*This is Part 3 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.
- Part 2 addressed the allocation of IR&D and B&P costs, except for special allocations.
- This Part 3 addresses 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.
Special Allocations of IR&D and B&P Costs to Segments and Final Cost Objectives
- Special Allocation to Segments: In accordance with CAS 420-50(e)(2), when a particular segment receives significantly more or less benefit from the IR&D or B&P costs than would be reflected by the allocation of such costs to the segment using the base required by CAS 403, the Government and the contractor may agree to a special allocation of the IR&D or BYP costs to such segment commensurate with the benefits received.
EXAMPLE: A contractor accumulates the costs of IR&D projects that benefit more than one segment of the company at the home office. The contractor has five segments. Four of these segments are involved in communications related businesses. The fifth segment, Segment M, performs mostly janitorial services with a small amount of communication related services. The contractor and the Government agree Segment M does not benefit as much as the other four segments from the IR&D projects performed by the home office. Therefore, the Government and contractor agree on a special allocation from the home office to Segment M.
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CAS 420-50(e)(2) requires that when a special allocation to a particular segment is warranted:
- The amount of the special allocation must be excluded from the IR&D or B&P home office cost allocation pool before allocating that pool to other segments; and
- The base data of the segment receiving the special allocation must be excluded from the base used to allocate the home office IR&D or B&P costs to other segments.
EXAMPLE: A contractor that uses a total cost input base to allocate home office costs under CAS 403 accumulates the costs of IR&D projects that benefit more than one segment of the company at the home office. The contractor has five segments. Four of these segments are involved in communications related businesses. The fifth segment, Segment M, performs mostly janitorial services with a small amount of communication related services. . The contractor and the Government agree Segment M does not benefit as much as the other four segments from the IR&D projects performed by the home office. Therefore, the Government and contractor agree on a special allocation from the home office to Segment M. For FY 2014, the parties agree that the amount of the special allocation to Segment M is $50,000. During FY 2014, the home office accumulates $5,050,000 of IR&D costs that are not identifiable to a particular segment or segments. A summary of the total cost input for each segment is as follows:
| Segment | Total Cost Input |
| Segment I | $10,000,000 |
| Segment J | $20,000,000 |
| Segment K | $40,000,000 |
| Segment L | $30,000,000 |
| Segment M | $15,000,000 |
| Total | $115,000,000 |
In accordance with CAS 420, the contractor computes the allocation of IR&D costs to the segments as follows:
Cost Pool:
Total IR&D Costs $10,050,000
Less: Special Allocation to Segment M $ 50,000
IR&D Costs After Removing Special Allocation $10,000,000
Allocation Base:
Total Cost Input – All Segments $115,000,000
Less: Segment M’s Share of Allocation Base $ 15,000,000
Net Allocation Base $100,000,000
The IR&D costs are allocated to segments as follows:
| Segment | FY 2014 Total Cost Input for Segment (Excluding Segment M)(A) | FY 2014 Total Cost Input for Contractor(B) | % of Total Cost Input(C= A/B) | FY 2014 IR&D Costs to be Allocated from Home Office to Segments (Excluding Segment M)(D) | Amount of Allocation of IR&D Costs to Each Segment(C*D) |
| Segment I | $10,000,000 | $100,000,000 | 10% | 10,000,000 | $ 1,000,000 |
| Segment J | $20,000,000 | $100,000,000 | 20% | 10,000,000 | $ 2,000,000 |
| Segment K | $40,000,000 | $100,000,000 | 40% | 10,000,000 | $ 4,000,000 |
| Segment L | $30,000,000 | $100,000,000 | 30% | 10,000,000 | $ 3,000,000 |
| Net | $100,000,000 | 100% | $10,000,000 | ||
| Segment M | N/A | N/A | N/A | N/A | $ 50,000 |
| Total | $10,050,000 |
Thus, in accordance with CAS 418, the contractor would allocate the $10,050,000 of IR&D costs for FY 2014 to segments as follows:
Segment I $ 1,000,000
Segment J $ 2,000,000
Segment K $ 4,000,000
Segment L $ 3,000,000
Segment M $ 50,000
Total $10,050,000
- Special Allocation to Final Cost Objectives: In accordance with CAS 420-50(f)(2) when a particular final cost objective receives significantly more or less benefit from the IR&D or B&P costs than would be reflected by the allocation of such costs to the segment using the base required by CAS 410, the Government and the contractor may agree to a special allocation of the IR&D or BYP costs to such final cost objective commensurate with the benefits received.
