[Federal Register Volume 61, Number 183 (Thursday, September 19, 1996)]
[Notices]
[Pages 49351-49356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-24072]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
Cost Accounting Standards Board; Allocation of Selling and
Marketing Costs
ACTION: Notice.
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SUMMARY: The Office of Federal Procurement Policy, Cost Accounting
Standards Board (CASB), invites public comments concerning a Staff
Discussion Paper on the allocation of selling and marketing costs to
government contracts.
DATES: Comments must be in writing and must be received by November 18,
1996.
ADDRESSES: All comments should be addressed to Dr. Rein Abel, Director
of Research, Cost Accounting Standards Board, Office of Federal
Procurement Policy, 725 17th Street, NW., Room 9001, Washington, DC
20503. Attn: CASB Docket No. 96-03.
FOR FURTHER INFORMATION CONTACT: Rein Abel, Director of Research or
Richard C. Loeb, Executive Secretary, Cost Accounting Standards Board
(telephone: 202-395-3254).
SUPPLEMENTARY INFORMATION:
A. Regulatory Process
The Cost Accounting Standards Board's rules, regulations and
Standards are codified at 48 CFR Chapter 99. Section 26(g)(1) of the
Office of Federal Procurement Policy Act, 41 U.S.C. 422(g), requires
that the Board, prior to the establishment of any new or revised Cost
Accounting Standard, complete a prescribed rulemaking process. The
process generally consists of the following four steps:
[[Page 49352]]
1. Consult with interested persons concerning the advantages,
disadvantages and improvements anticipated in the pricing and
administration of Government contracts as a result of the adoption of a
proposed Standard.
2. Promulgate an Advance Notice of Proposed Rulemaking.
3. Promulgate a Notice of Proposed Rulemaking.
4. Promulgate a Final Rule.
This proposal is step one of the four-step process.
B. Background and Summary
In response to the Cost Accounting Standards Board's (CASB's)
continuing research, a number of commenters have identified selling and
marketing costs as an issue requiring consideration. The primary
concern raised is the causal/beneficial relationship of selling costs
to final cost objectives and their subsequent cost allocations. More
specifically, issues have arisen in which the allocation of selling and
marketing costs as a direct or as an indirect cost, and/or the
appropriate pooled cost composition or allocation base selection, have
caused substantial controversies.
This Staff Discussion Paper represents the results of research
performed by the staff of the Cost Accounting Standards Board, and is
issued by the Board in accordance with the requirements of 41 U.S.C.
422(g)(1)(A). The statements contained herein do not necessarily
represent the position of the Cost Accounting Standards Board.
C. Public Comments
Interested persons are invited to participate by submitting data,
views or arguments with respect to this Staff Discussion Paper. All
comments must be in writing and submitted to the address indicated in
the Addresses section.
Richard C. Loeb,
Executive Secretary, Cost Accounting Standards Board.
Allocation of Selling and Marketing Costs
Outline
Introduction
Scope of Project
Preliminary Research
Part I--Terminology and Definition
A. Discussion
B. Issues
Part II--Homogeneity of Pools
A. Discussion
B. Issues
Part III--Selection of Allocation Bases
A. Discussion
B. Issues
Part IV--Composition of Allocation Bases
A. Discussion
B. Issues
Part V--Current Expensing vs. Deferral
A. Discussion
B. Issues
Allocation of Selling and Marketing Costs
Introduction
In response to the Cost Accounting Standards Board's (CASB's)
research, a number of commenters have identified selling and marketing
costs as an issue requiring consideration. The primary concern raised
is the causal/beneficial relationship of selling costs to final cost
objectives and their subsequent cost allocations. The prior CASB also
identified selling and marketing costs as an area requiring research.
When the prior CASB promulgated Cost Accounting Standard (CAS) 9904.410
``Allocation of Business Unit General and Administrative Expenses to
Final Cost Objectives'', a separate research project dealing with
selling and marketing costs was established. In its prefatory comments
on CAS 9904.410, the CASB stated: ``* * * the Board is currently
working on projects involving IR&D, B&P and selling costs. The Board at
this time does not require changing the accounting for these costs.''
