Home Office Policy

PURPOSE

ABC through its subsidiaries conducts extensive busines with the US Government (USG), both directly as prime contractors and indirectly as subcontractors. As a result, ABC is subject to numerous USG regulations such as the Federal Acquisition Regulation (FAR) and Cost Accounting Standards (CAS). As with many large multi-national corporations, ABC has both Corporate Home Offices and Intermediate Home Offices which allocates costs to Operational sites performing on contracts.

The purpose of this Policy is to establish requirements for Home Offices for:

• Allocation of Costs to Operational Units

• Incurred Cost Submissions

• Disclosure Statements

SCOPE / LIMITS

This policy applies to ABC Home Offices that allocate costs to Operational sites that have costs based on cost or pricing data.

DEFINITIONS

3 Factor Formula: is the arithmetical average of the following three (3) 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. Segment - means one of two or more divisions, product departments, plants, or other subdivisions of an organization reporting directly to a home office, usually identified with responsibility for profit and/or producing a product or service. The term includes subsidiaries (domestic and foreign) in which the organization has a majority ownership, or less than a majority of ownership, but over which it exercises control.

Residual Pool: Typical residual expenses are those of the chief executive, the chief financial officer, and any staff which are not identifiable with specific activities of segments.

POLICY

Allocation of Costs to Operational Units

1. All Home Offices must establish procedures to be followed in the estimation, accumulation, and reporting of Home Office costs. The procedures need to include the absorption of these costs into the receiving entity.

2. Home Office Cost and Allocation methodology is as follows:

• Home Office expenses should be allocated on the basis of the beneficial or causal relationship between the supporting and receiving activities. Such expenses should be allocated to segments to the maximum extent practical.

• Expenses not directly allocated, if significant in amount and in relation to total home office expenses, shall be grouped in logical and homogeneous expense pools and allocated as follows:

• Centralized Service – Allocated based on service furnished or received by segment.

• Independent Research and Development and Bid and Proposal (IR&D/B&P) – Allocated as required by CAS 420.

• Residual Expenses – Base Representative of the Total Activity of Segments receiving the allocation, except, whereas, 3 Factor Formula if the total amount of such expenses for the previous fiscal year (before elimination of costs allocated via special or advance agreement) exceeds the following amounts based on revenue of all segments receiving the allocation.

• 3.35% of first 100M

• 0.95% of next 200M

• 0.30% of next 2.7B

• 0.20% of all amounts over 3B

Incurred Cost Submissions

All Home Offices that allocate costs to Segments that perform work on Flexibly Priced Contracts (contracts which contain FAR 52.216-7 – Allowable Cost and Payment Clause, or FAR 52.232-7 T&M Payment Clause) must prepare and submit an Incurred Cost Submission.

Disclosure Statements

All Home Offices that allocate costs to Segments that perform work on CAS Covered Contracts (CAS) that are Full CAS Covered, must also submit a CAS Disclosure Statement.