*This is Part 5 of a 6-part blog. Each part addresses the fundamental requirements and techniques for application related to the standard, and provides specific examples.
- Part 1 addressed the overall purpose of the standard, as well as the requirements/techniques for application related to direct costs.
- This Part 2 addressed the requirements/techniques for application related to indirect cost pools.
- Part 3 addressed the requirements/techniques for application related to allocation bases (with the exception of the allocation of indirect cost pools that benefit each other, which is addressed in Part 4 of this blog).
- Part 4 addressed the requirements/techniques for application related to allocation bases for the allocation of indirect cost pools that benefit each other.
- This Part 5 addresses special allocations.
- Part 6 will address pre-determined indirect rates.
Background: This standard provides the criteria for the accumulation of indirect costs, including service center and overhead costs, in indirect cost pools. It also includes guidance relating to the selection of allocation measures based on the beneficial or causal relationship between an indirect cost pool and cost objectives. The standard covers the allocation of indirect costs for indirect cost pools other than those covered by CAS 403 (allocation of home office expenses to segments); CAS 410 (allocation of G&A expenses), and CAS 420 (allocation of “Bid & Proposal” and “Independent Research & Development” costs).
In accordance with CAS 418.50(f), when a particular cost objective in relation to other cost objectives receives significantly more or less benefit from an indirect cost pool than would be reflected by the allocation of such costs using a base required by CAS 418, the Government and contractor may agree to a special allocation. When the Government and contractor agree on a special allocation:
- The amount of the special allocation must be commensurate with the benefits received.
- The amount of a special allocation must be excluded from the indirect cost pool.
- The data for the particular cost objective that is receiving the special allocation must be excluded from the base used to allocate the indirect cost pool.
EXAMPLE: A contractor that normally assembles widgets at its plant enters into a contract (Contract Q) whereby the contractor supplies the labor but the actual assembly will occur at the customer’s plant. The assembly overhead pool includes the following functions:
- Assembly Overhead Pool
- Fringe Benefits
The contractor requests a special allocation for Contract Q because of the unique nature of the contract. The contract does not incur facilities related costs such as depreciation and utilities. However it does incur fringe benefits at the same rate as other contracts. It also incurs supervision and supplies, but at a lesser rate than the other contracts. The Government and contractor agree on a special allocation. This is in compliance with CAS 418.
The following illustrates how the special allocation is computed.
For FY 2014, the assembly overhead pool includes the following costs:
Function FY 2014 Cost
Supervision $ 700,000
Fringe Benefits $1,000,000
Supplies $ 300,000
The allocation base for the assembly overhead pool, which is direct labor dollars, consisted of the following for FY 2014:
Cost Objective FY 2014 Direct Labor Dollars
Contract N $ 8,000,000
Contract O $ 5,000,000
Contract P $12,000,000
Contract Q $10,000,000
Contract R $15,000,000
After analyzing the costs of each function and the estimated usage of that function by Contract Q, the Government and contractor agree on a special allocation of $300,000 to Contract Q. In accordance with CAS 418, the contractor computes the cost allocation for the assembly overhead pool as follows:
Assembly Overhead Pool:
Total Assembly Overhead Pool $7,000,000
Less: Special Allocation to Contract Q $ 300,000
Net Pool After Removing Special Allocation $6,700,000
Total Direct Labor Dollars $50,000,000
Less: Contract Q Share of Allocation Base $10,000,000
Net Allocation Base $40,000,000
The net pool and net allocation base are allocated to cost objectives as follows:
FY 2014 Direct Labor Dollars (A)
Total Direct Labor Dollars (B)
% of Total Direct Labor Dollars (C= A/B)
FY 2014 Assembly Overhead Costs (D)
Allocation of Assembly Overhead Costs (C*D)
Cost Objective (A) (B) (C=A/B) (D) (C*D)
Contract N $ 8,000,000 $40,000,000 20% 6,700,000 $1,340,000
Contract O $ 5,000,000 $40,000,000 12.5% 6,700,000 $ 837,500
Contract P $12,000,000 $40,000,000 30% 6,700,000 $2,010,000
Contract R $15,000,000 $40,000,000 37.5% 6,700,000 $2,512,500
Contract Q (Special Allocation) $ 300,000
Thus, in accordance with CAS 418, for FY 2014 the contractor would allocate the $7,000,000 of assembly pool costs to cost objectives as follows:
Contract N $1,340,000
Contract O $ 837,500
Contract P $2,010,000
Contract Q (Special Allocation) $ 300,000
Contract R $2,515,500
EXAMPLE: Segment T has a general overhead pool that includes a number of functions, including occupancy costs. Segment T has thirty contracts. The segment requests a special allocation for eight of those contracts for the general overhead pool. All eight contracts were awarded during the most recent fiscal year. The contractor contends that these eight contracts have a large number of workers in a small area of space, as compared to the other twelve contracts. A special allocation is not appropriate in this situation. The contractor’s basic pool structure has become the problem. This is indicated by the fact that there are numerous cost objectives receiving significantly more or less benefit from an indirect cost pool than is reflected by using the contractor’s established allocation base. When there are numerous cost objectives for which the allocation base is not appropriate, this usually means that (1) the pool is not homogeneous, and/or (2) the base itself is not an appropriate measure of the activity in the pool. In this instance, it is evident that the occupancy costs do not have the same relationship to cost objectives as the other functions in the pool. Thus, the single indirect cost pool is no longer homogeneous. To comply with CAS 418, the contractor must establish a separate indirect cost pool for the occupancy costs and allocate those costs on an appropriate measure such as square footage occupied.