The Cost Accounting Standards (CAS) were developed to promulgate accounting practices designed to achieve uniformity and consistency in the cost accounting practices followed by defense contractors and subcontractors under Federal contracts as a condition of contracting. Vice Admiral Rickover and Senator Proxmire pushed for the development of standards in the late 1960's because of criticism in accounting practices of defense contractors. In 1970 the Cost Accounting Standards Board (CASB) was formally established and that board developed the cost accounting standards still in use today. The CASB has issued 19 cost accounting standards (Table 9-1 ) that have the full effect of law.
| Standard No. | Title |
| 401 |
Consistency in Estimating, Accumulating and Reporting Costs |
| 402 |
Consistency in Allocating Costs Incurred for the Same Purpose |
| 403 |
Allocation of Home Office Expenses to Segments |
| 404 |
Capitalization of Tangible Assets |
| 405 |
Accounting for Unallowable Costs |
| 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 G&A Expenses to Final Cost Objectives |
| 411 |
Accounting for Acquisition Costs of Material |
| 412 |
Composition and Measurement of Pension Costs |
| 413 |
Adjustment and Allocation of Pension Cost |
| 414 |
Cost of 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 Costs |
| 420 |
Accounting for IR&D Costs and Bid and Proposal Costs |
Table 9-1 Cost Accounting Standards
Full CAS coverage applies to a contractor business unit that:
- Receives a single CAS-covered contract award of $50 million or more; or
- Receives $50 million or more in net CAS-covered awards during its preceding cost accounting period.
Contractors subject to full CAS coverage are required to:
- Disclose in writing their cost accounting practices;
- To follow the disclosed practices consistently; and
- To comply with duly promulgated cost accounting standards.
Modified CAS applies to a negotiated non-exempt contract of less than $50 million, but more than $500,000 awarded to a business unit that received less than $50 million in net CAS-covered awards during its preceding cost accounting period. Modified CAS coverage requires only that the contractor comply with CAS 401, 402, 405 and 406.
FAR 52.230-2 and FAR 52.230-3 requires that prime contractors flow the CAS requirements down to subcontractors and require subcontractors to flow them down to lower tier subcontractors.
9.5.1 Uniformity in Cost Accounting Systems
Cost accounting and cost data plays a large role in contract negotiation and settlement on contracts where there is less than full and open competition. The method of cost accounting can make a substantial difference in how costs are assigned and how costs are calculated on these non-competitive contracts.
Manufacturing control requires an understanding of how a contractor accumulates cost data and how costs are estimated. Contractor decisions regarding the estimated effort required to manufacturing a system will be largely influenced by the contractor's cost accounting system and the data generated from that system. Thus, planned production effort must be reviewed from a systems standpoint. The planned production effort (fabrication, assembly, etc.) can be further broken down into specific operations (welding, setup, windings, etc.). Cost accounting systems need to reflect the breakdown of the design components (WBS) and the breakdown (work packages) of the manufacturing processes used to fabricate those parts. It is at these levels that the process of cost incurrence and measurement must be understood (Figure 9-5).
Figure 9-5 Aircraft WBS
The idea of standards is used to a considerable extent in all business and accounting data. If cost figures are to be used with confidence, they must meet standards as to their content. Direct costs should be discernible from indirect costs, not by how computations are made or by convenience in making such computations, but by some specified idea of what makes them different.
Public Law (PL) 91-379 represented a major step toward uniformity in cost reporting. This law requires contractors to ensure consistency and uniformity in their cost accounting practices in estimating, accumulating, and reporting cost; and to disclose such practices to the government.
Consistency in charging cost means that contractors must be consistent in charging both direct and indirect costs to government contracts. If a particular cost is identified as a direct costs, then it must be charged as a direct charge to all work projects for which it is intended. If a particular cost is identified as an indirect costs, then it must be charged to cost pools and allocated to direct work projects over an appropriate basis.
