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M.B.A. (SEM-2)
Cost Accounting Standards (CAS)
Cost Accounting Standards (popularly known as CAS) are a set of 19 standards and rules
promulgated by the United States Government for use in determining costs on negotiated procurements.
CAS differs from the Federal Acquisition Regulation (FAR) in that FAR applies to substantially all
contractors, whereas CAS applies primarily to the larger ones.

In 1970, Congress established the original Cost Accounting Standards Board (CASB) to 1)
promulgate cost accounting standards designed to achieve uniformity and consistency in the cost
accounting principles followed by defense contractors and subcontractors in excess of $100,000 and 2)
establish regulations to require defense contractors and subcontractors, as a condition of contracting, to
disclose in writing their cost accounting practices, to follow the disclosed practices consistently and to
comply with promulgated cost accounting standards. After adopting 19 standards, the original CASB was
dissolved on September 30, 1980; the standards, though, remained active.

However, CASB was revived in 1988 within the Office of Federal Procurement Policy
(OFPP). The current CASB consists of five members: the OFPP Administrator (who serves as Chairman)
and one member from the United States Department of Defense (this position is held by the Director of
the Defense Contract Audit Agency), the General Services Administration, industry, and the private

The Standards

The original CASB adopted 19 standards, numbered 401 through 420 (419 was never
assigned). The new CASB readopted the original 19 standards with only minor modifications, and has yet
to adopt any new standards.
standard Title
401 Consistency in Estimating, Accumulating and Reporting Costs
402 Consistency in allocation costs incurred for the same purpose
403 Allocation of home office expenses to segments
404 Capitalization of tangible assets
405 Accounting for unallowable cost

406 Cost accounting period

407 Use of standard costs for direct material and direct labor
408 Accounting for costs of compensated personal absence
409 Depreciation of tangible capital assets

410 Allocation of business unit general and administrative expenses to final cost
411 Accounting for acquisition costs of material
412 Composition and measurement of pension cost
413 Adjustment and allocation of pension cost
414 Cost o money as an element of the cost of facilities capital
415 Accounting for the cost of deferred compensation
416 Accounting for insurance cost
417 Cost of money as an element of the cost of capital assets under construction
418 Allocation of direct and indirect cost
419 Unused
420 Accounting for independent research and development costs and bid and proposal
costs (IR&D and B&P)
401. Consistency in Estimating, Accumulating and Reporting Costs
This standard is designed to achieve consistency in the cost accounting practices used by a contractor in
estimating costs for proposal purposes with those practices used in accumulating and report costs during
contract performance. It is also designed to provide a basis for comparing such costs. The main idea here
is that the consistent application of cost accounting practices will facilitate the preparation of reliable cost
estimates used in pricing a proposal and then, once performance under the contract begins, a means to
compare those cost estimates with the actual cost of contract performance.

This consistency requirement between estimating and accumulating costs is a two-part requirement. First,
a contractor's practices used to estimate costs in pricing proposals must be consistent with practices used
in accumulating actual costs. Second, the contractor's practices used in accumulating costs must be
consistent with practices used to estimate costs in pricing the related proposal. Noncompliance with this
standard can exist because a contractor has failed to estimate its cost in accordance with its established or
disclosed accounting practices and can also occur when a contractor estimates in accordance with its
disclosed or established practices but accumulates on a different basis.

To illustrate, a contractor who estimates average engineering direct labor rates by labor category and
collects costs by labor category complies with this standards. On the other hand, a contractor who
estimates engineering labor by cost function (i.e. drafting, manufacturing, etc) but accumulates total
engineering labor in one undifferentiated account would not be in compliance.

402. Consistency in allocation costs incurred for the same purpose

The purpose of CAS 402 is to ensure that each type of cost is allocated only once and on only one basis to
any contract or other cost objective. The fundamental requirement requires that all costs incurred for the
same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final
cost objectives. To state this another way, you cannot charge a cost direct to a contract if those same kinds
of costs have also been charged indirect and you cannot charge a cost to an indirect cost pool that gets
allocated to a Government contract if those same types of costs have also been allocated directly.