CAS 9904.420, ``Accounting for Independent Research and Development
and Bid and Proposal Costs'' was promulgated in September 1979.
However, no Standard was ever promulgated to deal with the unique
issues relating to selling and marketing costs. The CAS Board has asked
the staff to begin the necessary research to resolve these matters.
Scope of Project
In its Statement of Objectives, Policies and Concepts, July 1992,
the CASB states: ``* * * the Board believes in the desirability of
direct identification of costs with final cost objectives where the
following allocation characteristics exist:
1. The beneficial or causal relationship between the incurrence of
cost and cost objectives is clear and exclusive.
2. The amount of resource used is readily and economically
measurable.''
The aforementioned document further states:
``Where units of resources used are not directly identified with
final cost objectives, the cost of such resources should be grouped
into logical and homogeneous pools for allocation to cost objectives
in accordance with a hierarchy of preferable techniques.''
Under certain circumstances in government contracting, selling and
marketing costs may be properly susceptible to direct identification
with final cost objectives. In most cases, however, selling and
marketing costs are indirectly allocated.
Several Armed Services Board of Contract Appeals (ASBCA) cases have
concluded that selling costs identified with a final cost objective
(e.g., sales commissions) could be treated as an indirect cost,
Daedalus Enterprises, Inc., 93-1 BCA 25499 and Aydin Corp. (West), 94-2
BCA 26899, aff'd in part, rev'd in part, Aydin Corp. (West) v. Widnall,
61 F.3d 1571 (Fed. Cir. 1995). Accordingly, the scope of this project
includes selling and marketing costs identified with final cost
objectives and those not identified with final cost objectives.
Preliminary Research
The staff's preliminary research to date includes:
a. Review of literature;
b. Analysis of ASBCA decisions; and
c. Review of the prior CASB's research relating to selling and
marketing costs.
This research disclosed a number of cost accounting issues which we
believe must be considered by the Board in developing a potential CAS.
These issues, presented in more detail in the ensuing parts of this
SDP, deal with the following matters:
a. Terminology and Definition
b. Homogeneity of Pools
c. Selection of Allocation Bases
d. Composition of Allocation Bases
e. Current Expensing vs. Deferral
Part I
Terminology and Definition
A. Discussion
The problem of terminology and definition is closely related to--in
fact, it is sometimes difficult to separate it from--the question
concerning the number of cost pools, or the degree of homogeneity of
such pools (see Part II). It seems that any CAS evolving from this
project must use terms that are adequately defined so as to ensure
understanding by all parties concerned of the types of costs, functions
and activities being covered.
Kohler, defines ``selling expense (cost)'' and ``marketing cost''
as follows:
``Selling Expense (Cost)--Any expense or class of expense incurred
in selling or marketing. Examples: salesmen's salaries, commissions,
and traveling; selling department salaries and expenses; samples;
credit and
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collection costs. Shipping costs are often so classified.''
``Marketing Costs--The cost of locating customers, persuading them
to buy, delivering goods, and collecting sales proceeds; selling
cost.''
The Institute of Management Accountants (IMA) classifies
``marketing costs'' into two general categories: ``1. Costs of getting
orders--i.e. advertising, sales promotion, direct selling, sales
administration and sales research. 2. Costs of filling orders--
warehousing, shipping, clerical operations connected with filling
orders and collecting the money.'' Most authors of accounting
literature (for example, Anthony and Shillinglaw) define the term
``marketing costs'' (or ``distribution costs'') generally in the same
fashion as the IMA; that is, the term is broken down into two major
categories of costs: ``order-getting costs'' and ``order-filling
costs.''
In government contracting, however, the terms are often defined in
a narrower sense; that is, most government contractors limit the terms
to include only ``order-getting'' costs. ``Order-filling costs'' are
often classified as general and administrative expenses, e.g.,
collection, and as manufacturing overhead costs or as other indirect
costs, e.g., warehousing. For example, the Federal Acquisition
Regulation (FAR) 31.205-38 states: ``Selling is a generic term
encompassing all efforts to market the contractor's products or
services, some of which are covered specifically in other subsections
of 31.205. Selling activity includes the following broad categories:
(1) Advertising
(2) Corporate image enhancement including broadly-targeted sales
efforts, other than advertising
(3) Bid and proposal costs
(4) Market planning
(5) Direct selling''
Some contractors, however, make a distinction between selling and
marketing activities. Marketing is defined as being long-range in its
objectives and includes market research and development and
advertising. Selling is short-range in its objectives and includes
direct selling efforts, sales promotion and demonstration, and customer
liaison.