Incurring costs based on causation or benefit means that if you work on a specific project, then you charge your time to that project. If you buy material for a specific project, then it is charged to that project and not another project.
A firm's accounting system consists of the methods and records established to identify, assemble, analyze, classify, record, and report the firm's transactions and to maintain accountability for the related assets and liabilities. The accounting system should be well-designed to provide reliable accounting data and prevent mistakes that would otherwise occur. A cost accounting system that is unreliable can provide data that are not current, accurate, and complete data in support of an offeror's proposal. The defective cost data can create inaccurate estimates no matter how well the estimating uses the data provided.
Every firm has its own characteristics and individuality. These characteristics are often useful in adapting to the environment as to markets, products, supply or resources, and other factors and arise from sources that may even be somewhat beyond the control of owners or managers. Further, the operation of systems to collect and process data about operations is a part of the task of management, and the outputs of such systems are generally regarded as proprietary to the company. Therefore, while these costs are available to the government the information must be protected accordingly.
9.5.2 Cost Accounting Systems
There are two commonly-used systems for cost accounting, job-order and process. Either system can provide adequate results, when it is properly maintained by the firm. Each can be classified as either a historical cost system or a predetermined cost system, which makes possible four "pure" types of cost systems: (1) the historical job order cost system; (2) the predetermined job order cost system; (3) the historical process cost system; and (4) the predetermined process cost system. Most contractors, however, accumulate both historical data end predetermined data for use in estimating contract costs, and many contractors apply their own variations to the job order cost system and the process cost system.
9.5.2.1 Job Order Cost System
Under a job-order cost system the firm accounts for output by specifically identifiable physical units. The costs for each job or contract normally are accumulated under separate job orders.
- When a contract is for a limited number of units that are neither very complex nor costly, the costs of all units may be accumulated under one job order without any further breakdown.
- When the contract is for items that are both complex and costly, the total quantity may be broken down into smaller production lots. The job order for the total contract may be supported by a separate job order for each lot.
- The use of lots permits the contractor to establish better control over the work, and the historical cost data from a series of lots lend themselves to a projection of estimated costs for future production.
- Experience with the product normally determines the number of units for which costs are to be accumulated.
9.5.2.2 Process Cost System
Under a process cost system, direct costs are charged to a process even though end-items (which may not be identical) for more than one contract are being run through the process at the same time. At the end of the accounting period, the costs incurred for that process are assigned to the units completed during the period and to the incomplete units still in process.
- Process cost systems are typically used by firms that continuously manufacture a particular end-item, like automobiles which require identical or highly similar production processes. A process is one part of a complete set of activities that an item must pass through during manufacture.
- Normally an item will go through more than one process. When an item comes out of one process and enters another, its cost from the process just completed will be charged to the next process, usually as material cost. This continues until the completed end-item emerges from its last process.
- A process cost system identifies which factory employees charged their time to which processes, what their rates of pay were, and the total cost charged to the process.
9.5.3 Historical Cost Systems
When actual cost data are accumulated after operations have taken place, the cost accounting system is a historical cost system. Historical data are used in all cost accounting systems, at least as a base for comparing actual results with predicted results. The accumulation and application of historical data are important ingredients of a reliable cost estimate. To prevent distorted projections from "historical data, the following should be analyzed in determining expected costs for new products.
- Changes in plant layout and equipment;
- Changes in products, materials, and methods;
- Changes in organization, personnel, working hours, conditions, and efficiency;
- Changes in cost;
- Changes in managerial policy;
- Lag between incurrence of cost and reporting of manufacturing; and
- Random influences such as strikes and weather.
9.5.4 Predetermined Cost Systems
Predetermined cost systems are cost accounting systems in which data about the manufacture of an end product are accumulated before the end product is produced. A contractor using a predetermined cost system uses process and material information about a job to predict the costs for doing that job. When contractors use predetermined cost data, normally these data are substantiated by actual costs identified on previous end products.
