B-79310, DEC 14, 1948

B-79310: Dec 14, 1948

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REQUESTING A DECISION AS TO WHETHER YOU ARE AUTHORIZED TO MAKE PAYMENT ON THE FOLLOWING BUREAU VOUCHERS STATED IN FAVOR OF DOUGLAS AIRCRAFT COMPANY. SAID AMOUNTS ORIGINALLY WERE REIMBURSED TO THE CONTRACTOR BUT AS A RESULT OF EXCEPTIONS TAKEN BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE. COLLECTIONS OF THE AMOUNTS WAS EFFECTED BY DEDUCTIONS FROM SUMS OTHERWISE DUE THE CONTRACTOR. THE SAID ITEMS ARE AS FOLLOWS: TABLE OMITTED EACH OF THE CONTRACTS INVOLVED PROVIDES THAT FOR PURPOSES OF DETERMINING THE AMOUNTS PAYABLE TO THE CONTRACTOR THEREUNDER ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH THE REGULATIONS FOR THE DETERMINATION OF THE COST OF PERFORMING A CONTRACT AS PROMULGATED BY TREASURY DECISION 5000.

B-79310, DEC 14, 1948

PRECIS-UNAVAILABLE

COLONEL J. HARRIS, F. D., U.S. ARMY:

THERE HAS BEEN RECEIVED BY REFERENCE FROM THE OFFICE OF THE CHIEF OF FINANCE YOUR LETTER OF JUNE 15, 1948, REQUESTING A DECISION AS TO WHETHER YOU ARE AUTHORIZED TO MAKE PAYMENT ON THE FOLLOWING BUREAU VOUCHERS STATED IN FAVOR OF DOUGLAS AIRCRAFT COMPANY, INCORPORATED, SANTA MONICA, CALIFORNIA:

TABLE OMITTED

THE AMOUNTS OF THE VOUCHERS REPRESENT A PORTION OF THE CONTRACTOR'S OVERHEAD ALLOCATED TO THE CONTRACTS DURING THE FISCAL YEARS 1942, 1943, AND 1944 AND COVER CERTAIN DEPRECIATION EXPENSES AT THE CONTRACTOR'S PLANT IN SANTA MONICA, CALIFORNIA. SAID AMOUNTS ORIGINALLY WERE REIMBURSED TO THE CONTRACTOR BUT AS A RESULT OF EXCEPTIONS TAKEN BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE, COLLECTIONS OF THE AMOUNTS WAS EFFECTED BY DEDUCTIONS FROM SUMS OTHERWISE DUE THE CONTRACTOR. THE SAID ITEMS ARE AS FOLLOWS:

TABLE OMITTED

EACH OF THE CONTRACTS INVOLVED PROVIDES THAT FOR PURPOSES OF DETERMINING THE AMOUNTS PAYABLE TO THE CONTRACTOR THEREUNDER ALLOWABLE ITEMS OF COST WILL BE DETERMINED BY THE CONTRACTING OFFICER IN ACCORDANCE WITH THE REGULATIONS FOR THE DETERMINATION OF THE COST OF PERFORMING A CONTRACT AS PROMULGATED BY TREASURY DECISION 5000, APPROVED BY THE SECRETARY OF WAR, AUGUST 2, 1940.

SECTION 26.9 OF T. D. 5000 IS, IN PERTINENT PART, AS FOLLOWS:

"SEC. 26.9 COST OF PERFORMING A CONTRACT OR SUBCONTRACT.-- (A) GENERAL RULE.-- THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT SHALL BE THE SUM OF (1) THE DIRECT COSTS, INCLUDING THEREIN EXPENDITURES FOR MATERIALS, DIRECT LABOR AND DIRECT EXPENSES, INCURRED BY THE CONTRACTING PARTY IN PERFORMING THE CONTRACT OR SUBCONTRACT; AND (2) THE PROPER PROPORTION OF ANY INDIRECT COSTS (INCLUDING THEREIN A REASONABLE PROPORTION OF MANAGEMENT EXPENSES) INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT.