Discussions with contractor and government representatives indicate
that terminology and definition in this area are not without problems.
There is a considerable amount of diversity in the specific meaning
being attached to the term ``selling and marketing costs.''
Furthermore, problems are being encountered in distinguishing between
selling and marketing costs and certain other costs, such as IR&D and
B&P costs.
In addition to the costs of such activities as market research and
development, direct selling effort, selling administration and sales
promotion and demonstration, many government contractors consider the
costs of some or all of the following activities as part of selling and
marketing costs:
a. Business planning
b. Bid and proposal
c. Contract administration including negotiation and pricing
d. Technical marketing (or work performed by ``marketing
representatives'')
e. Program management
f. Subcontract administration
g. Spares administration or logistical support
Other contractors, however, treat the costs of these activities
differently; some contractors treat the costs of some of the activities
as part of general and administrative expenses (``G&A''); others treat
them either as part of manufacturing, engineering or comparable
overhead pools; and still others treat them as direct costs. Likewise,
some contractors treat the costs of selling efforts performed by
salaried employees differently than the costs of similar selling
efforts performed by outside sales agents.
Of the cost of those activities listed above, preliminary research
has indicated that costs of contract administration are often as
significant as selling and marketing costs and that opinions appear to
be divided as to whether or not such costs should be part of selling
and marketing costs. In this regard, one recognized expert has stated:
``Selling costs normally include bidding and proposal costs not
directly assignable to contracts obtained from such effort * * * as
well as costs of contract administration and sales and service.'' A
number of companies, however, treat contract administration costs as
part of G&A.
Those companies which treat the costs of contract administration as
part of selling and marketing costs cite several reasons in support of
such treatment. Among the reasons cited are: (i) The same people
perform both contract administration and selling and marketing
activities, (ii) the two activities are often difficult to distinguish
or they overlap; and (iii) people who are assigned contract
administration responsibility perform selling or negotiation work on
potential follow-on contracts. An additional reason cited by those
contractors with a mix of government and commercial business--although
this is more closely related to the question of allocation--is that
because selling and marketing costs tend to be higher on commercial
than on government business, whereas contract administration costs tend
to be higher on Government than on commercial business, combining the
two types of costs produces results similar to those of separate cost
allocations.
B. Issues
1. What activities should be encompassed by the term ``selling and
marketing''? In responding to this issue, please address your comments
to whether each of the activities listed above should be part of
selling and marketing. Please state your reasons for including, or
excluding, the activities and provide a brief description of the
activities.
2. Should ``selling'' and ``marketing'' be separately defined and
how should they be defined?
3. What are the distinctive characteristics of selling and
marketing activities that can be used to assure that such activities
are properly segregated from other activities?
Part II
Homogeneity of Pools
A. Discussion
As mentioned previously, the CASB has emphasized the need for and
the importance of grouping indirect costs into logical and homogeneous
pools. The literature also indicates the general weight of opinion that
homogeneity of indirect cost pools should be achieved by establishing
separate pools, rather than a single pool for a ``blanket'' allocation.
CAS 9904.410 defines G&A as ``Any management, financial and other
expense which is incurred for the general management and administration
of the business unit as a whole. G&A expense does not include those
management expenses whose beneficial or causal relationship to cost
objectives can be more directly measured by a base other than a cost
input base representing the total activity of a business unit during a
cost accounting period.''
In a recent decision, the ASBCA concluded that selling costs are
different from G&A expenses. The ASBCA stated: CAS 410.30(6) defines
``General and Administrative (G&A) expense'' as an expense incurred for
the general management and administration of the business as a whole.
Aydin acknowledges that its sales commission costs were essentially
selling costs. In this case, the Solar II commission incurred was not
incurred for the management and administration of
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Aydin as a whole * * * We conclude, therefore, that Aydin's sales
commission costs in general, and the Solar II sales commission in
particular, were not G&A expenses for purposes of CAS 410. See Aydin
Corp. (West), 94-2 BCA 26899.
