[Code of Federal Regulations]
[Title 48, Volume 7]
[Revised as of October 1, 2001]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR9904.401-61]

[Page 371-372]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
     CHAPTER 99--COST ACCOUNTING STANDARDS BOARD, OFFICE OF FEDERAL 
           PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET
 
PART 9904--COST ACCOUNTING STANDARDS--Table of Contents
 
Sec. 9904.401-61  Interpretation.

    (a) 9904.401, Cost Accounting Standard--Consistency in Estimating, 
Accumulating and Reporting Costs, requires in 9904.401-40 that a 
contractor's ``practices used in estimating costs in pricing a proposal 
shall be consistent with his cost accounting practices used in 
accumulating and reporting costs.''
    (b) In estimating the cost of direct material requirements for a 
contract, it is a common practice to first estimate the cost of the 
actual quantities to be incorporated in end items. Provisions are then 
made for additional direct material costs to cover expected material 
losses such as those which occur, for example, when items are scrapped, 
fail to meet specifications, are lost, consumed in the manufacturing 
process, or destroyed in testing and qualification processes. The cost 
of some or all of such additional direct material requirements is often 
estimated by the application of one or more percentage factors to the 
total cost of basic direct material requirements or to some other base.
    (c) Questions have arisen as to whether the accumulation of direct 
material costs in an undifferentiated account where a contractor 
estimates a significant part of such costs by means of percentage 
factors is in compliance

[[Page 372]]

with 9904.401. The most serious questions pertain to such percentage 
factors which are not supported by the contractor with accounting, 
statistical, or other relevant data from past experience, nor by a 
program to accumulate actual costs for comparison with such percentage 
estimates. The accumulation of direct costs in an undifferentiated 
account in this circumstance is a cost accounting practice which is not 
consistent with the practice of estimating a significant part of costs 
by means of percentage factors. This situation is virtually identical 
with that described in Illustration 9904.401-60(b)(5), which deals with 
labor.
    (d) 9904.401 does not, however, prescribe the amount of detail 
required in accumulating and reporting costs. The amount of detail 
required may vary considerably depending on the percentage factors used, 
the data presented in justification or lack thereof, and the 
significance of each situation. Accordingly, it is neither appropriate 
nor practical to prescribe a single set of accounting practices which 
would be consistent in all situations with the practices of estimating 
direct material costs by percentage factors. Therefore, the amount of 
accounting and statistical detail to be required and maintained in 
accounting for this portion of direct material costs has been and 
continues to be a matter to be decided by Government procurement 
authorities on the basis of the individual facts and circumstances.