Cost Accounting Standards An Overview

							  Cost Accounting Standards: An                 Federal Regulations, Chapter 99,
            Overview                            effective on April 17, 1992.
  By Chuck Grosso, CIA, CGAP, Sandia National
                Laboratories
                                                That is enough history for now. What
What do the 18th Century German poet            about CAS? The standards, of course,
Johann Wolfgang Von Goethe, Senator             are based on common sense principles
William Proxmire and Vice Admiral H.G.          of cost accounting. There are three
Rickover have in common? All three              major pillars of CAS that include,
men were interested in accounting.              consistency in charging costs between
Goethe once said, “Double-entry                 direct and indirect projects, incurring
bookkeeping is one of the most beautiful        cost based on causal/beneficial
discoveries of the human spirit.”               relationship and full cost-allocation or
Senator Proxmire and Admiral Rickover           full-cost recovery.
jointly developed the concept of Cost
Accounting Standards (CAS).                     Contractors must be consistent in
                                                charging both direct and indirect costs to
In some work environments, the                  Government contracts. If certain costs
acronym CAS strikes fear into the hearts        are disclosed as direct costs, they must
and minds of managers and                       be charged directly to work projects for
accountants everywhere---well, almost.          the same purpose, in similar
What is CAS? They sound simple                  circumstances. If certain costs are
enough. Besides, auditors are used to           disclosed as indirect costs, they must be
working with all kinds of auditing,             charged to cost pools and allocated to
financial and accounting standards in           direct work projects over an appropriate
their work.                                     basis for the same purpose, in similar
                                                circumstances.
For those of you who absolutely enjoyed
your cost accounting class in school,           Incurring costs based on a
and for the rest of you too, CAS are a          causal/beneficial relationship simply
detailed set of nineteen accounting             means that if you work on a particular
standards promulgated by the Cost               work project, you charge your time to
Account Standards Board. Recently,              that project. If you buy something
four new CAS standards have been                benefiting that project, it is charged for
written and apply to contracts with             the item.
educational institutions. Recent
legislation has rendered CAS applicable         Full-cost allocation or full-cost recovery
to Government contracts with all                in a Government-owned-company
agencies of the U.S. Government.                operated (GOCO) context refers to the
                                                fact that all costs related to a particular
Historically, the concept of CAS                project are charged to that project and
originated out of criticism of defense          billed to that particular Government
contractor accounting practices and, as         project sponsor. No other sponsor
mentioned above, was developed by               should be billed for any part of the
Vice Admiral H.G. Rickover and Senator          project cost.
William Proxmire. The Cost Accounting
Standards Board was originally                  These three principles are intended to
authorized by statute in August 1970            achieve equity in charging costs to
while the scope of CAS was limited to           Government contracts.
negotiated contracts with the defense
agencies of the U.S. Government. CAS
was recodified in Title 48 of the Code of
As mentioned above, there are nineteen         •   CAS 420, Accounting for
major standards and four additional                independent research and
standards for educational institutions.            development and bid and
The nineteen standards include the                 proposal costs.
following titles:
                                            The four educational-related standards
   •   CAS 401, Consistency in              provide coverage on consistency in
       estimating, accumulating and         estimating, accumulating and reporting
       reporting costs.                     costs, consistency in allocating costs,
   •   CAS 402, Consistency in              identification of unallowable costs and
       allocating costs incurred for the    consistency in selection and use of a
       same purpose.                        cost accounting period.
   •   CAS 403, Allocation of home
       office expenses to segments.         For CAS-covered contactors, there is
   •   CAS 404, Capitalization of           also a disclosure requirement.
       tangible assets.                     Contractors must write and maintain a
   •   CAS 405, Accounting for              CAS disclosure statement. The
       unallowable costs.                   disclosure statement is a document
   •   CAS 406, Cost accounting             describing a contractor’s accounting
       period.                              system. There are usually two parts,
   •   CAS 407, Use of standard costs       consisting of preprinted forms containing
       for direct material and direct       boxes to check and blanks to fill in and
       labor.                               continuation sheets that contain
   •   CAS 408, Accounting for costs of     amplification and commentary on the
       compensated personal absence.        responses provided in the forms. The
                                            amount of detail provided in the CAS
   •   CAS 409, Depreciation of
                                            disclosure statement is, of course, left
       tangible capital assets.
                                            up to the contractor. In offering a word
   •   CAS 410, Allocation of business
                                            to the wise, however, it should be
       unit general and administrative
                                            recognized that the disclosure statement
       expenses to final cost objectives.
                                            must provide sufficient detail to convey
   •   CAS 411, Accounting for              full understanding of a contractor’s
       acquisition costs of materials.      accounting system to the Contracting
   •   CAS 412, Cost accounting             Officer and to any interested auditors.
       standard for composition and
       measurement of pension costs.        If an organization makes significant
   •   CAS 413, Adjustment and              accounting changes during the fiscal
       allocation of pension cost.          year or at the beginning of a fiscal year,
   •   CAS 414, Cost of money as an         those changes must be documented in
       element of the cost of facilities    a modified CAS disclosure statement
       capital.                             that is submitted to the Contracting
   •   CAS 415, Accounting for the          Officer of the sponsoring agency.
       cost of deferred compensation.
   •   CAS 416, Accounting for              The Contracting Officer of the
       insurance costs.                     sponsoring agency has responsibility to
   •   CAS 417, Cost of money as an         rule on adequacy of a contractor’s CAS
       element of the cost of capital       disclosure statement.
       assets under construction.
   •   CAS 418, Allocation of direct and    Besides being an externally-imposed
       indirect costs.                      requirement for Government
                                            contractors, CAS is a major accounting
control that assists management with
charging costs to Government contracts
and equitable treatment of Government
sponsoring agencies where multiple
sponsors engage the services of a
single contractor.

For auditors who audit contractors with
the U.S. Government, knowledge of
CAS becomes increasingly important.

Additional information about CAS may
be obtained at the following Internet
sites:

http://www.whitehouse.gov/omb/procure
ment/casb.html

http://www.arnet.gov/far/97/html/appendi
x.html