The idea that selling and marketing costs are different from G&A
can be found in accounting literature. Kholer, for example, expresses
this idea by defining ``administrative expense'' as ``A classification
of expense incurred in the general direction of an enterprise as a
whole, as contrasted with expense of a more specific function, such as
manufacturing or selling * * *'' (underscoring added). In a similar
vein, the IMA distinguishes selling and marketing costs from G&A by
defining G&A as costs of ``* * * president's office, treasurer's office
[and] controller's office.''
The idea of establishing homogeneous indirect cost pools is
expressed in CAS 9904.418-40(b) and 50(b)(1). CAS 9904.418-40(b)
states:
Indirect costs shall be accumulated in indirect pools which are
homogenous.
CAS 9904.418-50(b)(1) states:
An indirect cost pool is homogenous if each significant activity
whose costs are included therein has the same or a similar
beneficial or causal relationship to cost objectives as the other
activities whose costs are included in the cost pool. It is also
homogenous if the allocation of the costs of the activities included
in the cost pool result in an allocation to cost objectives which is
not materially different from the allocation that would result if
the costs of the activities were allocated separately.
The concept of homogenous indirect cost pools is also discussed in
FAR 31.203(b) as ``Indirect costs shall be accumulated by logical cost
groupings with due consideration of the reasons for incurring such
costs * * * Commonly, manufacturing overhead, selling expenses and
general and administrative expenses are separately grouped.'' In
practice, however, only some contractors have established a separate
pool of selling and marketing costs. Discussions with some contractors
disclosed that selling and marketing costs are significant,
particularly when they are compared with G&A.
As discussed above, accounting opinion generally supports the need
for increased homogeneity. However, there is no agreement as to how to
achieve a degree of homogeneity of indirect costs that assures their
accurate allocation. Although the literature deals with the subject of
selling and marketing costs, most of the discussion is presented from
the perspectives of internal cost controls and managerial decisions.
Such accounting literature suggests a number of different ways to
accumulate selling and marketing costs which could be adopted for
purposes of allocation to contracts. Among the various methods cited
are: (i) By activities (direct selling efforts, sales administration,
market research, etc.), (ii) by product lines, (iii) by customers, and
(iv) by geographical locations.
The concept of segregating selling costs on a beneficial or causal
relationship was addressed in CAS Working Group Item 78-21,
Implementation of CAS 410, Allocation of Business Unit General and
Administrative Expenses to Final Cost Objectives. The Working Group
responded to a question raised concerning whether selling costs could
be included in the G&A pool if an inequitable distribution resulted.
The Working Group concluded that selling costs could not remain in the
G&A pool when an inequitable distribution resulted. Working Group Item
78-21 states in part:
Although the prefatory remarks are permissive in this regard, the
standard's fundamental requirement paragraph 410.40(d)(1) requires a
separate allocation of costs which can be allocated to business unit
cost objectives on a beneficial or causal relationship which is best
measured by a base other than a cost input base * * * Therefore, if
a significant disparity exists in marketing activity for elements of
the business, selling expenses should be the subject of a separate
distribution in reasonable proportion to the benefits received. For
example, it may be appropriate to separately allocate selling costs
of foreign and domestic markets.
In light of Working Group Item 78-21, questions have arisen as to
the allocability of foreign selling costs on domestic government
contracts. The government regulations addressing foreign selling costs
have changed over the past decade. DAR 15.205-37 stipulated that the
allocability of selling costs were to be determined in light of
reasonable benefit to the U.S. government. However, the current FAR
31.205-38 states:
The costs * * * to promote export sales of products normally sold to
the U.S. Government, including the costs of exhibiting and
demonstrating such products, are allowable on contracts with the
U.S. Government provided--
(i) The costs are allocable, reasonable, and otherwise allowable
under this Subpart 31.2;
(ii) That, with respect to a business segment which allocates to
U.S. Government contracts, $2,500,000 or more of such costs in a
given year of such business segment, a ceiling on the allowable
costs shall apply.