The key phrase in applying this standard is "costs incurred for the same purpose in like circumstances"
and this is where arguments arise between contractors and Government oversight agencies. There are
examples within the narrative of the standards that illustrate the Board's view of "same purposes" and
"like circumstances" (see FAR 9904.402-60). One off cited example is the firefighters. In this example, a
contractor proposed as a direct cost to perform a contract which required three firemen on 24-hour duty at
a fixed-post to provide protection against damage to highly inflammable materials used on the contract.
The contractor also had a firefighting capability for general plant protection that it charged indirect. In
this case, the CAS Board said it was fine to charge the fixed-post firefighters direct because that was
different circumstances.

There were a number of disputes soon after this Standard was issued involving proposal preparation costs.
Most contractors charge B&P (bid and proposal) costs indirect. However, some contracts, as a contract
line item, require the contractor to prepare some kind of follow-on proposal. The Board had to issue a
formal interpretation on this to rule that if a contract required a contractor to prepare a follow-on proposal,
that was differing circumstances than the usual B&P activity within the company.
403. Allocation of home office expenses to segments
The purpose of CAS 403 is to establish criteria for allocating home office expenses to the segments of the
organization on the basis of a beneficial or causal relationship. A home office is one that is responsible for
directing or managing two or more but not necessarily all segments of an organization (CAS 403.30(a)(2).
This definition includes intermediate levels of home offices such as group organizations which report to a
common home office. An intermediate level may be both a segment and a home office.

In the context of CAS 403, there are three types of home office expenses.

Expenses incurred for specific segments

Expenses that have a clear relationship (i.e. measurable with reasonable objectivity) to two or more

Residual expenses which possess no readily measurable relationship to segments.

Expenses that are incurred for specific segments are to be allocated directly to those segments to the
maximum extent practical. Expenses that are not directly allocable, but possess an objective measurable
relationship to segments, should be grouped in logical and homogeneous expense pools and distributed
over allocation bases reflecting the relationship of the expenses to the segments concerned. These
allocations, to the extent practical should minimize the amount of expenses which may be categorized as
residual expenses.

404. Capitalization of tangible assets

This standard is primarily concerned with the measurement of costs, and the assignment of those costs to
accounting periods. When a contractor purchases an item, CAS 404 provides the criteria for determining
whether or not to assign the entire amount of the asset cost in the year of purchase (expense the asset), or
to spread the cost over two or more years (capitalize the asset). Under the CAS definition, a tangible
asset for which the cost is spread over two or more years is termed a tangible capital asset. CAS 404
also provides criteria for determining the cost of the tangible capital asset. Note that CAS 409, which will
be the subject of a future Practical CAS blog, provides criteria for depreciating capital assets, i.e., the
acceptable methods for spreading the costs of tangible capital assets over multiple years .

405. Accounting for unallowable cost

The fundamental requirement of this Standard is very simple. Contractors must set up a process to
identify unallowable costs and then to segregate those costs in their accounting system. That way,
unallowable costs should not impact the price of negotiated contracts (where history is used to estimate
costs) nor gets billed to the Government.

Unallowable costs are those expressly unallowable under FAR Part 31 cost principles, FAR supplements,
regulations, and contract terms. The definition also includes costs that are mutually agreed to be
unallowable as well as directly associated costs. Directly associated costs are those that are generated
solely as a result of another incurred cost and which would not have been incurred otherwise.
Unallowable costs that would normally be part of an indirect rate allocation base must remain in the base
for rate computation purposes even though the cost cannot be charged to the Government.

The Standard requires that records by adequate to establish and maintain visibility of identified
unallowable costs (including directly associated costs). The adequacy of records has been a source of
contention over the years. Contractors often feel that if they do not claim the costs, then the auditor has no
right to review the underlying support. Auditors on the other hand, argue that they need the source
documents in order to ensure that contractors have identified and excluded all "directly associated" costs.
406. Cost accounting period
The purpose of CAS 406 is to provide criteria for selecting the time periods to be used as cost accounting
periods for accumulating and reporting costs. At the time of its promulgation, the CAS Board felt it was
necessary to reduce the effects of variations in the flow of costs within each cost accounting period.
Secondarily, it could also enhance objectivity, consistency, and verifiability and promote uniformity and
comparability in contract cost measurements.