EXAMPLE: A contractor business unit has $2 billion in sales and 200 contracts. The contractor uses a total cost input base that complies with the requirements of CAS 410. On January 1, 2014, the contractor is awarded a $900 million contract. The contract requires the contractor to supply a large amount of equipment, which will constitute $650 million of the total contract cost. The contractor does not normally supply this type of equipment when it performs contract work, and plans to lease the equipment. The Government and the contractor enter into an advance agreement that provides for a special allocation of B&P/IR&D costs to the $650 million contract. This is in accordance with CAS 420, since inclusion of the total cost input for this particular final cost objective would result in the contract receiving a disproportionate allocation of B&P/IR&D costs.
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CAS 420-50(f)(2) requires that when a special allocation to a particular final cost objective is warranted:
- The amount of the special allocation must be excluded from the IR&D and B&P cost pool(s) before allocating the pool(s) to other cost objectives; and
- The particular final cost objective’s base data receiving the special allocation must be excluded from the base used to allocate this pool(s).
EXAMPLE: A contractor business unit has $2 billion in sales and 200 contracts. The contractor uses a total cost input base that complies with the requirements of CAS 410. On January 1, 2014, the contractor is awarded a $900 million contract (Contract H). The contract requires the contractor to supply a large amount of equipment, which will constitute $650 million of the total contract cost. The contractor does not normally supply this type of equipment when it performs contract work, and plans to lease the equipment. The Government and the contractor enter into an advance agreement that provides for a special allocation of B&P/IR&D costs to the $650 million contract. During FY 2014, the business unit incurs $8,200,000 of B&P/IR&D costs. For FY 2014, the Government and contractor agree that the amount of the special allocation for Contract H is $200,000. The total cost input for all contracts during FY 2014 is $200 million as shown below:
| Cost Objective | FY 2014 Total Cost Input |
| Contract D | $ 40,000,000 |
| Contract E | $ 30,000,000 |
| Contract F | $ 20,000,000 |
| Contract G | $ 10,000,000 |
| Contract H | $ 150,000,000 |
| Total | $ 250,000,000 |
In accordance with CAS 420, the contractor computes the allocation of B&P/IR&D costs to final cost objectives as follows:
Cost Pool:
Total B&P/IR&D Costs $8,200,000
Less: Special Allocation to Segment M $ 200,000
IR&D Costs After Removing Special Allocation $8,000,000
Allocation Base:
Total Cost Input – All Segments $250,000,000
Less: Contract H’s Share of Allocation Base $150,000,000
Allocation Base (Excluding Contract H) $100,000,000
The contractor therefore computes the cost allocation of the B&P/IR&D costs to each contract as follows:
| Cost Objective | FY 2014 Total Cost Input for each Cost Objective (A) | FY 2014 Total Cost Input for Segment(B) | % of Total Cost Input(C= A/B) | FY 2014 B&P/IR&D Costs(D) | Allocation of B&P/IR&D Costs(C*D) |
| Contract D | $ 40,000,000 | $100,000,000 | 40% | $8.000,000 | $3,200,000 |
| Contract E | $ 30,000,000 | $100,000,000 | 30% | $8,000,000 | $2,400,000 |
| Contract F | $ 20,000,000 | $100,000,000 | 20% | $8,000,000 | $1,600,000 |
| Contract G | $ 10,000,000 | $100,000,000 | 10% | $8,000,000 | $ 800,000 |
| Net – Without Contract H | $100,000,000 | 100% | $8,000,000 | ||
| Contract H (Special Allocation) | $ 200,000 | ||||
| Total | 100% | $8,200,000 |
Thus, the contractor would allocate the $8,200,000 of B&P/IR&D costs to cost objectives as follows:
Contract D $3,200,000
Contract E $2,400,000
Contract F $1,600,000
Contract G $ 800,000
Contract H $ 200,000
Total $8,200,000