Proposed Rule2026-05512
Conformance of Cost Accounting Standards to Generally Accepted Accounting Principles for CAS 407 Use of Standard Costs for Direct Material and Direct Labor
Primary source
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Published
March 20, 2026
Issuing agencies
Management and Budget OfficeFederal Procurement Policy Office
Abstract
The Office of Federal Procurement Policy (OFPP), Cost Accounting Standards Board (the Board), is releasing this notice of proposed rulemaking (NPRM) to elicit public comments on proposed changes to the Cost Accounting Standards (CAS) to conform CAS 407 to Generally Accepted Accounting Principles (GAAP). The Board is performing the work under case number, CASB 2025-02.
Full Text
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<title>Federal Register, Volume 91 Issue 54 (Friday, March 20, 2026)</title>
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[Federal Register Volume 91, Number 54 (Friday, March 20, 2026)]
[Proposed Rules]
[Pages 13562-13566]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-05512]
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OFFICE OF MANAGEMENT AND BUDGET
Office of Federal Procurement Policy
48 CFR Parts 9903 and 9904
RIN 0348-AB91
Conformance of Cost Accounting Standards to Generally Accepted
Accounting Principles for CAS 407 Use of Standard Costs for Direct
Material and Direct Labor
AGENCY: Cost Accounting Standards Board, Office of Federal Procurement
Policy, Office of Management and Budget.
ACTION: Notice of proposed rulemaking.
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SUMMARY: The Office of Federal Procurement Policy (OFPP), Cost
Accounting Standards Board (the Board), is releasing this notice of
proposed rulemaking (NPRM) to elicit public comments on proposed
changes to the Cost Accounting Standards (CAS) to conform CAS 407 to
Generally Accepted Accounting Principles (GAAP). The Board is
performing the work under case number, CASB 2025-02.
DATES: Comments must be in writing and must be received by April 20,
2026.
ADDRESSES: Submit comments to the Federal eRulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>. by searching for ``CASB 2025-02''. Select the link
``Comment Now'' that corresponds with ``CASB 2025-02''. Follow the
instructions provided on the ``Comment Now'' screen. Please include
your name, company name (if any), and ``CASB 2025-02'' on your attached
document. If your comment cannot be submitted using <a href="https://www.regulations.gov">https://www.regulations.gov</a>, call
[[Page 13563]]
or email the points of contact in the FOR FURTHER INFORMATION CONTACT
section of this document for alternate instructions. Comments received
generally will be posted without change to <a href="https://www.regulations.gov">https://www.regulations.gov</a>,
including any personal and/or business confidential information
provided. Public comments may be submitted as an individual, as an
organization, or anonymously (see frequently asked questions at <a href="https://www.regulations.gov/faq">https://www.regulations.gov/faq</a>). To confirm receipt of your comment(s),
please check <a href="https://www.regulations.gov">https://www.regulations.gov</a>, approximately two or three
days after submission to verify posting.
Privacy Act Statement: The Board proposes this rule to elicit
public views pursuant to 41 U.S.C. 1502. Submission of comments is
voluntary. The information will be used to inform sound decision-
making. Do not include any information you would not like to be made
publicly available. Additionally, the OMB System of Records Notice, OMB
Public Input System of Records, OMB/INPUT/01, 88 FR 20913 (available at
<a href="http://www.federalregister.gov/documents/2023/04/07/2023-07452/privacy-act-of-1974-system-of-records">www.federalregister.gov/documents/2023/04/07/2023-07452/privacy-act-of-1974-system-of-records</a>), includes a list of routine uses associated
with the collection of this information.
FOR FURTHER INFORMATION CONTACT: John L. McClung, Manager, Cost
Accounting Standards Board (telephone: 202-881-9758; email:
<a href="/cdn-cgi/l/email-protection#d7bdb8bfb9f9bbf9bab4b4bba2b9b0e597b8bab5f9b2b8a7f9b0b8a1"><span class="__cf_email__" data-cfemail="12787d7a7c3c7e3c7f71717e677c7520527d7f703c777d623c757d64">[email protected]</span></a>).
SUPPLEMENTARY INFORMATION:
I. Background
Section 820 of the 2017 National Defense Authorization Act modified
statutory responsibilities of the Board, codified at 41 U.S.C. 1501(c).
