cost pools (they are to be "homogeneous") and (3) guidance relating to the selection of allocation methods that are based on the "beneficial or causal relationship between indirect cost pool and cost objectives." A cost pool is "homogeneous" if each significant activity whose costs are in the pool has the same or similar "beneficial or causal relationship" to the cost objectives as the other activities. Alternatively, if there is not the same or causal beneficial relationship, a cost pool can still be homogeneous if the separate activity costs were allocated separately but the result was not "materially different."

The government did not take exception to the new allocation unit method but it contended the "one pool" method of combining all manufacturing overhead in a single pool causes an inequitable allocation of costs and causes the government to carry more than its fair share of these expenses. It contended since the Armour building costs are "commercial costs only" and do not benefit the government contracts. The government asserted the issue was similar to one of the non-compliance illustrations in CAS 418-60(d) where combining machining and assembling activity would result in significant differences if the two were allocated separately.

In its arguments, AM argued its unit method was CAS-compliant pining aout it was one of the four acceptable bases the standard pointed to as being compliant. AM further argued that what constitutes a "homogeneous indirect cost pool" should not be defined by the class of customer (e.g. military versus commercial). The government, apparently successfully, argued it is not disputing the unit method allocation base used by AM but rather the single pool. It also disputed AM’s contention it was using a "class of customer" to define whether the pool was homogeneous but rather argued it was looking at the function and activities in the pool.

The Board noted it was undisputed that the single manufacturing overhead cost pool included indirect costs from the Armour building and the HMMWVs derived no benefit from these costs because none of the HMMWVs were manufactured there. It concluded that since the single overhead pool included indirect costs from both the Mishawaka plant activities (both HMMWVs and HUMMERs) and the Armour building activities (HUMMERs only) and because the Mishawaka plant activities did not have the same or similar beneficial or causal connection to the cost objective (vehicles) as the Armour building activities, the single manufacturing overhead pool was not homogeneous and hence AM was in noncompliance with CAS 418.

Though it ruled on the entitlement of the government to a price adjustment, it stressed it was not ruling on the quantum portion due. It noted there were numerous methods of computing the appropriate overhead allocation that were compliant with CAS 418 and left it up to the parties to determine the quantum of adjustment (AM General LLC, ASBCA, No. 53610).

The following case addresses how Lockheed allocated its computer costs but also one a non-compliance was identified, could it offset increased costs with lower costs on other contracts and losses on sale of computers.

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