Cost Accounting Standards

Cost Accounting Standards represents 19 rules and standards to achieve homogeneity and consistency in cost reporting and accounting. It has ensured that firms engaged in contracts with the United States government will systematically handle costs. CAS necessitates a standardized approach for reporting and accumulating costs, ascertaining consistent classification, and disclosing costs. The standardization has its vitality in auditability and compliance in government contracts. 

As per CASB, it has 19 standards as listed below: 

1. Consistency about reporting, accumulating, and estimating costs. 
2. Consistency concerning assigning costs incurred related to the same cause.
3. Assigning the home office costs into multiple categories.
4. Capitalization of all tangible assets.
5. Accounting related to allowable costs.
6. Period of cost accounting
7. For direct labor and material using standard costs.
8. Paid personal leave accounting.
9. Tangible capital asset depreciation
10. Allocating administrative and general costs for the business unit to the final cost targets.
11. Taking the procurement cost of the material into account.
12. Pension cost measurement and composition.
13. Pensions’ cost allocation and adjustment 
14. Facilities capital cost includes money cost as its element.
15. Considering deferred compensation costs 
16. Insurance cost accounting
17. Capital assets that are being built have money's cost as its component.
18. Indirect and direct cost allocation
19. Taking into consideration the costs of bid & proposal along with independent research & development 

It has minimized the cost misallocation risk and ensured fair pricing concerning government contracts. Moreover, it also prevents the shifting of costs and spreads the need for accountability within contracts. 

All large and sub-contractors apply CAS while working under contract with the United States government. Therefore, as a result, it ensures reliable and accurate cost data leading to sound decision making and financial integrity. However, a contractor must also be aware of cost accounting standards exemptions as mentioned in the 48 CFR 9903.201-1.

Government cost accounting standards have two main types of CAS coverage, namely:

• Full CAS coverage: All contracts more than $50 million have to be used in adherence to all 19 CAS standards. Furthermore, the 19 CAS standards have been divided into 6 types:
  • Basic CAS concepts (CAS 401, 402, 405, 406)
  • Allocation of costs (CAS 403, 410, 418, 420)
  • Compensation (CAS 408, 412, 413, 415)
  • Fixed assets (CAS 404, 409, 414, 417)
  • Labor and material costing (CAS 407, 411)
  • Insurance (CAS 416)
• Modified CAS coverage: All contracts within the bracket of $2-50 million have to comply with just 4 out of 19 CAS standards - CAS 401, 402, 405, and 406. 

Moreover, CAS frameworks have been designed to enable accuracy in practices of cost accounting: 

• Standard costing: It utilizes standard costs related to control and product costing, contrasting real costs with those of standard costs to determine variances.
• Activity-based costing (ABC): It allocates costs to services and products as per the resources they utilize offering more correct cost information. 
• Lean accounting: It aids practices of lean manufacturing by giving simplified and relevant financial information.
• Marginal costing: It consists of calculating the expenses of manufacturing one extra unit, helping in decision-making concerning production and pricing.

Let us use a few examples to understand the topic.

Example #1

An online article published on June 24, 2024, discusses the request for comment by the public upon execution of CAS as mulled by the CAS board on indefinite delivery vehicles (IDVs). The CAS Board seeks feedback on its six substitute approaches, like the application of CAS order-by-order or as per cumulative cutoff. Such requests have arisen from the recommendations of the section 809 panel underscoring the irregularity or heterogenous nature of applying the CAS to the IDVs because of their infinite nature.

As per the report, public comments must be given by August 19, 2024, and the CAS Board will consider revisions to enable consistency and clarity. As a result, it would incentivize both government and contractors by decreasing compliance burdens and handling cost risks.

Example #2

Let us assume that AlphaTechno Corporation produces sophisticated electronics in Old York City. It has an employee, Joana, in the job role of cost accountant to utilize CAS in its company products. All new products have their costs calculated by Joanna based on the assessment of their fixed costs like overhead, materials and labor aligned with variable costs.

Hence, by deploying CAS, Joana assigns indirect costs like equipment depreciation and factory utilities to every new product. She notes cost drivers and manufacturing volume data, guaranteeing every order fulfills CAS coverage cutoffs. Hence, such an exact cost measurement aids AlphaTechno in complying with state contracts and conserving profitability.

CAS has a lot of importance in various realms, such as:

• It ensures correct financial reporting helping towards trustworthy decision-making of business. 
• It leads to transparency related to cost allocation, resulting in enhanced resource management. 
• It also facilitates cost control along with aiding in formulating standards and benchmarks.
• The government uses it in other liabilities and income tax assessments. 
• Increases adherence to regulatory and legal requirements. 
• Supports anticipated cost estimation and efficacy budget planning.
• Enables analysis and comparison throughout different periods or business units.