These changes require the Board to conform CAS to GAAP, and minimize
the burden on contractors while protecting the interests of the
Government. This proposed rule is part of an ongoing series of Board
actions to reduce the regulatory footprint of CAS for standards that
are most suitable for potential conformance to GAAP, as identified in
the Board's global roadmap published in March 2019 (84 FR 9143),
because they focus primarily on cost measurement and assignment of
costs to accounting periods, which is also addressed by GAAP. For
additional recent discussion by the Board on the evolution of GAAP to
address cost measurement and assignment of costs to accounting periods,
see (90 FR 43994). This NPRM is issued by the Board in accordance with
the requirements of 41 U.S.C. 1502.
II. CAS 407--Use of Standard Costs for Direct Material and Direct Labor
A. Overview and Conclusion
Based on the Board's comparison of CAS 407 with pertinent GAAP
content, other CAS Standards, and the Federal Acquisition Regulation
(FAR), the Board has concluded that there is significant overlap and
equivalent requirements. For the vast majority of requirements in CAS
407, comparable requirements exist in GAAP, CAS 401, CAS 418, the CASB
Disclosure Statement, FAR 31.201-1 Composition of total cost, FAR
31.202 Direct costs, and FAR 31.205-26 Material costs. These comparable
requirements protect the Government's interests and promote the
uniformity and consistency that was the basis for promulgating CAS 407
more than 50 years ago, when comparable GAAP coverage did not exist.
The Board has concluded that, for the vast majority of the requirements
in CAS 407, the Government's interests are adequately protected by
relying on disclosed GAAP practices that are consistently followed and
subject to notice of changes and cost recovery pursuant to CAS 401--
Consistency in estimating, accumulating, and reporting costs.
Specifically, all contractors, whether subject to full or modified CAS
coverage, are subject to CAS 401 and will continue to be required to
consistently follow their disclosed or actual cost accounting
practices. In addition, they will continue to be bound by the 9903.201-
4 CAS contract clauses requiring disclosure and consistency in cost
accounting practices regardless of whether a specific standard exists.
These contract clauses implement the statutory requirements for
disclosure of 41 U.S.C. 1502(f)(1), and protections from payment of
increased costs as a result of changes to contractors' cost accounting
practices provided by 41 U.S.C. 1502(f)(2).
As explained in greater detail below, the Board proposes to retain
certain limited requirements (i.e., CAS 407-30(a)(7), CAS 407-40(b),
CAS 407-50(a)(4)(i) and (ii), CAS 407-50(d)(1) and (2), CAS 407-50(e),
and CAS 407-60(b)). These requirements address standard costs and
related variances at the production unit level that are not covered by
GAAP. The Board proposes to move these requirements to CAS 418--
Allocation of direct and indirect costs.
This proposal would be consistent with the Board's guiding
principles for conforming CAS to GAAP because it would eliminate CAS
content to minimize the burden on contractors while protecting the
interests of the Government. Furthermore, the Board's conclusion to
eliminate CAS 407 would align with the guiding principles to rely on
coverage in GAAP when it would materially achieve uniformity and
consistency in cost accounting without bias or prejudice to either
party, rely on other CAS Standards which may protect the Government's
interests, and eliminate CAS coverage when no longer necessary.
The Board has not identified any instance where the elimination of
CAS 407, as contemplated, would result in a change to a contractor's
disclosed cost accounting practices for government contracts. With the
noted exceptions, the current CAS requirements are nearly identical to
GAAP. The Board expects that contractors would continue to follow their
existing practices as they are both compliant with CAS and GAAP. As
such, having identified no cost accounting practice changes as a result
of this proposed rule any current or future changes related to standard
costing of direct material or labor and the treatment of variances
would be considered unilateral as defined in 9903.201-6(b)(2).
B. Evolution of CAS and GAAP Coverage on Use of Standard Costs for
Direct Material and Direct Labor
CAS 407 was initially published April 1, 1974, at 39 FR 11869. The
preamble for the original publication of CAS 407 stated that, ``[w]ork
preliminary to the development of this Cost Accounting Standard was
initiated as the result of the recognition that practices concerning
the use of standard costs for contract costing purposes have not been
well defined in Government procurement regulations.'' The preamble
identified that, ``. . . this standard provides needed criteria which
the Board believes will improve cost measurement and will result in
more equitable assignment of contract costs.'' The purpose of CAS 407
is to provide criteria under which standard costs may be used for
estimating, accumulating, and reporting costs of direct material and
direct labor; and to provide criteria relating to the establishment of
standards, accumulation of standard costs, and accumulation and
disposition of variances from standard costs.
The CAS 407 standard has remained static since its initial
promulgation, with the exception of being incorporated into the FAR (57
FR 14153, April 17, 1992) and having one of the illustrations corrected
for a mathematical discrepancy (57 FR 34167, August 3, 1992). By
contrast, GAAP has been revised significantly with additional content
and changes in
[[Page 13564]]
requirements since the original promulgation of CAS 407 in 1974.
