Contractor ABC currently performs on fixed price contracts for the U.S. Government but wants to begin bidding on cost reimbursable contracts later this year. To begin planning for this, an analyst at Contractor ABC has drafted an initial cost flow diagram to show how indirect costs likely move from the corporate home office level, down through intermediate home offices, and finally into the Federal segment where the cost reimbursable work will be performed. Given the information below, contemplate the indirect rate allocation chart prepared by the analyst (colored lines indicate an allocation of indirect expenses from one level in the waterfall to another). As we covered in our class, there is no “perfect” rate structure design, so we encourage you to offer alternative allocations methodologies for this cost flow diagram.
For your discussion board response, offer up 1-2 thoughts, questions, or recommendations given the drafted structure above and scenario facts below. You do not need to answer every question below.
1. Do you think the IT costs are allocating appropriately to the intermediate home offices? Why or why not?
2. Do you think the Security costs are allocating appropriately to the intermediate home offices? Why or why not?
3. Do you think the c-suite executive costs are allocating appropriately to the intermediate home offices? Why or why not?
4. Do you think the public sector IHO is allocating appropriately to the segments? Why or why not?
5. Do you think the commercial IHO Is allocating appropriately to the segments? Why or why not?
6. What types of questions would you ask an analyst (or others) to get additional information to help you with your engagement?
Segment Facts:
• The IT pool benefits everyone within the organization. The allocation basis for IT is number of laptops.
• The Security pool is made up expenses which support both Federal and Non-Federal activities. In looking at the expense data, the analyst noticed that a majority of the security expenses related to specific security infrastructure required for federal military bases.
• The analyst cannot come up with a good allocation base for C-Suite expenses and decides that they will be considered residual home office expenses that will allocate over three factor formula. The analyst also knows that a large majority of the company’s tangible assets reside in the Research segment. As a reminder, three factor formula allocates over the following three factors: net book value of tangible capital assets, payroll dollars, and operating revenue.
• The Federal, Commercial, and Research intermediate home offices contain various functional support groups (i.e., marketing, FP&A, Legal) that benefit only the work performed within those IHOs.