CAS 418 – Allocation of Direct and Indirect Costs (Part 2 of 6)

*This is Part 2 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 will address the requirements/techniques for application related to indirect cost pools.
  • Part 3 will address some of the requirements/techniques for application related to allocation bases.
  • Part 4 will address the requirements/techniques for application related to allocation bases not addressed in Part 4 of this blog.
  • Part 5 will address 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).


Indirect Cost Pools


  • CAS 418.40(b) and CAS 418.50(b) require that indirect cost pools be homogeneous.  CAS 418.50(b) (1) states that an indirect cost pool is homogeneous if:


  1. Each significant activity that is included in the cost pool has the same or similar beneficial or causal relationship to cost objectives as other activities whose costs are included in the cost pool; or

EXAMPLE: A contractor establishes a single manufacturing pool that includes both assembly and fabrication functions.  The allocation base is total manufacturing labor.  The assembly functions relate to assembly direct labor activities and the fabrication functions relate to fabrication direct labor activities.  This pool would not meet Criteria A.

EXAMPLE:  A contractor establishes a single overhead pool that includes computer hardware and computer software support.  The allocation base for the overhead pool is computer hours used.  This pool meets Criteria A and is therefore homogeneous because the hardware and software support functions have the same causal relationship to the cost objectives, i.e., computer usage.      

  1. The allocation of the costs of the activities in the pool to cost objectives is not materially different from the allocation that would result if the cost of the activities were allocated separately.

EXAMPLE:  A contractor establishes a single overhead pool that contains fabrication and assembly functions.  The allocation base is total fabrication and assembly labor.  The relationship between the functions and the cost objectives is not similar.  The fabrication function relates to fabrication direct labor and the assembly function relates to assembly direct labor.  In FY 2012, the total indirect costs for the single overhead pool are $325,000.  Of this $325,000, the indirect costs related to the fabrication function are $125,000, while the indirect costs related to the assembly function are $200,000.  An analysis of each function shows the following direct labor costs incurred during FY 2012 for each final cost objective:


Final Cost Objective Fabrication Labor Assembly Labor Total Labor
Contract A $  500,000 $1,000,000  $1,500,000
Contract B $  300,000 $  550,000 $  850,000
Contract C $  200,000 $  380,000 $  580,000
Contract D $  100,000 $  220,000 $  320,000
Total $1,100,000 $2,150,000 $3,250,000 

To determine if the single overhead pool meets Criteria B, the contractor performs the following analysis:


Overhead Rate – One Pool:  10.00% ($325,000/$3,250,000)


Overhead Rate – Two Pools:

         Fabrication Pool:          11.36%         ($125,000/$1,100,000)


         Assembly Pool:              9.30% ($200,000/2,150,000)



Cost Impact Computation:

Final Cost Objective Allocation (Separate Fabrication Pool)


Allocation (Separate Assembly Pool)


Total Allocation (Two Separate Pools)

(C = A+B)

Total Allocation (Single Pool)



(C + D)

Contract A  $56,818

($500,000 x 11.36%)



x 9.30%)

$149,841  $150,000

($1,500,000 x10%)

Contract B  $34,091

($300,000 x 11.36%)


($550,000 x 9.30%)

$85,254  $85,000

($850,000 x 10%)

Contract C  $22,727

($200,000 x 11.36%)


($380,000 x 9.30%)

$58,076  $58,000

($580,000 x 10%)

Contract D  $11,364

($100,000 x 11.36%)


($220,000 x 9.30%)

$31,829  $32,000

($320,000 x 10%)

Total  $125,000

($1,100,000 x 11.36%)


($2,150,000 x 9.30%)

$325,000  $325,000

($3,250,000 x 10%) 


The analysis shows that the allocation using a single pool will not be materially different for any of the four contracts (the largest cost impact is for Contract B, and that is only $254).  Therefore, the use of a single pool is homogeneous for FY 2012.  Note that the contractor will need to perform this same analysis each year to show that use of a single pool continues to not result in a materially different allocation then would result if two separate allocations (one for fabrication and one for assembly) were made.


  • CAS 418.50(b) (3) requires that a homogeneous indirect cost pool include all indirect costs identified with the activity to which the pool relates.

EXAMPLE: A contractor has an assembly overhead pool that includes the activities related to product assembly.  The contractor includes indirect labor costs in the pool when those costs are incurred by employees classified as “indirect workers”.  Indirect labor costs incurred by employees that are classified as “direct workers” are charged to the general overhead pool.  This practice is in noncompliance with CAS 418.  All indirect labor costs associated with product assembly must be included in the assembly overhead pool, regardless of whether the employee is classified as “direct” or “indirect”.