Additionally, the sophistication of accounting systems to accurately
calculate, document, and support the utilization of standard costs has
drastically changed since CAS 407 was first promulgated.
C. CAS 407 Compared With GAAP
The Board performed a side-by-side comparison of CAS and GAAP
requirements to identify any material differences. The Board assessed
unique CAS requirements in order to determine whether they were
necessary to protect the Government's interests or whether other
existing requirements in CAS Standards or the FAR would adequately
protect the interests of the Government.
Fundamental Requirements
The fundamental requirements of CAS 407 allow the use of standard
costs for estimating, accumulating, and reporting costs of direct
material and direct labor when: standard costs are entered into the
books of account; standard costs and related variances are
appropriately accounted for at the level of the production unit; and
practices with respect to the setting and revising of standards, use of
standard costs, and dispositions of variances are stated in writing and
are consistently followed. GAAP states that, ``standard costs are
acceptable if adjusted at reasonable intervals to reflect current
conditions so that at the balance-sheet date standard costs reasonably
approximate such costs computed under one of the recognized bases''
(ASC 330-10-30-12). While companies may elect to use a standard costing
approach for operations, any variance between actual costs and standard
costs would need to be absorbed to result in the reporting of actual
costs in inventory, subject to the considerations in ASC 330-10-30-3
through 330-10-30-8. ASC 912-330-50-1 requires that a contractor
disclose their accounting policies with respect to costs included in
inventory.
In addition to the requirements in GAAP, the Board also evaluated
other CAS Standards and FAR regulations. The Board identified that the
CASB Disclosure Statement requires the disclosure of setting standards,
revising standards, and disposing of variances related to standard
costs. FAR 31.201-1(a), Composition of Total Cost also requires the
adjustment of standard costs for applicable variances. For each of the
fundamental requirements in CAS 407, with the exception of accounting
for standard costs and variances at the level of the production unit,
the Board identified that a comparable requirement exists in GAAP,
other CAS Standards, or FAR that would protect the Government's
interests and promote uniformity and consistency.
Based on the Board's research it concluded that GAAP does not
define production unit. CAS 407-30 defines Production unit to mean a
grouping of activities which either uses homogeneous inputs of direct
material and direct labor or yields homogeneous outputs such that the
costs or statistics related to these homogeneous inputs or outputs are
appropriate as bases for allocating variances. This was in response to
comments received and documented in the preambles:
Use of the term production unit. Many commentators expressed a
need for a better understanding of the meaning and significance of
the term production unit. As defined in 407.30(a)(7), a production
unit is a grouping of activities which either uses homogeneous
inputs of direct material and direct labor or yields homogeneous
outputs. Where a grouping of activities meets either one of these
two criteria, it is the proper level at which to accumulate standard
costs of direct material and direct labor and to accumulate
variances related thereto. Since variances are allocated on the
bases of costs and statistics of each production unit, homogeneity
of standard costs of direct material and direct labor would assure
that data thus accumulated would be appropriate as bases for
allocating variances to cost objectives. The concept of homogeneity
embodied in the term production unit, then, would permit contractors
a degree of flexibility in setting and revising standards based on
individual needs and circumstances and still provide for the proper
cost assignment of variances. To further clarify the intended
meaning and purpose of a production unit, the Board has added an
illustration as 407.60(b).
The Board deliberated and concluded that the existing concept of
the production unit in CAS 407 is required and therefore the definition
at 407-30(a)(7), the fundamental requirement at 407-40(b), and the
illustration at 407-60(b) should be retained.
Techniques for Application
The techniques for application of CAS 407 require the documentation
of the criteria for setting and revising standards, details on
calculating and allocating standard costs and the associated variances,
and memorandum worksheet adjustments. GAAP directly addresses
accounting policies with respect to inventory in ASC 912-330-50-1. GAAP
requires that the contractor's basis of stating inventories be
consistently applied and disclosed as well as disclosure of any change
in valuation (ASC 330-10-35-20 and ASC 330-10-50-1). GAAP recognizes
that practices vary in determining costs of inventory but ultimately
requires consistency and disclosure (ASC 270-10-45-6.d and ASC 330-10-
30-12). As discussed above, GAAP does not define production unit and
therefore the techniques related to production units in CAS 407-50 do
not have comparable GAAP requirements. On this basis, the Board
concluded that CAS 407-50(a)(4)(i) and (ii), CAS 407-50(d)(1) and (2),
and CAS 407-50(e) should be retained.