"(5) INDIRECT FACTORY EXPENSES.-- ITEMS, USUALLY TERMED FACTORY OVERHEAD, 'WHICH ARE NOT DIRECTLY CHARGEABLE TO THE FACTORY COST OF PERFORMING THE CONTRACT OR SUBCONTRACT BUT WHICH ARE PROPERLY INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT AND CONSIST OF THE FOLLOWING:

"(E) MISCELLANEOUS INDIRECT FACTORY EXPENSES.-- MISCELLANEOUS FACTORY EXPENSES NOT DIRECTLY CHARGEABLE TO THE FACTORY COST OF PERFORMING THE CONTRACT OR SUBCONTRACT, SUCH AS ***; EMPLOYEE'S WELFARE EXPENSES; ***; BUT NOT INCLUDING ANY AMOUNTS WHICH ARE NOT INCIDENT TO SERVICES, OPERATIONS, PLANT, EQUIPMENT OR FACILITIES INVOLVED IN THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT.

"(G) EXPENSES OF DISTRIBUTION, SERVICING AND ADMINISTRATION.-- EXPENSES OF DISTRIBUTION, SERVICING AND ADMINISTRATION, WHICH ARE TREATED IN THIS SECTION AS A PART OF GENERAL EXPENSES IN DETERMINING THE COST OF PERFORMING A CONTRACT OR SUBCONTRACT (SEE PARAGRAPH (B) OF THIS SECTION), COMPREHEND THE EXPENSE INCIDENT TO AND NECESSARY FOR THE PERFORMANCE OF THE CONTRACT OR SUBCONTRACT, WHICH ARE INCURRED IN CONNECTION WITH THE DISTRIBUTION AND GENERAL SERVICING OF THE CONTRACTING PARTY'S PRODUCTS AND THE GENERAL ADMINISTRATION OF THE BUSINESS, SUCH AS--

"(4) OTHER EXPENSES.-- MISCELLANEOUS OFFICE AND ADMINISTRATIVE EXPENSES, SUCH AS ***; EMPLOYEES' WELFARE EXPENSES ***.

"(J) ALLOCATION OF INDIRECT COSTS.-- NO GENERAL RULE APPLICABLE TO ALL CASES MAY BE STATED FOR ASCERTAINING THE PROPER PROPORTION OF THE INDIRECT COSTS TO BE ALLOCATED TO THE COST OF PERFORMING A PARTICULAR CONTRACT OR SUBCONTRACT. SUCH PROPER PROPORTION DEPENDS UPON ALL THE FACTS AND CIRCUMSTANCES RELATING TO THE PERFORMANCE OF THE PARTICULAR CONTRACT OR SUBCONTRACT. SUBJECT TO A REQUIREMENT THAT ALL ITEMS WHICH HAVE NO RELATION TO THE PERFORMANCES OF THE CONTRACT OR SUBCONTRACT SHALL BE ELIMINATED FROM THE AMOUNT TO BE ALLOCATED, ***"

WITH RESPECT TO ITEM (A), DEPRECIATION ON STANDARD OIL LEASEHOLD IMPROVEMENT FOR THE FISCAL YEARS 1942, 1943, AND 1944, THERE ARE ATTACHED TO THE RECLAIM VOUCHER IDENTICAL COPIES OF LETTERS DATED MAY 19, 1948, FROM THE RESIDENT AUDITOR TO THE OFFICER-IN-CHARGE, AIR FORCE, DOUGLAS AIRCRAFT COMPANY, INCORPORATED, WHICH READ, IN PART, AS FOLLOWS:

