48 CFR 9904 PDF

See or , as applicable. Negotiated contracts not exempt in accordance with The rules for determining the applicable type of CAS coverage are in For purposes of this paragraph b 2 , an order issued by one segment to another segment shall be treated as a subcontract. Full coverage requires that the business unit comply with all of the CAS specified in part that are in effect on the date of the contract award and with any CAS that become applicable because of later award of a CAS-covered contract.

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Back to Top It provides for: 1 Identification of expenses for direct allocation to segments to the maximum extent practical; 2 Accumulation of significant nondirectly allocated expenses into logical and relatively homogeneous pools to be allocated on bases reflecting the relationship of the expenses to the segments concerned; and 3 Allocation of any remaining or residual home office expenses to all segments. Appropriate implementation of this Standard will limit the amount of home office expenses classified as residual to the expenses of managing the organization as a whole.

Other terms defined elsewhere in this part 99 shall have the meanings ascribed to them in those definitions unless paragraph b of this subsection, requires otherwise.

This term includes both direct assignments of cost and the reassignment of a share from an indirect cost pool. It typically establishes policy for, and provides guidance to the segments in their operations. It usually performs management, supervisory, or administrative functions, and may also perform service functions in support of the operations of the various segments. An organization which has intermediate levels, such as groups, may have several home offices which report to a common home office.

An intermediate organization may be both a segment and a home office. It includes both reimbursable costs and fees under cost-type contracts and percentage-of-completion sales accruals except that it includes only the fee for management contracts under which the contractor acts essentially as an agent of the Government in the erection or operation of Government-owned facilities.

It excludes incidental interest, dividends, royalty, and rental income, and proceeds from the sale of assets used in the business. The term includes Government-owned contractor-operated GOCO facilities, and joint ventures and subsidiaries domestic and foreign in which the organization has a majority ownership. The term also includes those joint ventures and subsidiaries domestic and foreign in which the organization has less than a majority of ownership, but over which it exercises control.

Such expenses shall be allocated directly to segments to the maximum extent practical. Expenses not directly allocated, if significant in amount and in relation to total home office expenses, shall be grouped in logical and homogeneous expense pools and allocated pursuant to paragraph b of this subsection. Such allocations shall minimize to the extent practical the amount of expenses which may be categorized as residual those of managing the organization as a whole.

These residual expenses shall be allocated pursuant to paragraph c of this subsection. Expenses of centralized service functions performed by a home office for its segments shall be allocated to segments on the basis of the service furnished to or received by each segment. Centralized service functions performed by a home office for its segments are considered to consist of specific functions which, but for the existence of a home office, would be performed or acquired by some or all of the segments individually.

Examples include centrally performed personnel administration and centralized data processing. The expenses incurred by a home office for staff management or policy guidance functions which are significant in amount and in relation to total home office expenses shall be allocated to segments receiving more than a minimal benefit over a base, or bases, representative of the total specific activity being managed. Staff management or policy guidance to segments is commonly provided in the overall direction or support of the performance of discrete segment activities such as manufacturing, accounting, and engineering but see paragraph b 6 of this subsection.

The expense of line management shall be allocated only to the particular segment or group of segments which are being managed or supervised. If more than one segment is managed or supervised, the expense shall be allocated using a base or bases representative of the total activity of such segments.

Line management is considered to consist of management or supervision of a segment or group of segments as a whole. Central payments or accruals which are made by a home office on behalf of its segments shall be allocated directly to segments to the extent that all such payments or accruals of a given type or class can be identified specifically with individual segments. Central payments or accruals are those which but for the existence of a number of segments would be accrued or paid by the individual segments.

Common examples include centrally paid or accrued pension costs, group insurance costs, State and local income taxes and franchise taxes, and payrolls paid by a home office on behalf of its segments. Any such types of payments or accruals which cannot be identified specifically with individual segments shall be allocated to benefitted segments using an allocation base representative of the factors on which the total payment is based.

Independent research and development costs and bid and proposal costs of a home office shall be allocated in accordance with The expenses incurred by a home office for staff management, supervisory, or policy functions, which are not identifiable to specific activities of segments shall be allocated in accordance with paragraph c of this subsection as residual expenses.

Typical residual expenses are those for the chief executive, the chief financial officer, and any staff which are not identifiable with specific activities of segments. Residual expenses shall be allocated to all segments under a home office by means of a base representative of the total activity of such segments, except where paragraph c 2 or 3 of this subsection applies.

The number of groupings will depend primarily on the variety and significance of service and management functions performed by a particular home office. Ordinarily, each service or management function will have to be separately identified for allocation by means of an appropriate allocation technique.

However, it is not necessary to identify and allocate different functions separately, if allocation in accordance with the relevant requirements of For example, if the personnel department of a home office provides personnel services for some or all of the segments a centralized service function and also established personnel policies for the same segments a staff management function , the expenses of both functions could be allocated over the same base, such as the number of personnel, and the separate functions do not have to be identified.

The allocation of centralized service functions shall be governed by a hierarchy of preferable allocation techniques which represent beneficial or causal relationships. The preferred representation of such relationships is a measure of the activity of the organization performing the function.

Supporting functions are usually labor-oriented, machine-oriented, or space-oriented. Measures of the activities of such functions ordinarily can be expressed in terms of labor hours, machine hours, or square footage.

Accordingly, costs of these functions shall be allocated by use of a rate, such as a rate per labor hour, rate per machine hour or cost per square foot, unless such measures are unavailable or impractical to ascertain. In these latter cases the basis for allocation shall be a measurement of the output of the supporting function. Output is measured in terms of units of end product produced by the supporting function, as for example, number of printed pages for a print shop, number of purchase orders processed by a purchasing department, number of hires by an employment office.

Surrogates used to represent the relationship are generally measures of the activity of the segments receiving the service; for example, for personnel services reasonable surrogates would be number of personnel, labor hours, or labor dollars of the segments receiving the service. Any surrogate used should be a reasonable measure of the services received and, logically, should vary in proportion to the services received.

This formula is considered to result in appropriate allocations of the residual expenses of home offices. It takes into account three broad areas of management concern: The employees of the organization, the business volume, and the capital invested in the organization. The percentage of the residual expenses to be allocated to any segment pursuant to the three factor formula is the arithmetical average of the following three percentages for the same period.

For this purpose, the operating revenue of any segment shall include amounts charged to other segments and shall be reduced by amounts charged by other segments for purchases.

Property held primarily for leasing to others shall be excluded from the computation. Another indication may be that, in relation to its size, comparatively little or no costs are allocable to a segment pursuant to Evidence of comparatively little communication or interpersonal relations between a home office and a segment, in relation to its size, may also indicate that the segment receives significantly less benefit from residual expenses.

Conversely, if the opposite conditions prevail at any segment, a greater allocation than would result from the application of This may be the case, for example, if a segment relies heavily on the home office for certain residual functions normally performed by other segments on their own.

This situation may arise, for example, in instances where the Government contracts directly with a corporation which is wholly or partly owned by another corporation. For purposes of contracts subject to this Standard, the contracting corporation may only accept allocations from the other corporation to the extent that such allocations meet the requirements set forth in this Standard for allocation of home office expenses to segments.


Appendix A to 9904.410—Transition From a Cost of Sales or Sales Base to a Cost Input Base



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