Cost Accounting Practice Change - Examples

Introduction

Changes which result in a change in the measurement of costs, the assignment of costs to cost accounting periods, or the allocation of costs to cost objectives should be considered to be changes in cost accounting practice.

Illustrations of changes which "DO NOT MEET" the definition of “Change To A Cost Accounting Practice"

Description	Accounting Treatment
(a) - Change in Interest Rate actuarial assumptions	Change in Estimate
Changes in the interest rate levels in the national economy have invalidated the prior actuarial assumption with respect to anticipated investment earnings. The pension plan administrators adopted an increased (decreased) interest rate actuarial assumption. The company allocated the resulting pension costs to all final cost objectives	Adopting the increase (decrease) in the interest rate actuarial assumption is not a change in cost accounting practice.
(b) - Pension Plan Benefit Change	Change in Cost
The basic benefit amount for a company's pension plan is increased from $8 to $10 per year of credited service. The change increases the dollar amount of pension cost allocated to all final cost objectives	( The increase in the amount of the benefits is not a change in cost accounting practice.
(c) - "New" Pension Plan Cost	Initial Adopotion of an Accounting Practice
A contractor who has never paid pensions establishes for the first time a pension plan. Pension costs for the first year amounted to $3.5 million	The initial adoption of an accounting practice for the first time incurrence of a cost is not a change in cost accounting practice.
(d) - Deferred Incentive Compensation Costs	Elimination of Costs
A contractor maintained a Deferred Incentive Compensation Plan. After several years' experience, the plan was determined not to be attaining its objective, so it was terminated, and no future entitlements were paid	There was a termination of the Deferred Incentive Compensation Plan. Elimination of a cost is not a change in cost accounting practice.
(e) - Elimination of Segment	Elimination of Costs
A contractor eliminates a segment that was operated for the purpose of doing research for development of products related to nuclear energy	The projects and expenses related to nuclear energy projects have been terminated. No transfer of these projects and no further work in this area is planned. This is an elimination of cost and not a change in cost accounting practice.
(f) - Asset Lives	Change in Estimate
For a particular class of assets for which technological changes have rarely affected asset lives, a contractor starts with a 5-year average of historical lives to estimate future lives. He then considers technological changes and likely use. For the past several years the process resulted in an estimated future life of 10 years for this class of assets. This year a technological change leads to a prediction of a useful life of 7 years for the assets acquired this year for the class of assets	The change in estimate (not in method) is not a change in cost accounting practice. The contractor has not changed the method or technique used to determine the estimate. The methodology applied has indicated a change in the estimated life, and this is not a change in cost accounting practice.
(g) - Reorganization	No change in practice - Department still in same Pool
The marketing department of a segment has reported directly to the general manager of the segment. The costs of the marketing department have been combined as part of the segment's G&A expense pool. The company reorganizes and requires the marketing department to report directly to a vice president at corporate headquarters	After the organization change in the company's reporting structure, the parties agree that the appropriate recognition of the beneficial or causal relationship between the costs of the marketing department and the segment is to continue to combine these costs as part of the segment's G&A expense pool. Thus, the organizational change has not resulted in a change in cost accounting practice.

Court Cases

Corporate Reorganization

A corporate reorganization that involves a change in the grouping of segments for home office expense allocation purposes should not be considered a change in accounting practice unless the method or technique used to allocate the costs changes.

The Govt's position is that a change in accounting "method or technique" (practice) includes any change in the size and composition of the segment base or cost pools. The govt. argues that if a segment base is expanded by putting more segments into the base, or by merely increasing the size of the underlying segments, that constitutes a change in accounting methods or techniques that requires the contractor to file a cost impact proposal. Martin Marietta Corporation (MMC) contends that changes in cost accounting methods or techniques do not encompass size changes, but rather they are limited to changes in the methodologies of how indirect costs are accumulated in costs pools or are allocated to the segment bases.

The board rendered a decision in favor of MMC.