The fundamental requirement of CAS 406 requires contractors to use a cost accounting period that lines
up with its fiscal year (or some other 12 month period if agreed to by the Government). So when you
forecast indirect rates, those rates should be based on a fiscal year. When submitting final indirect
expense rates, the final rates should be based on a fiscal year.

This is pretty much a common sense requirement. What else would a contractor legitimately base a rate
calculation on other than its fiscal year. Perhaps some contractors were using partial years' data on which
to to base indirect rates rates and by using partial year data, was able to skew the results somehow. In the
Standard's preamble comments, there was concern expressed that the use of partial year data could
increase costs to the Government. But the main problem that the Standard addressed it "The lack of a firm
requirement specifying the cost accounting period to be used."
407. Use of standard costs for direct material and direct labor
The purpose of Cost Accounting Standard 407 is to provide some criteria for impacted contractors under
which "standard costs" can be used for estimating, accumulating and reporting direct material and direct
labor costs. It does not cover standards for overhead, service centers or pre-established measures used
solely for estimating.

This standard does not require contractors to establish a standard cost accounting system but if a
contractor chooses to cost Government contracts through a standard cost accounting system, and if the
contractor is subject to "full CAS coverage", then this particular standard applies.

Now if you do not have a standard cost accounting system, or have plans to implement such a system, you
can stop reading. This standard is not for you. If however, you have implemented a standard cost
accounting system or are considering such, read on. We do not have data on the number of government
contractors subject to CAS 407 but we sense it is pretty low. We know of government auditors who have
never encountered a contractor subject to CAS 407 in 30+ years of auditing. Most government contracts
do not lend themselves to standard costing system approaches.
408. Accounting for costs of compensated personal absence
Compensated personal absences are absences from work for reasons such as illness, vacation, holidays,
jury duty, military training, or personal activities, for which an employer pays compensation directly to an
employee. The purpose of Cost Accounting Standard 408 is to require contractors to accrue the costs of
compensated personal absences into the accounting period when earned. Prior to CAS 408, many
contractors booked the costs when the leave was taken, not when it was earned. Today, many contractors
that are not CAS covered, still do. CAS 408 also requires that the costs for an entire cost accounting
period be allocated pro-rata on an annual basis among the final cost objectives of that period. That means
that contractors cannot allocate monthly increments.

This might sound simple but it can be complex to implement. In order to accurately accrue an expense
and related liability for compensated personal absences, contractors must consider and estimate, among
other things, forfeitures when employees leave the company, use or lose rules, payouts for unused
vacations, continuity of workforce, disciplinary termination, and severance payments. The standard
allows the use of either the earned wage rates or anticipated wage rates, so long as consistency is
409. Depreciation of tangible capital assets
CAS 409 is the second half of the capitalization/depreciation standards. Yesterday we discussed CAS
404, Capitalization of Tangible Assets and today we discuss how those capital assets should be
depreciated. This Standard came about in order to "enhance objectivity and consistency" in allocating
depreciation costs to Government contracts. For companies with a significant number of capital assets,
this standard will require extensive record-keeping.

The first thing the standard requires is that contractors estimate residual values for all assets (or groups of
assets). Residual value is deducted from capitalized value to determine the depreciable cost base. The
Standard generally prohibits contractors from depreciating assets below their residual value unless
residual values are immaterial. .

The next thing contractors need to determine is how long the assets are going to last - the estimated
service life. The estimated service life of the tangible capital asset, over which the depreciated cost is
assigned, must reasonably approximate the actual period of usefulness to its current owner, considering
such factors as obsolescence and required quality and quantity of output. Here's where it gets tedious.
The standard requires contractors to maintain adequate records which identify the age of the asset or asset
group at retirement or withdrawal from active use. These records should contain such information as asset
acquisition/disposition dates, date asset was withdrawn from active service, and any other factors that
directly influence asset lives.

410. Allocation of business unit general and administrative expenses to

final cost objective
CAS 410 provides criteria for allocating general and administrative (G&A) expenses to final cost
objectives (e.g. contracts) and provides guidelines for the type of expenses that should be included in the
G&A expense pool. It also requires that G&A expenses be allocated on a cost input base which represents
the total activity of the company.

