*This is Part 2 of a 3-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 the accumulation of IR&D and B&P costs.
- This Part 2 addresses the allocation of IR&D and B&P costs, except for special allocations.
- Part 3 will address special allocations of IR&D and B&P costs.
- Background: As stated at CAS 420-20, the purpose of the standard is to provide criteria for the accumulation of IR&D and B&P costs, and for the allocation of such costs to cost objectives based on the beneficial or causal relationship between such costs and cost objectives.
Allocation of IR&D and B&P Costs
- In accordance with CAS 420-50(d), when work performed by one segment for another segment is a part of an IR&D or B&P project of the performing segment, the costs of that work must be transferred to the home office and allocated in accordance with the requirements of CAS 420-50(e), which addresses the allocation of IR&D/B&P costs from the home office to segments. There is an exception to this requirement at CAS 420‑50(g), which states that these costs may be directly allocated to the receiving segments without going through the home office if such an allocation does not provide a substantially different result than would be made if the costs were first passed through the home office accounts.
EXAMPLE: Segment Z has an IR&D project to develop a prototype for a new weapon. The firing mechanism for the weapon is being developed by Segment Y. The work in Segment Y meets the definition of IR&D. The contractor incurs $50,000 of IR&D costs. The contractor directly allocates the $50,000 to Segment Y (the costs are not transferred to the home office). Based on the contractor’s established practices for allocating home office costs to segments, if the costs had been transferred to the home office Segment Y would have received a $50,000 direct allocation from the home office for Segment Z’s participation in the project. Since the result would not have been substantially different if the costs had first passed through the home office accounts, the direct allocation of the $50,000 from Segment Z to Segment Y is in compliance with CAS 420-50(g).
- CAS 420-50(e(1) requires that when the costs of IR&D and B&P projects are accumulated at a home office, any projects that can be identified to specific segments must have their costs allocated to such segments.
EXAMPLE: The contractor accumulated the following B&P costs at the home office:
|Contract Proposal 1 – All Significant Work to be Performed in Segment T||$50,000|
|Contract Proposal 2 – All Significant Work to be Performed in Segment Q||$40,000|
|Contract Proposal 3 – Work Not Identifiable to Any Particular Segment||$100,00|
|Contract Proposal 3 – Work Not Identifiable to Any Particular Segment||$90,000|
In accordance with CAS 420, the contractor must directly allocate $50,000 to Segment T (the project cost of Contract Proposal 1), and $40,000 t Segment Q (the project cost of Contract Proposal 2).
- In accordance with CAS 420-50(e)(2), when the IR&D and B&P costs are accumulated at the home office, the cost of the IR&D and B&P projects that cannot be identified to a specific segment must be allocated among all segments by means of the same base used by the company to allocate residual expenses under CAS 403, unless a special allocation is warranted.
EXAMPLE: A contractor that uses total cost input to allocate home office costs under CAS 403 accumulated the following costs for B&P projects at the home office (none of the projects can be identified to any specific segment or segments):
|Contract Proposal 1||$ 50,000|
|Contract Proposal 2||$ 70,000|
|Contract Proposal 3||$100,00|
|Contract Proposal 4||$ 80,000|
The total cost input for each of the contractor segments is shown below:
|Segment||Total Cost Input|
|Segment A||$ 6,000,000|
|Segment B||$ 9,000,000|
In accordance with CAS 420, the $300,000 of B&P costs must be allocated using total cost input, which is the same base used to allocate residual costs under CAS 403. The allocation of the $300,000 of B&P costs is as follows:
|Segment||Total CostInput by Segment(A)||Total Cost Input for Contractor(B)||% of Total Cost Input(C=A/B)||Total B&PCosts(D)||B&P Cost Allocation(C*D)|
|Segment A||$ 6,000,000||$30,000,000||20%||$300,000||$ 60,000|
|Segment B||$ 9,000,000||$30,000,000||30%||$300,000||$ 90,000|
In accordance with CAS 420-50(e)(2), the contractor must allocate $60,000 of B&P costs to Segment A, $90,000 to Segment B, and $150,000 to Segment C.