"3. IN RESPECT TO ITEM (A) ABOVE THE FINAL OVERHEAD SETTLEMENT AGREEMENTS FOR FISCAL YEARS INVOLVED INCLUDED, AS OVERHEAD EXPENSE, DEPRECIATION ON THE IMPROVEMENTS. HOWEVER, SUBSEQUENT DETERMINATION BY THE BOARD OF CONTRACT APPEALS, WITH CONCURRENCE BY LOCAL CONTRACTING OFFICER, THAT WELFARE DIVISION OPERATIONS WERE NOT APPLICABLE TO COST FEE CONTRACT OPERATIONS NECESSITATED A CHANGE RESULTING IN APPLICATION OF THIS EXPENSE TO WELFARE OPERATIONS. SUPPLEMENTAL AGREEMENT NO. 71 TO CONTRACT W 33-038 -AC-361 EFFECTED SETTLEMENT BETWEEN THE CONTRACTOR AND THE GOVERNMENT FOR RETURN OF WELFARE DIVISION PROFITS, APPLIED AS A REDUCTION OF OVERHEAD EXPENSES FOR THE FISCAL YEARS HERE INVOLVED. IN THE SETTLEMENT THIS DEPRECIATION EXPENSE WAS COLLECTED. CONTRACTOR IS THEREFORE ENTITLED TO RECLAIM ANY AMOUNTS COLLECTED BY REASON OF FORMAL EXCEPTIONS."

ACCORDINGLY, SINCE IT HAS NOW BEEN DETERMINED THAT THE TOTAL AMOUNT OF THIS ITEM OF DEPRECIATION EXPENSE WHICH WAS COLLECTED BY REASON OF FORMAL EXCEPTION WAS A DUPLICATION OF A SET OFF OF THE SAME, AMOUNT IN SUPPLEMENTAL AGREEMENT NO. 71 UNDER TERMINATED CONTRACT W-33-038-AC 361, PAYMENT OF AMOUNTS ON THE VOUCHERS SUBMITTED REPRESENTING A REFUND OF SUCH OVERCOLLECTION IS AUTHORIZED.

IN REGARD TO ITEM (B), DEPRECIATION ON RESIDENTIAL PROPERTY FOR THE FISCAL YEAR 1942, THE LETTER DATED MAY 19, 1948, REFERRED TO ABOVE, STATES, IN PART, AS FOLLOWS:

"*** REPRESENTS DEPRECIATION ON PROPERTY ACQUIRED AT TIME OF EXPANDING OPERATIONS AND USED TO HOUSE PERSONNEL OF VARIOUS DEPARTMENTS DETERMINED BY THE CONTRACTING OFFICE AND AUDITOR TO BE AN INTEGRAL PART OF GENERAL OPERATIONS THEREFORE INCIDENT TO AND NECESSARY FOR OPERATION OF ALL CONTRACTS IN PROCESS AT THE SANTA MONICA PLANT."

SINCE IT NOW HAS BEEN DETERMINED THAT THE PROPERTY INVOLVED WAS USED BY THE CONTRACTOR FOR TRAFFIC OFFICES, FOR THE MANAGEMENT OF EMPLOYEES' HOUSING AND TRANSPORTATION, AND FOR STORAGE OF SUPPLIES FOR AN EMERGENCY HOSPITAL TO BE USED FOR THE CONTRACTOR'S EMPLOYEES, AND THAT SUCH RESIDENTIAL PROPERTY WAS USED IN CONNECTION WITH THE CONTRACT WORK, PAYMENT ON THE VOUCHERS SUBMITTED COVERING CLAIM THEREFOR, IS AUTHORIZED.

WITH RESPECT TO ITEM (C), DEPRECIATION ON RECREATION CENTER AND ARENA FOR THE FISCAL YEAR OF 1942, THE ABOVE-REFERRED-TO LETTER OF MAY 19, 1948, STATES IN PART:

"*** REPRESENTS AN ASSET USED AS A LUNCH AREA FOR EMPLOYEES, EMPLOYEE ENTERTAINMENT, RALLIES, ETC. AS SUCH, THE ASSET WAS CONSIDERED A NECESSARY ADJUNCT TO PRODUCTION FACILITIES AND INCIDENT TO AND NECESSARY FOR OPERATION OF COST-FEE CONTRACTS."

SINCE IT NOW HAS BEEN ESTABLISHED THAT THE FACILITIES WERE USED IN CONNECTION WITH MANAGEMENT TALKS, RALLIES, ENTERTAINMENT AND PRODUCTION INCENTIVE AFFAIRS, IT APPEARS THAT THE EXPENSES INCURRED PROPERLY AS REIMBURSABLE UNDER SECTION 26.9 OF TREASURY DECISION 5000 AS A WELFARE EXPENSE.