This could well be one of the most contentious of all the CAS standards because it requires a level of
judgment to implement. It requires contractors to use judgment on what costs should be included in the
pool and it requires the exercise of judgment to devise an "allocation base" that represents the total
activity of the company. If the Government doesn't like the allocation methodology it will cite a
contractor in noncompliance with CAS 410 (or FAR 15-203(d) - the functionally equivalent FAR
requirement that applies to non-CAS covered contractors. This gets a little technical so hold on.
G&A expenses must be grouped in a separate indirect cost pool and allocated only to final cost objectives.
For an expense to be classified as G&A, it must be incurred for managing and administering the whole
business unit. Therefore, those management expenses that can be more directly measured by a base other
than cost input should be removed from the G&A expense pool. For example, expenses such as program
management, procurement, subcontract administration, G&A expenses incurred for another segment, etc.,
should not be identified as G&A expenses. They should be the subject of a separate distribution in
reasonable proportion to the benefits received. However, immaterial expenses which are not G&A may be
included in the G&A expense pool. The G&A expense pool may be combined with other expenses
allocated to final cost objectives if the base for the combined pool is appropriate for allocating both the
G&A expense pool and the other expenses, and the individual and total expenses of the G&A expense
pool can be identified separately from the other expenses.

411. Accounting for acquisition costs of material

Cost Accounting Standard 411 provides guidance on using inventory costing methods and, according to
the Standard itself, improves the measurement and assignment of costs to cost objectives (e.g. contracts).
The standard requires contractors to accumulate the cost of material and allocate it to cost
objectives according to written statements of accounting policies and practices.

There are two basic methods of charging material costs to Government contracts. One is by direct
identification of the material item to a particular contract and the other is through inventory. To allocate a
cost directly to a contract, the end use of that material or category of material must be identified at the
time of purchase or production. Contractors can allocate a category of material directly even though it
maintains an inventory of this material, as long as the cost objective was specifically identified and the
cost allocated at the time of purchase or production. This could lead to a situation where material could be
allocated at different costs to the same cost objective, one cost by direct identification and one through
issuance out of inventory. That would be perfectly acceptable under this Standard.

412. Composition and measurement of pension cost

Pension plans are normally segregated into two types of plans; defined-benefit and defined-contribution
pension plans. CAS 412 establishes the composition of pension costs, the basis of measurement, and the
criteria for assigning pension costs to cost accounting periods. CAS 413 - Adjustment and Allocation of
Pension Costs, which we will look at later, addresses the accounting treatment of actuarial gains and
losses and the allocation of pension costs to segments within an organization.

This Standard has been fully incorporated into FAR (see FAR 31.205-6(j)) and therefore applies to all
Government contractors, whether CAS covered or not. However, since very few contractors have defined-
benefit plans these days, the complexities of this standard are not going to apply. Most of this standard
pertains to defined-benefit pension plans and the parts that apply to defined-contribution plans are easy to
understand and apply.

In a defined benefit pension plan, the contributions to be made by the contractor are calculated actuarially
to provide pre-established benefits, e.g. a lifetime annuity. Under a defined-benefit plan, pension costs
usually consist of four elements.
Normal costs
Amortization of any unfunded actuarial liabilities
Interest equivalent on the unfunded actuarial liability and actuarial gains and losses being
Adjustment for actuarial gains and losses
413. Adjustment and allocation of pension cost
CAS 413 is the companion to CAS 412 that we discussed yesterday. Like CAS 412, it has been
incorporated into FAR 31.206(j) and is applicable to all contracts, CAS-covered or not. Also, like CAS
412, it is full of complexities that must be carefully studied to ensure correct implementation. CAS 413
establishes criteria for

assigning actuarial gains and losses to cost accounting periods,

valuing pension fund assets and
Allocating pension costs to segments.

Actuarial gains and losses represent differences between actuarial assumptions and actual experience. For
example, you might have assumed that the pension funds held in trust would grow by five percent
whereas the actual growth was only four percent. The difference between five and four percent represent
an actuarial loss. CAS 413 requires that actuarial gains and losses be calculated every year and assigned
to current and subsequent cost accounting periods. Typically, these gains and losses are amortized over 15
years including the current period.

