Shortly after promulgating the cost accounting standards the CAS Board issued a 1979 summary of disclosure statement responses in what costs were considered direct and indirect. Though it is surprising that more current surveys have not been made (a useful research topic for an enterprising scholar, we would think) we find the survey results are substantially timely for today. (Editor’s Note. In fact, we find there are many more opportunities for flexibility than the survey implies.)

• Costs that are Generally Indirect

Some costs are generally charged indirect even though they could be tracked and charged direct. For example, though it could be tracked by contract sale of scrap and salvage is commonly indirect primarily due to the materiality and administrative burden of keeping track of which contract created the transaction.

Other categories of costs cause some problems. Purchasing, contract administration and subcontract administration costs are often charged indirectly. However, indirect charging can cause some confusion where such administrative costs can be tracked for large contracts, sometimes requiring dedicated personnel, while smaller contracts would require significant administration effort to identify small amounts of time to each contract and would likely lead to inaccurate timekeeping by employees having little patience recording small blocks of time. When charged indirect, contractors can argue that direct labor or total cost inputs, common allocation bases of overhead and G&A, respectively, do not provide an equitable allocation because of the widely different administrative efforts of different types of contracts. The author suggests an intriguing solution, especially when the contract calls for it: allocate purchasing/ contracting efforts directly to “major contracts” and then pool all other purchasing/contracting into a cost center and allocate them as indirect costs only to “nonmajor contracts.” Though some may argue the same cost is allocated direct and indirectly, which violates both the FAR and CAS 402 requirements to treat similar costs consistently, the author argues no contract receives both a direct and indirect allocation so there is no violation.

According to the CASB summary, charging rearrangement costs directly would raise questions of equitable allocations. Though the summary did not address equipment costs DCAA guidance informs its auditors that unless a contract explicitly approves special tooling, equipment or machinery costs the auditor is told to question direct costs of capital items. The author argues that direct costing is more common in non-defense contracts. For example, a contractor storing specimens in a refrigerator would more appropriately direct charge the refrigerator to that contract(s) that utilizes it since not all contracts may use the refrigerator equipment.

The cost of overnight mailings, courier services, long-distance telephone calls, cell phones, facsimile messages, copying, automobile mileage, software, supplies, office space and similar items are generally charged indirect. Though these costs could be identified to specific cost objectives direct charging of these costs would require significant administrative effort. There is probably greater justification for indirect charging of these items now than in the 70’s since the costs of, for example cell phones, faxes and software have gone down resulting in less benefit of tracking such costs. Similarly, reproduction costs are now often integrated with computers and printers and need not be tracked separately.

• Costs Generally Charged Direct

The Summary report disclosed that freight in and out, design engineering, drafting, shift premiums, preproduction costs, line inspection, travel, packaging and preservation, royalties, warranties, rework and scrap work were generally charged direct. The decision to charge these costs direct was influenced mainly by materiality considerations.

DCAA acknowledges that warranty costs may be consistently recorded as either direct or indirect and offers the following guidance. When the warranty costs are included in overhead the auditor is told to determine that the base for allocating this expense is made up only of contracts containing warranty provisions. When evaluating direct charges of warranty costs the auditor is to ascertain whether the same types of costs incurred on other government or commercial products are excluded from allocable overhead unless “it is clearly established that a cost duplication does not exist.”

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