RELATIVE TO ITEM (D), DEPRECIATION ON AMORTIZATION OF INVENTORY LOSSES FOR THE FISCAL YEAR 1942, PERTAINING TO RECLAIM VOUCHERS R-54 (W 535-AC- 24048), R-164, R-368, R-396, AND R-672 THERE IS ATTACHED TO VOUCHER R-672 A COPY OF A LETTER DATED OCTOBER 2, 1947, FROM THE CONTRACTOR TO THE RESIDENT INDUSTRIAL AUDITOR STATING, IN PART, AS FOLLOWS:

"THE REVISED AMOUNT OF THIS GROSS EXCEPTION AS INDICATED BY THE RESTATEMENT OF 10-22-46 IS $2,275.62, RATHER THAN $12,182.33. THIS AMOUNT IS, IN EFFECT, A DUPLICATION OF AAF DISALLOWANCES ARISING AS FOLLOWS:

"IN THE AUDIT AND SETTLEMENT OF EACH YEAR'S OVERHEAD, THE ARMY AUDITORS GROUPED ALL CAPITAL ASSETS INTO MAJOR CLASSIFICATIONS AND SUBCLASSIFICATIONS. THE CONTRACTOR'S RATES FOR CHARGING DEPRECIATION ON ALL ITEMS WERE REVIEWED, AND WHEREVER THE AAF AUDITORS WERE IN DISAGREEMENT, NEW RATES WERE ESTABLISHED. THE INDIVIDUAL RATES ON ITEMS NECESSARILY WORKED INTO COMPOSITE RATES FOR GROUPS OR CLASSIFICATIONS. DISALLOWANCES WERE THUS EFFECTED BY REVISION OF THE BOOKED RATES. THERE WERE CERTAIN ASSETS ON THE CONTRACTOR'S BOOK WHICH COULD NOT BE ACCOUNTED FOR PRIOR TO THE 1943 PHYSICAL INVENTORY AT THE SANTA MONICA PLANT, BUT UPON WHICH DEPRECIATION WAS BEING TAKEN UPON THE ASSUMPTION THAT THE ASSETS WERE ON HAND. THE ARMY AUDITORS REVIEWED THE 1943 PHYSICAL INVENTORIES, MADE A DETERMINATION OF WHAT HAD BEEN LOST AND HOW MUCH UNALLOWABLE DEPRECIATION WAS APPLICABLE THERETO FOR EACH YEAR. THE $2,275.62 INVOLVED IN THESE EXCEPTIONS ACTUALLY REPRESENTS, THEREFORE, DEPRECIATION ON ASSETS WHICH WERE NOT LOST, AND WHICH WERE IN THE BEST JUDGEMENT OF THE ADMINISTRATIVE AUDIT AGENCIES, AND THE CONTRACTING OFFICER, SATISFACTORILY ACCOUNTED FOR BY THE CONTRACTOR AND PROPERLY CHARGED ON ITS BOOKS."

SINCE THE RECORD SHOWS THAT THE GROSS AMOUNT OF $12,182.33 WAS ORIGINALLY QUESTIONED BY AN EXCEPTION STATED AGAINST VOUCHER 188279, MAY 1945 ACCOUNT OF G. KLEIN, AND ON THE BASIS OF SUCH QUESTION THE ADMINISTRATIVE AGENCY REDETERMINED ALLOWABLE DEPRECIATION AND DISALLOWED THE GROSS AMOUNT OF $9,906.71 ON VOUCHER 28742, FEBRUARY 1946 ACCOUNT OF J. L. FORTIER, AND THE BALANCE, AS PRORATED TO THE RELATED CONTRACTS IN THE AMOUNTS RECLAIMED, EXCEPT $112.13 WHICH RELATES TO ANOTHER EXCEPTION, WAS COLLECTED ON COLLECTION VOUCHER 15418, MAY 1946 ACCOUNT OF R. B. CONNER, AND AS IT HAS BEEN DETERMINED THAT THE REDETERMINATION BY THE ADMINISTRATIVE AGENCY IS CORRECT AND THE ADJUSTMENT IN THE GROSS AMOUNT OF $9,906.71 WAS SATISFACTORY, THE BALANCE COLLECTED, AS REPRESENTED BY THE RECLAIM VOUCHERS INVOLVED, MAY BE CONSIDERED AS PROPER FOR REIMBURSEMENT TO THE CONTRACTOR.