Disputes frequently arise between contractors and the Government on how to assign pension costs
equitably to segments. The standard provides several options but bottom line, pension costs must follow
the employees that generated the costs. Contractors can use a composite method if there are no significant
disparities in actuarial factors between segments and allocate costs to segments on a base which
represents the factors used in computing pension costs.
414. Cost of money as an element of the cost of facilities capital
This Standard has been incorporated into FAR 31.205-10 (Cost of Money) and is therefore applicable to
all government contracts and contractors. .
CAS 414 recognizes that the cost of facilities capital is a contract cost and provides criteria for measuring
and allocating an appropriate share of the cost of money that can be identified with the facilities employed
in a business.

CAS 414 contains some very specific techniques that must be used to compute cost of money in
connection with price proposals, forward pricing rate agreements, and with the establishment of final
indirect cost rates. Cost of money is an imputed cost which is identified with the total facilities capital
associated with each indirect cost pool. Generally, cost of money is allocated to contracts over the same
base used to allocate the other expenses included in the pool.

The calculation of the cost of money for each contract involves several steps.
1. The average net book value of facilities for each indirect expense pool having a
significant allocation of facilities is identified from accounting data used for contract costing.
2. The cost of money devoted to facilities capital for each indirect expense pool is the
product of these net book values multiplied by the cost of money rates per the Secretary of the
Treasury under Public Law 92-41, 85 Statute 97. The current rate is 2.625% and is updated every
six months. You can always find the current rate here.
3. 3) Facilities capital cost of money factors are computed by dividing the cost of money for
each pool by the corresponding allocation base. The allocation bases used in this computation
must be compatible with the bases used for applying indirect costs in determining contract costs.
415. Accounting for the cost of deferred compensation
The purpose of CAS 415 is to provide criteria for measuring deferred compensation costs and assigning
those costs to cost accounting periods. This standard applies to all deferred compensation costs except for
compensated absences and pension costs covered in CAS 408 and 412 respectively.
This is one of the CAS standards that have been incorporated into the FAR. FAR 31.205.6(k) makes CAS
415 applicable to all contracts, even those that are not CAS covered or those that are modified coverage.

Deferred compensation is an award made by an employer to compensate an employee in a future cost

accounting period for services rendered prior to receipt of compensation. It does not include the normal
year-end salary, wage or bonus accruals.

To measure deferred compensation, you have to get out your present value calculator. The amount that
contractors can claim on Government contracts is the present value of future benefits to be paid. These
future payments must meet other criteria as well.

The contractor cannot unilaterally avoid the payment.

The award is to be paid in money, other assets, or stock (cannot be time-off)
The future payment can be measured reasonably accurately (sometimes challenging)
Events entitling an employee to receive an award have a reasonable probability of occurrence.
Where compensation is to be paid in stock, there is reasonable probability that stock options will
be exercised (also sometimes difficult to support).
416. Accounting for insurance cost
CAS 416 provides criteria for the measurement of insurance costs, the assignment of such costs to cost
accounting periods, and their allocation to cost objectives. The Standard covers all kinds of insurances
including purchased insurance, self-insurance, and payments to a trustee of an insurance fund.

Self-insurance, probably the most complex part of this standard, is defined as the assumption or retention
of the risk of loss by a contractor, either voluntarily or involuntarily. The absence of insurance is typically
regarded as one form of self-insurance. Charges for self-insurance for each period for each type of self-
insured risk should be based on an estimate of the projected average loss for that period. That's where
things get complicated and disputes between contractors and the Government arise. Insurance
administration expenses which are material in relation to total insurance costs should be allocated on the
same basis as the related costs. Contractors with self-insurance programs must abide by CAS 416 whether
CAS covered or not. FAR 31.205-19 makes it so. The same FAR section also requires contracting officer
approval of a self-insurance program before the related costs are allowable.

Record keeping is a major piece of this standard. Contractors must maintain records to substantiate the
amounts of premiums, refunds, dividends, losses, and self-insurance charges. Records should also show
the frequency, amount and location of actual losses by major type of risk.

