[Code of Federal Regulations]
[Title 48, Volume 7]
[Revised as of October 1, 2007]
From the U.S. Government Printing Office via GPO Access
[CITE: 48CFR9904.401-61]

[Page 331-332]
 
            TITLE 48--FEDERAL ACQUISITION REGULATIONS SYSTEM
 
     CHAPTER 99--COST ACCOUNTING STANDARDS BOARD, OFFICE OF FEDERAL 
           PROCUREMENT POLICY, OFFICE OF MANAGEMENT AND BUDGET
 
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

[[Page 332]]

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 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.