IN REGARD TO THE EXCEPTION STATED AGAINST VOUCHER 197792, MAY 1945 ACCOUNT OF G. KLEIN, UNDER CONTRACT W-535-AC-17946, THE NET AMOUNT APPLICABLE, TO THIS ITEM OR $122.13, REFERRED TO ABOVE, WAS DEDUCTED ON VOUCHER 84489. FEBRUARY 1946 ACCOUNT OF R. B. CONNER. HOWEVER, THE RECORDS INDICATE THAT SUBSEQUENT THERETO, DUE TO A REDETERMINATION BY THE ADMINISTRATIVE AGENCY OF ALLOWABLE DEPRECIATION, THE NET AMOUNT OF $42.89 WAS SET OFF ON VOUCHER 114729, JUNE 1946 ACCOUNT OF R. B. CONNER, THEREBY RESULTING IN A DUPLICATE DEDUCTION OF SUCH AMOUNT.

ALSO, SINCE IT HAS BEEN DETERMINED THAT THE REDETERMINATION OF THE ADMINISTRATIVE AGENCY IS CORRECT, IT APPEARS THAT THE AMOUNT OF $69.24 AS WELL AS THE DUPLICATE SET OFF IN THE AMOUNT OF $42.89 IS PROPER FOR REIMBURSEMENT TO THE CONTRACTOR.

WITH RESPECT TO ITEM (D), DEPRECIATION ON AMORTIZATION OF INVENTORY LOSSES FOR THE FISCAL YEAR 1943, PERTAINING TO RECLAIM VOUCHERS R-37, R 41, R-54 (W-535-AC-40125), R-79, R-80, R-166, R-373, R-631, AND R-677, THERE IS ATTACHED TO VOUCHER R-677 A COPY OF A LETTER DATED NOVEMBER 11, 1947, FROM THE CONTRACTOR TO THE RESIDENT INDUSTRIAL AUDITOR, WHICH READS, IN PART, AS FOLLOWS:

"A. IN THE AUDIT AND SETTLEMENT OF THE CONTRACTOR'S 1943 OVERHEAD, THE AAF AUDITORS DISALLOWED (RESUBMISSION CLAIM) $11,190.03 OF THE $12,182.33 IN ACCOUNT 9063 AND STATED IN THIS EXCEPTION BY THE GENERAL ACCOUNTING OFFICE. THE FINANCE OFFICER LIKEWISE DEDUCTED ON D. O. VOUCHERS, AS INDICATED ON THE ATTACHED SCHEDULES, THEREBY DUPLICATING DEDUCTION FROM THE CONTRACTOR.

"A. THE EXCEPTION IS TAKEN AGAINST DEPRECIATION ON ALLEGED 'LOST ASSETS' AND AS SUCH IS, IN EFFECT, A DUPLICATION OF AMOUNTS PREVIOUSLY DISALLOWED BY THE AAF AUDITORS. IN THE AUDIT SETTLEMENT OF EACH YEAR'S OVERHEAD, THE ARMY AUDITORS GROUPED ALL CAPITAL ASSETS INTO MAJOR CLASSIFICATIONS AND SUB-CLASSIFICATIONS. THE CONTRACTOR'S RATES FOR CHARGING DEPRECIATION WERE REVIEWED, AND WHERE THE AAF AUDITORS WERE IN DISAGREEMENT NEW RATES WERE ESTABLISHED. THE INDIVIDUAL RATES ON ITEMS NECESSARILY WORKED INTO COMPOSITE RATES FOR GROUPS OR CLASSIFICATIONS. DISALLOWANCES WERE THUS EFFECTED IN TOTAL BY REVISION OF THE BOOKED RATES. THERE WERE CERTAIN ASSETS ON THE CONTRACTOR'S BOOKS WHICH COULD NOT BE ACCOUNTED FOR PRIOR TO THE 1943 PHYSICAL INVENTORY AT THE SANTA MONICA PLANT, BUT UPON WHICH DEPRECIATION WAS BEING TAKEN ON THE ASSUMPTION THE ASSETS WERE ON HAND. THE AAF AUDITORS REVIEWED THE 1943 PHYSICAL INVENTORIES, MADE A DETERMINATION OF WHAT HAD BEEN LOST AND HOW MUCH DEPRECIATION WAS APPLICABLE THERETO FOR EACH YEAR. OVERALL RATES WERE REVISED TO REFLECT THIS ALONG WITH OTHER FACTORS. THUS THE AMOUNTS INVOLVED IN THESE EXCEPTIONS ACTUALLY REPRESENT DEPRECIATION ON ASSETS WHICH WERE NOT LOST, AND WHICH IN THE BEST JUDGEMENT OF THE ADMINISTRATION AUDIT AGENCIES, AND THE CONTRACTING OFFICER, SATISFACTORILY ACCOUNTED FOR BY THE CONTRACTOR AND PROPERLY CHARGED ON ITS BOOKS.

