In 1992 Lockheed Martin formed a wholly-owned subsidiary, Lockheed Information Technology Company (LITC) to provide centralized mainframe and supercomputer services to various business segments.  The predominant users of two Cray supercomputers were two business units – LMSC that worked exclusively on government contracts and LASC that worked exclusively on both government contracts and independent research in support of government contracts.  For 1994 and 1995, the subsidiaries units using the Cray computers were charged under a method where LITC allocated its costs applying a fixed cost based on each company’s annual forecasted hours for CRAY computer resources (called the “resource commitment” method of allocation).  The DCAA reviewed LITC’s compliance with the Cost Accounting Standards and concluded Lockheed’s resource commitment method violated CAS 418 asserting use of a forecasted usage commitment resulted in significant differences of cost allocations rather than using an actual usage method (called “resource consumption”) recommended by CAS 418.50(e)(1).  The CO issued a final decision saying the allocation of Cray computer costs violated CAS 418, seeking $2.7 million of increased costs it asserted the government incurred due to the CAS violation.

CAS 418 requires that cost pools not containing a significant amount of costs of management or supervision where a direct labor or direct material would not be an appropriate base to allocate the indirect pooled costs, one of the following, in descending order of preference be used: (i) a resource consumption measure (ii) an output measure or (iii) a surrogate that is representative of resources consumed.  According to CAS 418-50(e)(3) when the third method is used, which was the case here, a permissible surrogate is the use of “pre-established rates, based on either forecasted actual or standard costs” which if used “shall be reviewed at least annually and revised as necessary to reflect the anticipated conditions.”  In addition, if pre-established rates are revised during a cost accounting period and the variances of the two rates are substantial then the costs allocated up to the time of the adjustment should be adjusted to reflect the revised pre-established rates.  Disagreeing with the government, the Court ruled that the use of pre-established rates was not impermissible but rather asserts Lockheed failed to review the rates “at least annually” and revise them “as necessary.”  Lockheed asserted it was compliant with CAS 418 but did not put forth any evidence to contradict the government’s assertions.  The Court ruled Lockheed’s cost allocation method did violate the CAS (Lockheed Martin Corp. v US, No. 00-129C).

{TAG_FORM_TITLE}