Difference between revisions of "Value Added Base"

Latest revision as of 10:45, 6 February 2014

A "Value Added" allocation base is one in pools have been carved out, adding value, and which represents a better recovery of costs from a causal/beneficial relationship. The value added base is one of three accepted methods under CAS 410 - Allocation of Business Unit General & Administrative Expenses to Final Cost Objectives.

Contractors can adopt a value-added General and Administrative (G&A) rate when proper cost accounting procedures justify its use. The treatment of G&A expenses supporting subcontract and material costs can have a significant impact on contract costs. As such, contractors can maximize cost recovery and increase competitiveness.

Value added G&A rates are an excellent alternative to an overhead pool of expenses distributed over direct labor and a G&A pool of expenses distributed over Total Cost Input (TCI)for companies with significant subcontract and/or material costs.

A value added base removes direct costs which can be more appropriately recovered under a different allocation base other than Total Cost Input.

Typical Value Added Bases

• Material Handling
• Subcontract Administration.

A value added base, removes direct costs that are more appropriately allocated and absorbed in a seperate rate rather than G&A. For instance, if a company has a significant amount of direct materials, the company will also have a significant cost in administering its direct materials. The indirect rate (ratio) and recovery of these administration costs would benefit contracts as a whole, and not the company as a whole. It is therefore, more appropriate to seperate these costs out of G&A expenses, and establish a seperate Material Handling rate.

A material handling pool would be appropriate when it would not be equitable to apply a full G&A to direct material and subcontract costs. A situation illustrating this would occur when most of a business's contracts were labor intense and the contractor receives a large contract that is primarily material costs.

Establishment of the seperate value added rate is pretty straighforward. The recovery of G&A cost associated with the administration of the employees in the Material Handling pool is often confused. In order to recovery the G&A costs associated with employees in the Material Handling pool, G&A must be applied to the Material Handling recovery, for the proper recovery of both pools. Therefore, the G&A base must include the Material Handling pool costs.

G&A Rate Effects of Establishing a Value Added G&A Allocation Base

Since you are removing Direct Material and/or Subcontract costs from your G&A allocation base, the G&A rate will increase.

Value Added Loading

The calculation below shows the correct treatment of a Material Handling base of $100 ($5 pool costs) with a Material Handling rate of 5% and G&A Rate of 10% would be as follows:

• Direct Materials................................$100

• Material Handling Rate Applied ................$5

• G&A Applied to Material Handling .............$.5

• Grand total recovered/charged to Customer...$105.50

Related Pages

CAS Working Group Item 78-21 CAS 410 - Allocation of Business Unit General & Administrative Expenses to Final Cost Objectives