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COST ACCOUNTING STANDARD 410 - Allocating G&A Expenses
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The CAS Board determined that since the G&A expense pool are those expenses related to the business as a whole, the allocation base should measure or represent the total activity of the business unit during the cost accounting period. A cost input base meets this objective and thus the standard requires a cost input base be used to allocate the G&A expense pool. It should include all significant elements of the cost input, whether allowable or not that represent the total activity of the business unit. Which cost input base best represents this total activity must be determined by the circumstances of each business unit. The standard allows contractors to select one of three cost input bases – total cost input, value-added cost input or single-element cost input. (Editor’s Note. Whether non-CAS covered contractors have more flexibility is a source of confusion. Based on our consulting experience, contractors can be successful in using another base but they should realize auditors will be inclined to reject a base not conforming to one of the three acceptable ones so the contractor should be prepared to put forth significant justifications to overcome initial challenges.)
Appeals boards ruled early that total activity and total cost input are not the same saying it is a “fallacy” that each dollar expended for materials and subcontracts necessarily bears the same beneficial relationship to incurrence of G&A expenses as labor and overhead do. The cost of each element comprising total activity may or may not “best represent total activity” depending on circumstances. The crucial question is “not what activity elements comprise ‘total activity’ but what ‘best represents total activity’ ”. The CAS Board in effect recognized this concept by permitting value added and single element input bases. The standard does not establish criteria for choosing the best base. The Board in Ford Aerospace stated there were neither statistics nor reliable objective standards in which to make the choice. The following discussion should, hopefully, add some light on these three choices.
Total Cost Input
The CAS Board stated in its preambles that the total cost input base was generally the best measure of total activity for a cost accounting period and states it is “generally acceptable” as an appropriate measure. When total cost input (TCI) does not appear to measure total activity of a business unit, other bases may be considered but a contractor should carefully consider its situation before changing from a total cost input base. (Editor’s Note. In spite of the verbiage in the standard for the acceptability of the total cost input base, we do find in our experience that DCAA frequently challenges the use of a TCI base with professional services firms. Consequently, firms should not assume that a stated preference for TCI will always result in acceptance by the government and firms should be prepared to defend their choice.) However, the appeals board made clear in the Ford case that under the plain wording of the standard the fact that TCI is acceptable in no way equates to it being “preferable.” The appeals board stated explicitly there is no preference for a total cost input base if inclusion of material and subcontract costs produce significant distortions in allocations.
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