FAR Cost Accounting Standards (CAS) 2 — Questions and Answers
Question 1: Under CAS 403, home office expenses must be allocated to operating segments on the basis of:
- Revenue of each segment only
- Beneficial or causal relationship between the expense and segments (Correct answer)
- Number of employees in each segment
- Direct labor hours recorded in each segment
Correct answer: Beneficial or causal relationship between the expense and segments
CAS 403 requires home office expenses to be allocated using a base that best reflects the beneficial or causal relationship between those expenses and the segments receiving benefit.
Question 2: What does CAS 404 govern?
- Capitalization of tangible capital assets (Correct answer)
- Accounting for specifically unallowable costs
- Composition and measurement of pension costs
- Allocation of business unit general and administrative expenses
Correct answer: Capitalization of tangible capital assets
CAS 404 establishes criteria for capitalizing tangible assets and requires contractors to apply capitalization thresholds consistently.
Question 3: Under CAS 405, what is the required treatment of costs specifically identified as unallowable?
- They may be prorated between allowable and unallowable cost pools
- They must be identified and excluded from billings, claims, and proposals (Correct answer)
- They may be included if they total less than 10% of contract value
- They must be submitted to DCAA for approval before exclusion
Correct answer: They must be identified and excluded from billings, claims, and proposals
CAS 405 requires costs specifically identified as unallowable, and their directly associated costs, to be identified and excluded from any government billing, claim, or proposal.
Question 4: CAS 406 establishes requirements for which accounting concept?
- Fiscal year selection procedures for government contractors
- Cost accounting periods used to accumulate and report costs (Correct answer)
- Period performance measurement for fixed-price contracts
- Quarterly reporting deadlines for CAS-covered awards
Correct answer: Cost accounting periods used to accumulate and report costs
CAS 406 requires consistency in the cost accounting periods used to accumulate costs and allocate costs to cost objectives, preventing arbitrary period shifts.
Question 5: Under CAS 409, which depreciation method is NOT permitted for government cost accounting purposes?
- Straight-line method
- Declining balance method
- Units-of-production method
- Accelerated cost recovery system (ACRS/MACRS) tax method (Correct answer)
Correct answer: Accelerated cost recovery system (ACRS/MACRS) tax method
CAS 409 does not permit tax-based depreciation methods like ACRS/MACRS; contractors must use methods that reflect the actual service life and productive use of the asset.
Question 6: CAS 412 and CAS 413 both address which type of deferred compensation cost?
- Stock option and equity compensation plans
- Pension costs for defined benefit and contribution plans (Correct answer)
- Post-retirement health and welfare benefits
- Severance and termination pay obligations
Correct answer: Pension costs for defined benefit and contribution plans
CAS 412 addresses composition and measurement of pension cost, while CAS 413 covers adjustments and allocations of pension cost to segments and cost accounting periods.
Question 7: As defined by CAS, what constitutes a 'cost accounting practice'?
- Any method of estimating costs specifically for a government contract
- Any disclosed or established accounting method or technique for measuring or allocating costs (Correct answer)
- The standard chart of accounts maintained for CAS compliance reporting
- The annual review process mandated by the CASB for large contractors
Correct answer: Any disclosed or established accounting method or technique for measuring or allocating costs
Under CAS, a 'cost accounting practice' means any disclosed or established accounting method or technique used to measure costs, assign costs to cost accounting periods, or allocate costs to cost objectives.
FAR Cost Accounting Standards (CAS) 2
Under CAS 403, home office expenses must be allocated to operating segments on the basis of: