Fiscal Year Concept. If the period of contract performance is shorter than the contractor’s fiscal year some accountants argue that only those indirect costs incurred during the contract performance should be charged to the contract. This runs counter to CAS 406 because the purpose of the standard is to minimize the affect of erratic flows of indirect costs that may be high in some months and low in others or those costs that are stated only on an annual basis (e.g. depreciation, taxes, insurance). To make sure erratic costs are smoothed out for the year and annual costs are properly recognized, CAS 406 states the appropriate cost accounting period for determining total costs applicable to a contract is the fiscal year, not the period of time a contractor may work on a contract. An example is provided to emphasize the point where the practice of estimating general management expenses (pool of costs) and total expenses (the allocation base) for the eight month period of performance is cited as non-compliant with CAS 406.

Annualized Forward Pricing Rates. When estimated rates are used for pricing purposes, the standard requires use of annualized budgeted or estimated rates to overcome volatility of overhead costs resulting from seasonal or cyclical variations as well as the fluctuations of the base costs such as direct labor. For example, while fixed costs (property taxes, rent, depreciation) will not fluctuate, variable costs (e.g. supplies, indirect labor) will vary with business while other costs will simply be erratic for other reasons (e.g. vacation and holiday pay during summer and Christmas, idle facilities costs due to installing new equipment, social security late in the year when the wages exceed the table maximum). To compute "normal costs" all the peculiarities of costs are collected in an annual cost pool and then an indirect rate is calculated that distributes month-to-month fluctuations over the entire year.

Monthly Allocations. Needing to use interim billing rates to charge the government for completed work, contractors commonly developed monthly billing rates reflecting costs incurred each month. The CAS Board held such monthly cost accounting periods were inappropriate because it allowed for too much manipulation of cost allocations. It should be noted that though the standard specifies use of annual rates, rates computed differently may be acceptable if they are representative of annual rates but the burden of proof falls on the contractor.