At corporate and group home offices, accumulating selling and
marketing costs in separate pools is not an uncommon practice. A number
of such offices accumulate the costs in terms of commercial versus
government business--some group home offices perform only selling and
marketing functions and some have separate group home offices for
commercial marketing and for government marketing.
A number of corporate and group home offices also accumulate
selling and marketing costs in terms of foreign versus domestic, and
some have separate marketing organizations for foreign marketing and
for domestic marketing. This kind of accumulation of selling and
marketing costs presumably reflects the need occasioned by significant
amounts of exports of U.S. products. In this regard, it is probably
important to note the various recurring changes in policy regarding the
allowability of marketing costs associated with Foreign Military Sales
(FMS) contracts.
A government representative suggests that selling costs be
segregated from marketing costs. According to this logic, marketing
costs which are long-range in objective should be segregated from
selling costs which are short-range in objective. The former should be
allocated on a broad base to all business of a contractor, whereas the
latter should be allocated only to those products or product lines
benefiting from the incurrence of selling costs.
Based on the foregoing discussion, the argument can be made that,
at one extreme, the accuracy of most contractors' allocations of
selling and marketing costs could be improved by creating several
pools. This would mean establishing pools by class of customers (such
as commercial versus government), by various activities (such as field
selling costs, sales demonstration, sales administration and marketing
research), by geographical locations (such as foreign versus domestic)
and by product lines.
At the other extreme, selling and marketing costs could be combined
with G&A, or a single pool of selling and marketing costs could be
used, on the theory that little additional accuracy will be provided by
increased homogeneity, and that any additional accuracy achieved would
be too costly or would not make much difference in the ultimate amounts
of selling and marketing costs to be allocated.
The central question, then, seems to be: How can the homogeneity of
selling and marketing costs be further improved in a way which will
have both theoretical validity and practical
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applicability? A related question is: To what extent can greater
comparability among contractors be achieved in this area?
B. Issues
1. Under what circumstances should selling and marketing costs be
accumulated in a pool separate and apart from G&A? Under what
circumstances should they be accumulated by: a. class of customers
(e.g., commercial versus government), b. geographical location (e.g.,
foreign versus domestic), c. type of activity (e.g., marketing versus
selling), d. product line, or e. some other methods?
2. Please describe the guidelines and criteria governing the
accumulation of selling and marketing costs which you believe should be
included in a potential standard. Is a new standard required or can
this issue be addressed within existing standard(s)?
3. Should a potential standard establish criteria and guidance on
when it would be inappropriate to establish a pool, i.e., when selling
or marketing expenses should be allocated directly to particular final
cost objectives?
Part III
Selection of Allocation Bases
A. Discussion
Theoretically, there are two ways to go about selecting an
allocation base; one way is to use judgmental criteria and the other is
to use a statistical analysis approach. Practical experience suggests
that the statistical analysis approach is seldom, if ever, used by
government contractors.
Government contractors use a variety of allocation bases for
selling and marketing costs. Among the bases being used are: sales,
three-factor formula, direct labor costs or hours and level of effort.
For the purpose of this Discussion Paper, the term ``level of
effort'' is used to refer to the time and effort incurred or to be
incurred by those personnel engaged in selling and marketing functions.
In practice, a variety of methods are used to express the ``level of
effort''. Some companies use ``projected time to be spent'' on selling
of certain products or product lines or selling to certain customers
during certain time intervals, such as every six months; others use the
actual time spent and recorded.
Output Bases
The Armed Services Pricing Manual (ASPM No. 1) states that ``Common
bases for distribution or estimation of selling expenses are total cost
of sales and total selling price.'' However, the document does not
describe the reasons or the circumstances for the use of such
allocation bases. On the other hand, the Defense Contract Audit
Agency's Contract Audit Manual states: ``Manufacturing expenses are
usually apportioned without regard to the specific end item being
manufactured or the customer to whom the item may ultimately be sold.
These latter factors, however, are important considerations in
apportioning selling expenses which may indicate that an overall
allocation of selling expenses on the basis of cost of sales or costs
of goods manufactured may not be equitable.''
