tain price revision terms is not known until the work has been completed and the price nego
tiated.
6-606.5 Allocation Bases for Corporate/Home Office Expense
a. When CAS 403 applies, reference should be made to the requirements of the standard and implementing audit guidance in 8-403. When CAS 403 does not apply, it may be used as general information in conjunction with the guidance in this section.
b. Home office expense is the cost of administering the overall operations of a multi-plant or multi-segment company. Home offices typically establish policy for and provide guidance to the segments in their operations. They usually perform management, supervisory, or ad
ministrative functions, but may also perform service functions in support of the operations of the various segments. The costs may include:
(1) those incurred for the benefit of a specific segment, such as specialized consulting services or leases for specific facilities;
(2) those incurred for the benefit of several but not all segments, or for several seg
ments in differing proportions, such as a central computer center or similar service opera
tions or fringe benefit costs such as pensions and insurance;
(3) those incurred for the common benefit of all segments, such as board of directors expenses or top executive salaries.
Costs of the third type, often referred to as "residual" corporate/home office expense, are typically allocated to all segments over a common allocation base except as discussed in d.
below. Costs of the first two types, where significant, require separate allocation for equita
ble costing of Government contracts at the various segments.
c. The segment auditor should identify all type (1) and type (2) expenditures allocated or charged to the segment, and should request audit assistance simultaneously with the request for verification of the corporate (type (3)) allocation. Whether or not assist audit requests have been received, the corporate auditor should initiate the audits of charged and allocated expense without delay. The corporate auditor is also required to audit and report on signifi
cant matters contained in the corporate financial statements, minutes, SEC filings, and tax returns, and to furnish an information copy of the published financial statements to the segment auditors.
d. To evaluate the bases used by the contractor to distribute home office expenses, the auditor should carefully evaluate the organizational structure and operations of the corpo
rate office and each corporate segment, including details of the type of service and support rendered by the corporate office to each segment. This may require close cooperation among the contract auditors cognizant of the company sites. (See 15-200 for information on the contract audit coordinator (CAC) program which has been established to facilitate this coordination within DCAA.) In addition, the corporate/home office auditor is respon
sible for the necessary audits of segments not involved in Government contract work. The objective is to see that the contractor's allocations proportionately distribute home office costs to all segments of the business on the basis of the relative benefits received. Use the applicable contract cost principles (such as FAR 31.201-4, 31.202, and 31.203) as criteria to evaluate the contractor's method.
e. Residual expenses generally have no discernible direct benefit to a particular seg
ment but are necessary to the overall business operations. They may be categorized as costs relating to the prudent management of all resources at the disposal of the
corpora-tion. Residual expenses may include the salaries, fringe benefits, occupancy costs, taxes, and other administrative expenses of the board of directors, executive committees, corpo
rate officers, and administrative/executive management officials. The basis of allocation of residual expenses should reflect the total activities of all segments of the business. How
ever, certain segments may require special allocations of residual expense if their opera
tions are relatively self-contained or self-sufficient and/or require minimal administrative support from the corporate/home office. Conversely, a segment may require special allo
cation in amounts greater than the average rate if it is highly dependent upon the home office staff for general administrative support. (See 6-606.6 regarding allocations to GOCO activities.)
f. The form of the business (foreign or domestic), the extent of ownership (wholly- or partially-owned), or the accounting treatment for financial accounting purposes (consoli
dated or unconsolidated) are not basic criteria for determining whether a particular seg
ment should be included in or excluded from the residual allocation base. Also, the fact that an individual contract or group of contracts does not permit recovery of corporate office expenses is not a reason to exclude the operating segment performing the con-tract(s) from the base of allocation. Once an appropriate base for distributing indirect costs has been accepted, it should not be fragmented by removing individual elements (FAR 31.203(d)). Also see CAS 410.50j for a discussion of special allocations. To the extent that the home office provides necessary support for the segment, a proportionate share of the residual expenses should be allocated to that segment.
6-606.6 Allocation Bases for Residual Corporate/Home Office Expense to GOCO Activities
a. Special attention should be given to the appropriate allocation of residual corpo
rate/home office expense to Government-owned contractor-operated (GOCO) plants. Con-tractor's GOCO activities are usually conducted on a basis substantially independent of supervision by higher corporate echelons. In addition, less administrative support is usual
ly received from the central office since many corporate administrative services are paral
leled by the GOCO administrative activity. In such circumstances, it would not be equita
ble to distribute a share of all the higher level supervisory or administrative expenses to these plants on a proportionate basis by any of the methods commonly used to allocate residual corporate/home office expense to segments.
b. Each auditor at a GOCO plant will provide the corporate/home office auditor infor
mation on the nature and extent of administrative functions performed at the GOCO plant.
The home office auditor and the contractor will reach agreement on whether administra
tive functions performed at the GOCO duplicate home office functions, so that a suitable corporate allocation structure is developed for GOCO activities.
c. If it is appropriate to allocate less residual expenses to a GOCO, the contractor may accomplish this by developing two expense rates as follows:
(1) a basic rate reflecting those corporate expenses which apply to all work of the contractor including GOCO plant operations, and
(2) a rate in addition to the basic rate reflecting those corporate expenses which apply to all work of the contractor except GOCO plant operations. Figure 6-6-1 is an ex
ample of the development of such rates.
6-606 d. Where CAS 403 applies, any special allocations of residual corporate/home office expenses to GOCO activities are established by agreement between the contractor and the Government in accordance with CAS 403.40(c)(3) and 403.50(d). Only a contracting officer may execute such an agreement, but the contract auditor will normally evaluate the proposed method before an initial agreement. The auditor will evaluate the continuing appropriateness of the contractor's method during each audit cycle, and advise the contracting officer if any formal agreement warrants revision.
Figure 6-6-1 (Ref. 6-606.6)
Sample Of Corporate Expense Rates --- GOCO Activities Rate Calculations
Totals Basic Additional
Residual Corporate Expenses:
Basic (applicable to all segment ac
tivities) $ 20,000 $ 20,000 —
Balance (applicable to non-GOCO
segment activities) $ 40,000 — $ 40,000
$ 60,000 $ 20,000 $ 40,000
Base of Allocation:
GOCO segment activities $ 200,000 $ 200,000 —
All other segment activities $ 800,000 $ 800,000 $800,000
$1,000,000 $1,000,000 $800,000
Rates — 2% 5%
Note: In this illustration, the corporate expense rate applicable to GOCO activities is 2%; the rate applicable to other activities of the contractor is 7%.
6-607 Reserved
6-608 Indirect Costs Transaction Testing Plan 6-608.1 General Guidance
a. Indirect costs are incurred as a result of business decisions made at all levels of management. These decisions may be based on established policies or may be a man
ager's choice among several options for achieving an objective. The auditor should con
sider the reasons underlying management decisions when a specific cost item and the Government's interest in the total allocated portion of indirect costs is significant.
b. The audit objectives are to:
(1) ascertain the extent to which the contractor's policies are being implemented at the operating level,
(2) determine whether the contractor is maintaining adequate control over the level of indirect expenditures,
(3) ascertain and evaluate significant fluctuations in the ratios of the accounts to the allocation base, and
(4) determine whether the contractor has excluded from expense pools costs which are unallowable because of the provisions of law, regulations, or the contract;
unreasonable in nature or amount; inapplicable to the Government operations; or inap
plicable to the indirect cost pool or period being audited.
6-608