Consistency in Allocating Costs Incurred for the Same Purpose

Consistency in Allocating Costs Incurred for the Same Purpose
Coming up next: The Sarbanes-Oxley Act: Definition and Explanation

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:03 What Is CAS 402?
  • 1:49 Purpose of CAS 402
  • 2:54 CAS 402 Example
  • 3:34 CAS Exemptions
  • 4:05 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed
Lesson Transcript
Instructor: Beth Loy

Dr. Loy has a Ph.D. in Resource Economics; master's degrees in economics, human resources, and safety; and has taught masters and doctorate level courses in statistics, research methods, economics, and management.

In this lesson, you'll learn how to identify direct and indirect costs when reporting contract costs. Learn more about the Cost Accounting Standard (CAS) 402 from the Federal Acquisition Regulations System (FARS) and exemptions to that standard.

What Is CAS 402?

Smart PEQ (in which PEQ stands for purpose, excellence, and quality) is a nonprofit that provides after-school activities for disadvantaged children. It was recently awarded a federal contract to improve analytical skills measured in standardized testing through mind games for the brain. Examples of these games are chess, Sudoku, NumberHunt, and FreeCell. Smart PEQ purchased iPads for the kids, 25 in total, to play the games. Because Smart PEQ is a nonprofit that receives federal funding, it must report its costs to the funding agency correctly.

As a federal contractor, Smart PEQ is subject to specific requirements for reporting costs. The Code of Federal Regulations (or CFR) details how government contractors like Smart PEQ have to report their costs. The CFR specifies the legislation we all must follow in the United States. One title of the CFR is the section that outlines the Federal Acquisition Regulations System (or FARS). FARS describes how the government and its subcontractors must buy goods and services.

In Section 402 of Title 48, Part 9904, we find the Cost Accounting Standard (CAS) that defines how costs are reported. CAS 402 exists to make sure we assign costs to only one objective. The purpose of CAS 402 is to prevent overcharging and double-dipping. Costs may be indirect costs at one stage of the contract but direct costs by the end of the contract. It's important that these are labeled and reported correctly.

Purpose of CAS 402

The purpose of CAS 402 is to define costs as direct and indirect, making sure that direct costs are subtracted from indirect costs when tied to one final contract objective. Often, this deduction is overlooked and the expense is counted as both a direct and indirect cost. All contracts have initial, intermediate, and final objectives, which are tied to costs. Smart PEQ will have costs that begin as indirect costs and end as direct costs. Let's look at the difference between direct and indirect costs:

  • A direct cost is tied to a specific, final contract objective. For Smart PEQ, a final contract objective is to improve standardized test scores by improving students' analytical skills through playing mind games.
  • Indirect costs are not tied to one specific final contract objective but could be tied to more than one final contract objective or an intermediate objective. For Smart PEQ, an intermediate objective is to teach students how to play mind games using an iPad.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support