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Question about transfer costs on IOTs/IWOs:

I am trying to resolve an issue regarding the application of a "Material Handling" like fee on Inter-company transfers to cover the administrative cost of the transfer. I found the 2010 DCAA MRD (http://www.dcaa.mil/mmr/10-PSP-009.pdf) that provides instruction for whether to transfer on the basis of cost or price, but haven't found any definitive guidance relative to the application of the cost of transfer without it looking like a "fee" when it is not. any guidance would be appreciated.

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Application of a material handling indirect expense (overhead) -- or, really, application of any indirect expense -- is never fee. The appropriate overhead burdens to apply to a specific transaction are described in the entity's Disclosure Statement. If there is no Disclosure Statement, then there should be an Accounting System Description that shows what cost elements/transaction comprise the allocation base of each indirect cost pool. Transactions shown as being in the allocation base receive the appropriate indirect expense allocation; whereas those not in the allocation base do not.

If the entity in question applies material handling to IOTs, then that is the way it's done and it should be done that way consistently. Only people who don't understand how indirect costs work would mistakenly consider that to be a fee.

The next question is whether material handling SHOULD BE applied to IOTs. That is, does the inclusion of IOTs into the material handling overhead base comply with applicable regulatory guidance (e.g., FAR 31.203 or CAS 418, if applicable). Those regulations require that there must be a logical nexus between functions/activities in the pool and the allocation base chosen. Consequently, there is no way to answer that question without knowing what functions/activities are included in the material handling indirect cost pool.

If the entity mistakenly thinks IOTs are "buy" then it may have the tendency to apply material handling to them, because Procurement is handling the transaction. Be advised that IOTs are "make" not "buy" unless the transfer is for a commercial item, or priced at "commercial prices" -- See FAR 15.407-2, 15.401, and 31.205-26(e) for more details.

Hope this helps.

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