Value Added Base
A "Value Added" allocation base is one in which adds values to the recovery of costs, and which represents a better recovery of costs from a causal/beneficial relationship. The value added base is one that is an accepted method of recovering indirect costs, and which is one of three methods in which Cost Accounting Standards (CAS) covered contractors may use in recovering G&A costs. CAS 410 - Allocation of Business Unit General & Administrative Expenses to Final Cost Objectives is the relevant CAS standard.
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 are Material Handling and/or 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.
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.
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
