[Code of Federal Regulations]

[Title 48, Volume 7]

[Revised as of October 1, 2005]

From the U.S. Government Printing Office via GPO Access

[CITE: 48CFR9904.403-50]



[Page 361-363]

 

            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. 9904.403-50  Techniques for application.



    (a)(1) Separate expense groupings will ordinarily be required to 

implement 9904.403-40. 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 9904.403-

40(b) can be made using a common allocation base. 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.

    (2) Where the expense of a given function is to be allocated by 

means of a particular allocation base, all segments shall be included in 

the base unless:

    (i) Any excluded segment did not receive significant benefits from, 

or contribute significantly to the cause of the expense to be allocated 

and,

    (ii) Any included segment did receive significant benefits from or 

contribute significantly to the cause of the expense in question.

    (b)(1) Section 9904.403-60 illustrates various expense pools which 

may be



[[Page 362]]



used together with appropriate allocation bases. 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.

    (2) Where neither activity nor output of the supporting function can 

be practically measured, a surrogate for the beneficial, or causal 

relationship must be selected. 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.

    (c)(1) Where residual expenses are required to be allocated pursuant 

to 9904.403-40(c)(2), the three factor formula described below must be 

used. 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.

    (i) The percentage of the segment's payroll dollars to the total 

payroll dollars of all segments.

    (ii) The percentage of the segment's operating revenue to the total 

operating revenue of all segments. 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.

    (iii) The percentage of the average net book value of the sum of the 

segment's tangible capital assets plus inventories to the total average 

net book value of such assets of all segments. Property held primarily 

for leasing to others shall be excluded from the computation. The 

average net book value shall be the average of the net book value at the 

beginning of the organization's fiscal year and the net book value at 

the end of the year.

    (d) The following paragraphs provide guidance for implementing the 

requirements of 9904.403-40(c)(3).

    (1) An indication that a segment received significantly less benefit 

in relation to other segments can arise if a segment, unlike all or most 

other segments, performs on its own many of the functions included in 

the residual expense. Another indication may be that, in relation to its 

size, comparatively little or no costs are allocable to a segment 

pursuant to 9904.403-40(b) (1) through (5). 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 9904.403-40(c) (1) 

or (2) may be indicated. 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.

    (2) Segments which may require special allocations of residual 

expenses



[[Page 363]]



pursuant to 9904.403-40(c)(3) include, but are not limited to foreign 

subsidiaries, GOCO's, domestic subsidiaries with less than a majority 

ownership, and joint ventures.

    (3) The portion of residual expenses to be allocated to a segment 

pursuant to 9904.403-40(c)(3) shall be the cost of estimated or recorded 

efforts devoted to the segments.

    (e) Home office functions may be performed by an organization which 

for some purposes may not be a part of the legal entity with which the 

Government has contracted. 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. In this case, 

the latter corporation serves as a ``home office,'' and the corporation 

with which the contract is made is a ``segment'' as those terms are 

defined and used in this Standard. 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.