Usry and Hammer advocate the use of ``gross sales value of products
sold'' for allocating what they term as ``functional costs of
selling.'' Horngren, on the other hand, criticizes the sales allocation
base: ``A commonly, but wrongly, used basis for allocation is dollar
sales. The costs of effort are independent of the results actually
obtained, in the sense that the costs are programmed by management, not
determined by sales.''
Level of Effort
Usry and Hammer advocate (in addition to sales) the use of ``number
of salespersons' calls on customers (based on salespersons' time
reports).'' The Defense Contract Audit Agency's Contract Audit Manual
appears to be advocating the same theory. As mentioned previously,
after cautioning auditors that the costs of sales or costs of goods
manufactured base may not be equitable for selling and marketing costs,
it goes on to state: ``The auditor should perform a careful analysis of
the time, effort and expense incurred for selling activities in
relation to the company's products, product lines, or other objectives
to determine the most suitable base * * *''
B. Issues
1. Under what circumstances should the output base(s) (sales, cost
of sales), the input base(s) (total cost input, direct labor cost,
value added, etc.) and other methods such as level of effort be used in
allocating selling and marketing costs at the business unit level?
2. Under what circumstances should these bases and methods be used
at the corporate home office level and/or the group home office level?
3. What criteria should be provided for selection among alternative
bases?
Part IV
Composition of Allocation Bases
A. Discussion
The problem of allocating selling and marketing costs is
complicated by the question concerning the composition of allocation
bases. Research of the available literature failed to disclose any
discussions of this question. Discussions with selected contractor and
government representatives revealed, however, that practices and
opinions vary as to whether certain kinds of sales or costs ought to be
reflected in an allocation base for selling and marketing costs. These
sales or costs pertain to:
1. Intracompany transfers.
2. Subcontract costs and purchased materials including
accommodation purchases and drop shipments.
3. Capitalized projects.
4. Certain kinds of contacts such as those for field services.
Those contractors which exclude some or all of these sales or costs
from an allocation base, or those which believe such sales or costs
should be excluded, advance various arguments. For example, they
contend that selling and marketing costs are incurred to sell products
and services to outside customers; accordingly, such costs should not
be allocated to intracompany transfers. Others exclude subcontract
costs and purchased materials from an allocation base on the theory
that the subcontractors' and vendors' selling and marketing costs are
already included in the prices of subcontracts and purchase orders.
Those contractors which exclude certain contracts, such as field
service contracts, express the view that selling and marketing costs
had been incurred on the ``parent contract'' under which the products
being serviced had been produced and sold and that few such costs are
incurred on the field service contracts. Capitalized projects are also
excluded from the allocation base on the theory that selling and
marketing costs are incurred to sell to outside customers. Conversely,
there are a number of contractors that include all or some of these
sales or costs or those which believe that such sales or costs should
be included.
Practices and opinions also vary as to whether the selling and
marketing costs incurred at corporate and group home offices should be
allocated to all segments under such offices or to just some segments.
Those contractors which exclude certain segments contend that the
excluded segments have their own selling and marketing organizations or
that the product lines
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of such segments are significantly different from those of the rest of
the segments.
The question of whether or not all of the above-mentioned sales or
costs, or all segments under a corporate or group home office, should
be included in an allocation base is presumably influenced by the
following factors among others:
1. How a contractor views the beneficial or causal relationship
between the selling and marketing costs and the sales, costs or
segments; that is, whether a contractor considers the relationship to
be close or remote (benefit to overall business).
2. How a contractor interprets the longstanding FAR 31.203(c)
policy regarding ``non-fragmentation of allocation bases''.
3. Whether a contractor considers the added refinement of its
allocation practices to be worthy of the efforts involved or to be
conductive to producing different allocation results.
A related question on the output bases concerns the use of
different methods of recognition of sales; that is, the completed-
contract method and the unit-of-delivery method as contrasted with the
percentage-of-completion method (or the ``cost-incurred'' method for
cost-type contracts). A number of contracts use different methods of
recognizing the sales of the same cost accounting period for the
different types of contracts performed. Obviously this practice creates
additional allocation problems.
B. Issues
1. Should an allocation base for selling and marketing costs
include the following?
a. Intracompany transfers.
b. Subcontract costs and purchased materials.
c. Capitalized projects.
d. Contracts such as for field services.
