One Agency, One Team, One Direction
CUI
Indirect Costs
Katelyn Rigle, NAVSUP FLA
Kellie Prassinos, LM BAE CAD Technical Specialist
CUI
Controlled by: DCAA Audit
Liaison Division
CUI Category: PRVCY
POC: Stephanie Ballard,
[email protected]
One Agency, One Team, One Direction
Today’s Discussion
Fundamental concepts related to indirect cost
allocation.
Differences between overhead and G&A
pools.
Understanding allocation bases.
Pool & Base relationship.
Significance of indirect rates.
Examples
Summary
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What is a Final Cost
Objective?
The purpose for which costs are measured.
A final accumulation point for all recorded costs.
A product, contract, job, task, delivery order, etc.
Final cost objectives receive both direct and
indirect costs.
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Indirect Costs
Reasonable and necessary costs of doing business.
Cannot be directly identified with a single contract.
Logically pooled into homogenous groupings.
Allocated equitably across all business activities,
according to the benefits each gains from them.
Allocated using a base which has a clear linkage to the
pool.
Any cost that is leftover after all direct costs have been
identified and charged to the correct contract.
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Indirect Costs
To the extent that indirect costs are
reasonable, allowable and allocable, they
are a legitimate cost of doing business
payable under a U.S. Government contract
or grant.
Costs incurred for the same purpose, in like
circumstances, must be treated consistently
for all contracts.
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Indirect Costs
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Overhead Pools:
Cost related to support of specific operations.
Manufacturing, Engineering, Material Handling, etc.
General & Administrative Pools:
Management, financial, and other expenses
incurred for the general management and
administration of the business unit as a whole.
G&A, IR&D, B&P
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Direct Vs. Indirect Costs*
Cost Element Direct or Indirect?
Rent Indirect
Freight on Direct Material Indirect
Packing on a Contract Direct
Supervisory Labor Indirect
Property Tax Indirect
Labor for a Job/Contract Direct
New Hire Training Indirect
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*Represents the most common treatment for these costs; however, there may be acceptable exceptions.
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Direct Vs. Indirect Costs*
Cost Element Direct or Indirect?
Contract Material Direct
Contract Travel Direct
Office Supplies Indirect
President’s Salary Indirect
Property Tax Indirect
Rent Indirect
Utilities Indirect
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*Represents the most common treatment for these costs; however, there may be acceptable exceptions.
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Allocation Base
A measure of direct contractor effort that can be
used to allocate pool costs based on benefits
accrued by the several cost objectives.
A means to equitably allocate indirect costs to
cost objectives.
This is what the pool is being allocated to.
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Base - Examples:
Direct Labor (hours or dollars),
Direct Materials,
Head count,
Total Cost Input or Value Added Base,
Quantity of Computers,
Number of Machine Hours,
Square footage, etc.
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Example of a G&A Base
Calculating a Total Cost Input (TCI) Base
+ Contract Direct Labor
+ Contract Direct Material
+ Contract ODC
+ Subcontract Costs
+ Gross Overhead
= Total Cost Input
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Example of a G&A Base
What is the difference between TCI and Value
Added Base?
+ Contract Direct Labor
+ Contract Direct Material
+ Contract ODC
+ Subcontract Costs
+ Gross Overhead
= Value Added Base
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Causal/Beneficial
Relationship
If it were not for the base, the pool expense would
not be incurred.
No labor cost -- No fringe expense.
No computers -- No computer service
department.
Significant decline in work -- Significant decline
in pool expenses.
No contracts -- Ultimate elimination of company.
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Pool / Base Relationship
Pool - Expenses to be Allocated
=
Base - Caused the Expenses or
Benefits from the Expenses
Causal/Beneficial Relationship -- If it were not for the base,
the pool expense would not be incurred.
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Overhead Rate Example
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Acct. No.
Description G/ L Adj
Claimed
7001
Salaries & Wages 33,060
33,060
7002 Postage & Handling 6,235 6,235
7004 Small Equipment 878 878
7011
Equipment Rental 27,150 27,150
7016 Repairs/Maintenance
1,681
1,681
8421 Leave 20,181 20,181
8425 Severance Pay 32,419 (23,023)
9,396
8427 Taxes 23,612 23,612
8431 Workers' Compensation 3,311 3,311
8435 Health Insurance 31,097 31,097
8440
Life Insurance 6,833
6,833
8445
Pension Plan 58,320
(8,612) 49,708
8450 Miscellaneous 612
612
Total OH Pool 245,389
(31,635) 213,754
Overhead Pool
OH B as e:
Direct Labor 633,012
OH Rate
OH Pool 213,754
OH Bas e 633,012
=
33.77%
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G&A Rate Example
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Acct. No.
Description G/L Adj Claimed
8001 Salaries & Wages 90,007 90,007
8320
Legal Fees 1,744
1,744
8501 Travel 12,987
(1,295)
11,692
8503 Entertainment 484 (484) -
8505 Advertising & Promotion 354
(287) 67
8522 Bad Debts 3,018 (3,018) -
8527
Interest Expense 1,001
(1,001)
-
8521 Leave 2,321 2,321
8527 Taxes 3,815 3,815
8535 Health Insurance 8,912 8,912
8540 Life Insurance 1,087 1,087
8545 Pension Plan 12,318 (1,883)
10,435
8550 Miscellaneous 3,357
3,357
Total G&A Pool 141,405 (7,968) 133,437
General & Administrative Pool
G & A B as e:
Direct Labor 633,012
Direct Travel 34,563
Direct Material 842,981
Other Direct Costs 172,105
Subcontracts 944,841
OH Expenditures 245,389
Total G&A Base 2,872,891
=
4.64%
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What is Cost Allocation?
Peanut Butter = Pool
SPREAD IT OVER THE
Bread = Base
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Indirect Rates
Ratio between the total indirect expenses
and some direct cost base.
“Device” for determining fairly and
conveniently what portion of indirect cost
each contract should bear.
Indirect cost rates are expressed in terms
such as dollars per hour or percentage of
cost.
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Indirect Rates – Cont’d
An Indirect Cost Rate by itself has very
little meaning.
The use of allocation bases and cost
structures vary greatly among contractors.
Indirect costs should not be compared
between organizations at the rate level.
The practice of direct or indirect charging
is not an indicator of best value.
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Allocating Indirect Costs
(4 Step Process)
1. Accumulate Costs (Pool):
Homogeneous; Logical Cost Groupings.
2. Select Allocation Base:
Causal or Beneficial Relationship.
3. Rate Computation:
Pool divided by base.
4. Rate Application:
Rate x Base Cost (Per Contract).
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DCAA Resources
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Questions/Comments
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