CAS 402 - Examples

For example: Changing a Contract Administrator from Indirect to Direct structure would necessitate an Accounting System change.

Demonstration of the principle is as follows, with the various costs.

Direct Contract Admin. Salary is $50,000 Overhead (Contract Admin.) pool is (excluding Direct Contract Admin.) is $100,000

Overhead Allocation Base (excluding Direct Contract Admin.) $250,000.

Contract A = Contract who employees a Contract Administrator full time.

Scenario 1

Original Rate Structure, Rates are based on Contract Administration being charged indirect only.

Pool = 150,000 Base 300,000 Rate = 50%

Total Cost Recovery is correct as 50% applied to $300,000 = $150,000

Contract Administration related cost for Contract A = $25,000. Contract Administration related to all other Contracts = $125,000.

This basically shows that Contract Administration Costs are disproportional between Contract A, and all the contracts of the company. The costs are not linear between the 2.

Scenario 2

Original Rate Structure, with same OH application, but eliminating Contract Admin. from Pool

Pool = 100,000 Base 300,000 Rate = 33%

Cost Recovery is incorrect as indirect cost are still being applied at 50%, when the rate is really 33%. Cost recovery should reflect a the removal of the pool cost, hence the new rate.

Cost recovery applying the same rate of 50% to $300,000 results in indirect recovery of $150,000 and direct recovery of $50,000 or over recovering $50,000 of costs.

By applying the new rate of 33%, total cost recovery is correct, but individual contract cost recovery is wrong.

Contract A Cost Recovery = $66,500 Contract A is picking up $15,500 more than its fair share of costs.

Scenario 3

Revised Overhead Structure to reflect Accounting Change

Pool = 100,000 Base 250,000 Rate = 40%

Contract A absorbs no indirect costs, as there is no OH (Contract Admin.) charge being applied to the Contracts Direct Costs.

All other contracts absorb $100,000, the correct amount of costs.