Please state the reasons for your answer.
2. Do you perceive any other output or input similar to the above
which may be included in an allocation base? Conversely, do you
perceive other similar output or input which may be excluded from an
allocation base? Please describe them.
3. Under what circumstances should a segment be excluded from the
allocation base of corporate home office or group home office selling
and marketing costs, and what criteria should be established regarding
allocation to segments?
4. Under what circumstances would it be appropriate to use
different methods of sales recognition to determine an output
allocation base for selling and marketing costs? If you believe that
the use of different methods is inappropriate, which method should be
used to determine the base?
Part V
Current Expensing vs. Deferral
A. Discussion
Previous parts of this Discussion paper discussed the problems
associated with terminology and definition and with allocation bases
for selling and marketing costs. Allocation of selling and marketing
costs is further complicated by the fact that such costs usually
include significant amounts of costs that are incurred in a current
cost accounting period but are for the benefit of future periods.
Accounting Principles Board Statement (APBS) No. 4 addresses
expense recognition and specifies three primary principles for
recognizing expenses. They are associating cause and effect, systematic
and rational allocation, and immediate recognition.
Under associating cause and effect, costs are recognized as
expenses on the basis of a presumed direct association with specific
revenue. APBS No. 4 states:
Some costs are recognized as expenses on the basis of a presumed
direct association with specific revenue. Although direct cause and
effect relationships can seldom be conclusively demonstrated, many
costs appear to be related to particular revenue and recognizing
them as expenses accompanies recognition of the revenue. Examples of
expenses that are recognized by associating cause and effect are
sales commissions and costs of products sold or services provided.
The term matching is often applied to this process.
Using the above language, sales commissions earned on a multi-year
contract would be recognized over the life of the contract rather than
expenses in the year of contract award.
Under immediate recognition, APBS No. 4 states:
Some costs are associated with the current accounting period as
expenses because (1) Cost incurred during the period provide no
discernible future benefits, (2) costs recorded as assets in prior
periods no longer provide discernible benefits or (3) allocating
costs either on the basis of association with revenue or among
several accounting periods is considered to serve no useful purpose.
APBS No. 4 states that examples of costs recognized in the current
period include such costs as most selling costs and general and
administrative type expenses.
Making the determination of whether selling and marketing costs can
be associated with revenue on the basis of cause and effect may be
difficult. Accounting literature has recognized these difficulties.
Usry and Hammer state: ``Cause and effect, generally obvious in the
factory, are not so readily discernible in the marketing processes. For
example, many promotional costs are incurred for future results,
creating a time lag between cause and effect. Conversely, the effects
of manufacturing changes are usually felt quickly; and matching between
effort and result usually can be determined. Furthermore, manufacturing
results are more readily quantified than are marketing costs. For
marketing costs, it is often not so easy to identify quantities or
units of activity with the cost incurred and results achieved.''
Lawrence (Cost Accounting, revised by Ruswinckel) states: ``A very
large number of manufacturing companies make their products to order,
and a great amount of expense is undertaken in order to sell products
that are not in existence at the time of sale. It is not considered
improper to defer an expense that will result in future benefit.''
In government contacting, the time lag between cause and effect,
referred to by Usry and Hammer, could be as much as 3 to 5 years.
However, government contractors rarely defer selling and marketing
costs. Presumably, this is because of the difficulties involved in
distinguishing between those costs that should be currently expensed
and those that should be deferred, and because of the high degree of
uncertainty as to future benefits. In a few instances, however,
contractors are known to have deferred those selling and marketing
costs incurred to secure substantial new programs.
B. Issues
1. Should selling and marketing costs incurred for the benefit of
future periods be deferred? If they should: a. under what circumstances
should selling and marketing costs be deferred; b. what criteria should
be established to distinguish between those costs that should be
currently expensed and those that should be deferred, and c. how should
the deferred costs be amortized?
2. If you do not believe that selling and marketing cost should be
deferred, which allocation base(s) should be used in order to minimize
the possible distorted allocations of costs incurred for future
periods?
[FR Doc. 96-24072 Filed 9-18-96; 8:45 am]
BILLING CODE 3110-01-P