In addition to the requirements in GAAP, the Board also evaluated
other CAS Standards and FAR regulations. The Board identified that the
CASB Disclosure Statement requires disclosure of setting standards,
revising standards, and disposing of variances related to standard
costs. The CASB Disclosure Statement also includes the level of
production unit to accumulate variances. CAS 402-50(e) states, ``Any
direct cost of minor dollar amount may be treated as an indirect cost
for reasons of practicality where the accounting treatment for such
cost is consistently applied to all final cost objectives, provided
that such treatment produces results which are substantially the same
as the results which would have been obtained if such cost had been
treated as a direct cost.'' This addresses the CAS 407 techniques
related to immaterial variances and is also consistent with FAR
31.202(b) which states, ``For reasons of practicality, the contractor
may treat any direct cost of a minor dollar amount as an indirect cost
if the accounting treatment (1) is consistently applied to all final
cost objectives; and (2) produces substantially the same results as
treating the cost as a direct cost.'' The Board also evaluated the
requirements in CAS 418--Allocation of direct and indirect costs and
identified coverage in this Standard related to standard costs.
III. Expected Impact of the Rule
The proposed rule is deregulatory in furtherance of 41 U.S.C.
1501(c), which requires the Board ensure that the Cost Accounting
Standards used by contractors rely, to the maximum extent practicable,
on commercial standards and accounting practices and systems. In
addition, 41 U.S.C. 1501(c) requires the Board to conform CAS
requirements, where practicable, to GAAP. The proposed rule would
eliminate 12 of the 16 individual requirements contained in CAS 407,
retaining only the minimal content the Board has identified as needed
to protect the Government's interest by moving it to another standard.
This will eliminate the need for a separate CAS addressing standard
costs for direct material and direct labor.
[[Page 13565]]
The proposed rule would result in the removal of over 2,000 words of
unnecessary regulatory text currently in place in this standard.
Reliance on a contractor's disclosed GAAP practices for CAS purposes
significantly reduces the regulatory footprint associated with CAS and
places reliance on commercial accounting practices under GAAP
consistent with 41 U.S.C. 1501(c). These changes, if finalized as
proposed, are expected to reduce burden for contractors, external
auditors, government auditors, and oversight functions by reducing
duplicative compliance requirements.
These changes individually and in conjunction with the Board's
ongoing broader CAS-GAAP conformance efforts and modernization of the
CAS programmatic requirements are expected to simplify CAS
administration and reduce barriers to entry for non-traditional
contractors including new mid-size entities who no longer qualify as
small businesses. These actions should increase competition in federal
contracting, as envisioned by the Senate Armed Services Committee in
promoting CAS-GAAP conformance (S. Rept. 114-25 Section 811), ``The
committee is concerned that the current cost accounting standards favor
incumbent defense contractors and limit competition by serving as a
barrier to participation by non-traditional, small business, and
commercial contractors. To level the competitive playing field to
access new sources of innovation it is in the government's interest to
adopt more commercial ways of contracting, accounting, and oversight.''
The Board is interested in comments on the expected impact of this
rule, including any quantified estimates on the cost reductions and
savings expected to be achieved by the proposed elimination of CAS 407.
IV. Regulatory Flexibility Act
CAS Board rules do not impact small entities within the meaning of
the Regulatory Flexibility Act 5 U.S.C. 601-612. Contracts and
subcontracts with small business concerns are exempted from all CAS
requirements.
V. Executive Orders 12866, 13563, and 14192
Executive Orders (E.O.s) 12866 and 13563 direct agencies to assess
all costs and benefits of available regulatory alternatives and, if
regulation is necessary, to select regulatory approaches that maximize
net benefits (including potential economic, environmental, public
health and safety effects, distributive impacts, and equity). E.O.
13563 emphasizes the importance of quantifying both costs and benefits,
of reducing costs, of harmonizing rules, and of promoting flexibility.
This is a significant regulatory action under section 3(f) of E.O.
12866, Regulatory Planning and Review, dated September 30, 1993. This
rule is anticipated to be a deregulatory action under E.O. 14192 based
on the discussion in the ``Expected Impact of the Rule'' section.
VI. Paperwork Reduction Act
The Paperwork Reduction Act, Public Law 96-511, does not apply to
this proposed rule because this rule imposes no paperwork burden on
offerors, affected contractors and subcontractors, or members of the
public that requires the approval of OMB under 44 U.S.C. 3501, et seq.