SINCE THE RECORD NOW INDICATES THAT THE RECLAIM OF AMOUNTS REPRESENTING AMORTIZATION OF INVENTORY LOSSES, IN THE GROSS AMOUNT OF 12,182.33 TO ALL CONTRACTS, THE APPLICABLE PORTION OF THE GROSS AMOUNT OF $11,190.03 WAS DEDUCTED TWICE, ONCE BY THE DISBURSING OFFICER TO SATISFY EXCEPTIONS STATED BY THE AUDIT DIVISION OF THE GENERAL ACCOUNTING OFFICE, AND ONCE BY THE ADMINISTRATIVE AGENCY AS A SET OFF AGAINST AMOUNTS DUE IN THE CONTRACTOR'S SUPPLEMENTAL OVERHEAD CLAIM FOR 1943, THIS OFFICE WILL NOT BE REQUIRED TO OBJECT FURTHER TO THE REIMBURSEMENT TO THE CONTRACTOR OF THE NET AMOUNT REPRESENTED BY THE RECLAIM VOUCHERS INVOLVED. IN REGARD TO THE REMAINING GROSS AMOUNT OF $992.30 AS APPLICABLE TO THE CONTRACTS INVOLVED AND WHICH IS BEING RECLAIMED ON MERIT, THE RECORD SHOWS THAT SUBSEQUENT TO THE QUESTIONING IN NOTICE OF EXCEPTION, STATED AGAINST VOUCHER 32109 AND OTHERS, AUGUST 1945 ACCOUNT OF G. KLIEN, OF THE INCLUSION OF LOST ASSETS IN THE PHYSICAL ASSETS DEPRECIATED BY THE CONTRACTOR, THE ADMINISTRATIVE AGENCY PERFORMED A REAUDIT OF DEPRECIATION EXPENSE AND EXCLUDED FROM THE SCHEDULE OF ITEMS SUBJECT TO DEPRECIATION ALL ASSETS NOT ON HAND AS OF THE END OF THE 1943 FISCAL YEAR. SINCE SUCH EXCLUSION AND THE RESULTING ADJUSTMENT EFFECTED BY THE ADMINISTRATIVE AGENCY SATISFIED THE QUESTION RAISED IN THE EXCEPTION, THE ITEM MAY BE CONSIDERED AS PROPER FOR REIMBURSEMENT TO THE CONTRACTOR.

ACCORDINGLY, THE VOUCHERS, TOGETHER WITH THE SUPPORTING PAPERS, ARE RETURNED HEREWITH, AND YOU ARE ADVISED THAT PAYMENT THEREON IS AUTHORIZED, IF OTHERWISE CORRECT.

AUDIT VOUCHER NO. 168 COVERING MATERIAL PURCHASES UNDER COST-PLUS-A FIXED -FEE CONTRACT W-33-038-AC-17117, WHICH APPARENTLY WAS FORWARDED WITH THE RECLAIM VOUCHERS IN ERROR, ALSO IS RETURNED HEREWITH.