Appendix B to 9904.414 - Example - ABC Corporation

ABC Corporation has a home office that controls three operating divisions (Business Units A, B & C). The home office includes an administrative computer center whose costs are allocated separately to the business units. The separate allocation conforms to the requirements specified in the Cost Accounting Standard No. 403. Tables I through VI deal with home office expense allocations to business units.

The A Division is a business unit as defined by the CASB, and it uses one engineering and one manufacturing overhead pool to accumulate costs for charging overhead to final cost objectives. In addition, the indirect cost allocation process also uses two “service centers” with their own indirect cost pools: Occupancy and technical computer center.

The costs accumulated in the occupancy pool are allocated among manufacturing overhead, engineering overhead, and the technical computer center on the basis of floor space occupied. The costs accumulated in the technical computer center cost pool are allocated to users on the basis of a CPU hourly rate. Some of these allocations are made to engineering or manufacturing overhead while others are allocated direct to final cost objectives.

At the business unit level, all the indirect expense incurred is regarded either as an engineering or manufacturing expense. Thus the sole item that enters into the business unit G&A expense pool is the allocation received by the A Division from the home office.

Operating results for the A Division are given in Table VII. Facilities capital items for the division are given in Table IX.

The example is based on a single set of illustrative contract cost data given in Table VIII. Since two methods, the “regular” and the “alternative” method, are potentially available for computing cost of money on facilities capital items two sets of different results can be considered.

In addition, total cost input is used in the example as the allocation base for the G&A expense. Two variations of this example have been prepared to illustrate the impact of excluding or including cost of money from total cost input. Variation I, summarized in Table XIII, excludes cost of money from the cost input allocation base. Variation II, summarized in Tables XVII and XVIII, includes cost of money in the cost input allocation base.

Throughout the example, where appropriate, cross references have been made to the text of the relevant parts of the Standard.

Variation I—Total Cost Input Allocation Base Excludes Cost of MoneyTable I—Net Book Value of Home Office Facilities CapitalDec. 31, 1974Dec. 31, 1975Administrative computer center facilities capital$550,000$450,000Other home office facilities capital420,000380,000Total970,000830,000

The assets in the above table generate allowable depreciation or amortization, as explained in Instructions for Form CASB CMF (Basis). Thus they should be included in the asset base for cost of money computation.

Table II—Home Office Facilities Capital Annual Average BalancesAdministrative computer center facilities capital$500,000Other home office facilities capital400,000Total900,000

The above averages are based on data in Table I computed in accordance with the criteria in Instructions for Form CASB CMF (Recorded, Leased Property, Corporate).

$970,000+$830,000=$1,800,00012=$900,000

Table III—Home Office Depreciation and Amortization for 1975Administrative computer center facilities capital$100,000Other home office facilities capital40,000Total140,000 Table IV—Allocation of ABC Home Office Expenses to Divisions (Business Units)Total expenseAllocation of business unitsABCAdministrative computer center$1,800,000$900,000$900,000Other home office4,800,0002,400,0001,200,0001,200,000Total6,600,0003,300,0002,100,0001,200,000

The above allocation is carried out in accordance with CAS 403. The expense allocated to individual business units above includes depreciation and amortization as reflected in Table V.

Table V—Depreciation and Amortization Component of ABC Home Office ExpenseTotal depreciation and amortization expenseAllocation of business unitsABCAdministrative computer center$100,000$50,000$50,000Other home office40,00020,00010,00010,000Total140,00070,00060,00010,000 TABLE VI—Allocation of Home Office Facilities Capital to Business Units

(a) Depreciation and amortization allocation in Table V converted to percentages.

Total depreciation and amoritzation expense (in percent)Allocation of business units (in percent)ABCAdministrative computer center1005050Other home office100502525