Exposure to the risk of loss may differ significantly between government and commercial operations and
products. When risks differ significantly, government and commercial insurance costs should be
accumulated and allocated separately.
417. Cost of money as an element of the cost of capital assets under
CAS 417
is almost like CAS 414 except whereas CAS 414 applies to assets employed, CAS 417 applies to assets
under construction, fabrication, or development for contractors' own use. Like CAS 414, it is applicable to
all contracts and contractors under FAR 31.205-10 as long as it is measured, assigned, and allocated in
accordance with CAS and the costs were specifically identified and proposed in cost proposals relating to
the contract under which the cost is to be claimed.

For each capital asset being constructed, fabricated, or developed, a representative investment amount
shall be determined each cost accounting period, giving appropriate consideration to the rate at which
costs of construction are incurred. The "representative investment" amount can be tricky to estimate on a
prospective basis and often, contractors and the Government are at odds in determining a "representative
investment". Consideration must be given to the rate of expenditure pattern of this investment. DFARS
Subpart 230.71 provides guidance in computing representative investment where a contractor experiences
an uneven or irregular expenditure pattern:

(a) The calculation of the representative investment requires consideration of the rate or expenditure
pattern of the costs to construct, fabricate, or develop a capital asset.
(b) If a majority of the costs were incurred toward the beginning, middle, or end of the cost accounting
period, the contractor shall either
(1) Determine a representative investment amount for the cost accounting period by calculating the
average of the month-end balances for that cost accounting period; or
(2) Treat month-end balances as individual representative investment amounts.
(c) If the costs were incurred in a fairly uniform expenditure pattern throughout the construction,
fabrication, or development period, the contractor may
(1) Determine a representative investment amount for the cost accounting period by averaging the
beginning and ending balances of the construction, fabrication, or development cost account for the cost
accounting period; or
(2) Treat month-end balances as individual representative investment amounts.
418. Allocation of direct and indirect cost
CAS 418 pertains to direct and indirect costs. It is intended to improve classification of costs as direct and
indirect and the allocation of indirect costs. The standard does three things. First, it requires contractors to
be consistent in the way it classifies costs as direct or indirect (and to maintain a written statement of
accounting policies and practices for classifying direct and indirect costs). Second, it establishes criteria
for accumulating indirect costs in indirect cost pools and requires that pools be homogeneous. And
thirdly, it provides guidance on allocating indirect cost pools to cost objectives in reasonable proportion
to the beneficial or causal relationships of the pooled costs to cost objectives.

To a certain extent, CAS 418 parallels the FAR coverage on indirect costs found in FAR 31.203.
However, CAS goes beyond the requirements of the FAR and provides more definitive guidance for
selecting allocation bases. For example, the requirement for a written statement of accounting policies for
classifying costs as direct or indirect is found in CAS but not FAR.
419. Unused
420. Accounting for independent research and development costs and
bid and proposal costs (IR&D and B&P)
The purpose of CAS 420 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.

Except for a couple of minor provisions involving the allocation of IR&D and B&P costs incurred at a
home office or a segment on behalf of another segment of the same company, CAS 420 is applicable to
all contractors even those that are exempt from CAS or fall under the Modified Coverage provisions
(see FAR 31.205-18).

The standard provides definitions for IR&D/B&P. Some disputes between contractors and the
Government could be avoided if the parties understood the definitions.

Independent research and development (IR&D) means the cost of effort which is neither
sponsored by a grant, nor required in the performance of a contract, and which falls within any of the
following three areas;
Basic and applied research
Development, and
Systems and other concept formulation studies
Bid and proposal (B&P) costs means the cost incurred in preparing, submitting or supporting any
bid or proposal which effort is neither sponsored by a grant, nor required in the performance of a contract.
CAS 420 (and FAR 31.205-18) requires that IR&D/B&P costs be accumulated by project, similar to the
way in which contract costs are accumulated. Project costs consists of all allocable costs except business
unit G&A. This would include labor, fringe benefits, overhead, as well as materials, subcontracts, and
ODCs (other direct costs).