List of Subjects in 48 CFR Parts 9903 and 9904
Cost accounting standards, Government procurement.
Kevin R. Rhodes,
Administrator, Office of Federal Procurement Policy, and Chair, Cost
Accounting Standards Board.
For the reasons set forth in the preamble, the Office of Federal
Procurement Policy proposes to amend chapter 99 of title 48 of the Code
of Federal Regulations as set forth below:
PART 9903--CONTRACT COVERAGE
0
1. The authority citation for part 9903 continues to read as follows:
Authority: Public Law 100-679, 102 Stat. 4056, 41 U.S.C. 422.
Subpart 9903.301--[Amended]
0
2. In Sec. 9903.301(a), edit the following definitions to read as
follows:
Actual cost. See 9904.401-30.
Production unit. See 9904-418-30.
0
3. In Sec. 9903.301(a), remove the following definitions:
Labor cost at standard.
Labor-rate standard.
Labor-time standard.
Material cost at standard.
Material-price standard.
Material-quantity standard.
Standard cost.
Variance.
PART 9904--COST ACCOUNTING STANDARDS
0
4. The authority citation for part 9904 continues to read as follows:
Authority: Public Law 100-679, 102 Stat. 4056, 41 U.S.C. 422.
Subpart 9904.407--[Removed and Reserved]
0
5. Remove and reserve subpart 9904.407.
Subpart 9904.418[Amended]
0
6. In Sec. 9904.418-30, add subparagraph (a)(5) to read as follows:
Sec. 9904.418-30 Definitions.
* * * * *
(a)(5) Production unit means a grouping of activities which either
uses homogeneous inputs of direct material and direct labor or yields
homogeneous outputs such that the costs or statistics related to these
homogeneous inputs or outputs are appropriate as bases for allocating
variances.
Subpart 9904.418 [Amended]
0
7. In Sec. 9904.418-50, edit paragraph (a)(2)(i) to read as follows:
Sec. 9904.418-50 Techniques for application.
* * * * *
(i) Standard costs may be used for estimating, accumulating, and
reporting costs of direct material and direct labor only when standard
costs and related variances are appropriately accounted for at the
level of the production unit and paragraph (h) of this subsection; or
Subpart 9904.418 [Amended]
0
8. In Sec. 9904.418-50, add paragraph (h) to read as follows:
Sec. 9904.418-50 Techniques for application.
* * * * *
(h) Standard costing.
(1) A labor-rate standard may be set to cover a group of direct
labor workers who perform disparate functions only under either one of
the following conditions:
(i) Where that group of workers all work in a single production
unit yielding homogeneous outputs (in this case, the same labor-rate
standard shall be applied to each worker in that group).
(ii) Where that group of workers, in the performance of their
respective functions, forms an integral team (in this case, a labor-
rate standard shall be set for each integral team).
(2) A contractor's established practice with respect to the
disposition of variances accumulated by production unit shall be in
accordance with one of the following subparagraphs:
(i) Variances are allocated to cost objectives (including ending
in-process inventory) at least annually. Where a variance related to
material is allocated, the allocation shall be on the basis of
[[Page 13566]]
the material cost at standard, or, where outputs are homogeneous, on
the basis of units of output. Similarly, where a variance related to
labor is allocated, the allocation shall be on the basis of the labor
cost at standard or labor hours at standard or, where outputs are
homogeneous, on the basis of units of output; or
(ii) Variances which are immaterial may be included in appropriate
indirect cost pools for allocation to applicable cost objectives.
(3) Where variances applicable to covered contracts are allocated
by memorandum worksheet adjustments rather than in the books of
account, the bases used for adjustment shall be in accordance with
those stated in paragraph (h) of this subsection.
Subpart 9904.418 [Amended]
0
9. In Sec. 9904.418-60, add paragraph (j) to read as follows:
Sec. 9904.418-60 Illustrations.
* * * * *
(j) Contractor J accumulates, in one account, labor cost at
standard for a department in which several categories of direct labor
of disparate functions, in different combinations, are used in the
manufacture of various dissimilar outputs of the department. Contractor
J's department is not a production unit as defined in 9904.418-30(a)(5)
of this Cost Accounting Standard. Modifying its practice so as to
comply with the definition of production unit in 9904.418-30(a)(5), it
could accumulate the standard costs and variances separately,
(1) For each of the several categories of direct labor, or
(2) For each of several subdepartments, with homogeneous output for
each of the subdepartments.
[FR Doc. 2026-05512 Filed 3-19-26; 8:45 am]
BILLING CODE 3110-01-P
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