CAS 403 - 3 Factor Formula
3 Factor Formula
(c) (1) Where residual expenses are required to be allocated pursuant to 9904.403-40(c)(2), the three factor formula described below must be used. This formula is considered to result in appropriate allocations of the residual expenses of home offices. It takes into account three broad areas of management concern:
- The payroll $$ of the organization,
- the business volume, and
- the capital invested in the organization.
The percentage of the residual expenses to be allocated to any segment pursuant to the three factor formula is the arithmetical average of the following three percentages for the same period.
- (i) The percentage of the segment's payroll dollars to the total payroll dollars of all segments.
- (ii) The percentage of the segment's operating revenue to the total operating revenue of all segments. For this purpose, the operating revenue of any segment shall include amounts charged to other segments and shall be reduced by amounts charged by other segments for purchases.
- (iii) The percentage of the average net book value of the sum of the segment's tangible capital assets plus inventories to the total average net book value of such assets of all segments. Property held primarily for leasing to others shall be excluded from the computation. The average net book value shall be the average of the net book value at the beginning of the organization's fiscal year and the net book value at the end of the year.
Table Showing 3FF
| Factor | Segment A $ | Segment B $ | Total $ | Segment A % | Segment B % | |
|---|---|---|---|---|---|---|
| Payroll $$ | 500,000 | 800,000 | 1,300,000 | .3846 | .6154 | |
| Revenue | 1,000,000 | 2,000,000 | 3,000,000 | .3333 | .6667 | |
| Net Book Value | 700,000 | 900,000 | 1,600,000 | .4375 | .5625 | |
| Total Percentage | 1.1554 | 1.8446 | ||||
| Factors | 3 | 3 | ||||
| Arithmetical Average | .3851 | .6149 | ||||
| Residual Expenses | 400,000 | |||||
| Allocation | 154,059.83 | 245,940.17 |
Excel Worksheet of 3FF Calculation
http://www.govcwiki.org/index.php?title=File:3_Factor_Formula_Worksheet.xlsx