B-138650, OCT. 19, 1959

B-138650, OCT. 19, 1959

TO LIEUTENANT A. S. CORBETT, USAF, ACCOUNTING AND FINANCE OFFICER, DOUGLAS AIRCRAFT COMPANY, INC.:

BY LETTER DATED FEBRUARY 5, 1959, FROM THE DEPUTY DIRECTOR OF ACCOUNTING AND FINANCE (COMPTROLLER), THERE WAS FORWARDED TO OUR OFFICE YOUR LETTER DATED OCTOBER 28, 1958, WITH ENCLOSURES, REQUESTING AN ADVANCE DECISION AS TO THE PROPRIETY OF MAKING PAYMENT ON BUREAU VOUCHERS NOS. R-84 AND R-182, IN THE RESPECTIVE AMOUNTS OF $116.64 AND $1,272.69, COVERING RECLAIMS OF DOUGLAS AIRCRAFT COMPANY, INC., FOR CERTAIN PORTIONS OF CLAIMED 1953, 1954, 1955, AND 1956 OVERHEAD EXPENSES PAID UNDER AIR FORCE COST-PLUS-A- FIXED-FEE CONTRACTS NOS. AF 33/600-22722 AND AF 29/601/-138, BUT SUBSEQUENTLY COLLECTED FROM THE COMPANY AS THE RESULT OF NOTICES OF EXCEPTIONS ISSUED BY OUR OFFICE.

OUR AUDITORS TOOK THE POSITION THAT, SINCE ADVERTISING COSTS WERE NOT GENERALLY REIMBURSABLE UNDER THE TERMS OF THE COMPANY'S COST-PLUS A-FIXED- FEE CONTRACTS WITH THE GOVERNMENT, THE EXPENSES OF OPERATING COMPANY DEPARTMENTS FOR ADVERTISING OR PUBLICITY PURPOSES SHOULD NOT BE GIVEN MORE FAVORABLE CONSIDERATION THAN THE EXPENSES INCLUDED IN THE COMPANY'S ADVERTISING ACCOUNT AS TO WHICH THE GOVERNMENT CONTRACTING AGENCIES HAD DETERMINED THAT ONLY RELATIVELY SMALL PERCENTAGES OF SUCH EXPENSES REPRESENTED ALLOWABLE INDIRECT COSTS. THUS, IN A NUMBER OF INSTANCES, EXCEPTIONS WERE TAKEN TO REIMBURSEMENT OF ADVERTISING DEPARTMENT AND SALES DEPARTMENT EXPENSES OF DOUGLAS AIRCRAFT COMPANY, INC., TO THE EXTENT OF 97 PERCENT OR MORE OF THE SUMS REIMBURSED ON VOUCHERS PAID UNDER THE CONTRACTS. AS RELATED TO CONTRACTS NOS. AF-33/600/-22722 AND AF 29/601/- 138, INVOLVING ORIGINAL REIMBURSEMENT CLAIMS FOR THE APPARENT AMOUNTS OF $36.21, $82.98, $390.50, AND $910.12, EXCEPTIONS WERE ISSUED IN THE RESPECTIVE AMOUNTS OF $35.37, $81.27, $384.42, AND $888.27.

IN B-121040, MAY 17, 1955, B-122689, JULY 29, 1955, AND B-126161, FEBRUARY 17, 1956, CONSIDERATION WAS GIVEN TO CERTAIN RECLAIMS OF THE COMPANY UNDER NAVY CONTRACTS AND IN EACH CASE THE POSITION OF OUR AUDITORS WITH RESPECT TO THE EXTENT TO WHICH ADVERTISING DEPARTMENT EXPENSES AND RELATED SALES DEPARTMENT EXPENSES COULD BE CONSIDERED AS ALLOWABLE COSTS WAS SUSTAINED. IT APPEARED THAT THE WORK OF THESE DEPARTMENTS CONSISTED PRIMARILY OF OPERATIONS WHICH WERE FOR THE PURPOSE OF PUBLICIZING THE NAME OF THE COMPANY AND ITS PRODUCTS.

IN LETTERS DATED OCTOBER 15, 1958, ATTACHED TO THE PRESENT RECLAIM VOUCHERS, THE COMPANY CONTENDED THAT THE DECISIONS WHICH DENIED ITS PREVIOUS RECLAIMS RESULTED FROM A MISINTERPRETATION OF THE TYPES OF ACTIVITIES PERFORMED BY THE ADVERTISING DEPARTMENT. IT WAS ALLEGED THAT THE DEPARTMENT PERFORMS VARIOUS SERVICES, INCLUDING INDUSTRIAL RELATIONS TYPE WORK, PUBLIC RELATIONS TYPE WORK, MILITARY RELATIONS TYPE WORK, STOCKHOLDERS RELATIONS TYPE WORK, EMPLOYEE RECRUITING TYPE WORK, PRODUCT PROVING TYPE WORK AND COMMUNITY SERVICE TYPE WORK, AS WELL AS COMMERCIAL SALES TYPE WORK. THE LETTERS REFER TO FILM PRODUCTIONS USED TO DEMONSTRATE THE PROGRESS ACHIEVED UNDER PARTICULAR PROJECTS, TO REPORT PICTORIALLY ON THE CONDUCT OF CONTRACTUALLY REQUIRED TESTS, TO ILLUSTRATE PERFORMANCE CAPABILITIES OF ARTICLES BEING PRODUCED, TO TRAIN MILITARY PERSONNEL IN THE OPERATION AND/OR MAINTENANCE OF THE COMPANY'S PRODUCTS, AND FOR OTHER PURPOSES. IT WAS STATED THAT THE COMPANY'S FILM WORK BEGAN IN 1950 AND HAS INCREASED YEAR BY YEAR; ALSO, THAT IT WAS DETERMINED DURING THE COMPANY'S ANALYSIS OF THE ADVERTISING DEPARTMENT THAT ITS ACTIVITIES COULD BE SEPARATED INTO TWO BASIC CATEGORIES WHICH COULD BE APPROPRIATELY CALLED "SPECIAL SERVICES" AND "FILM PRODUCTION.'

THE ACTIVITIES OF THE COMPANY'S ADVERTISING DEPARTMENT WERE MADE THE SUBJECT OF A RECENT INVESTIGATION BY REPRESENTATIVES OF OUR OFFICE. WAS REPORTED THAT THE COMPANY DID NOT MAINTAIN RECORDS OR PERFORM AN ANALYSIS OF ADVERTISING AND FILM EMPLOYEES' ACTIVITIES FOR THE COMPANY'S FISCAL YEARS 1953 THROUGH 1955, ALTHOUGH IN SOME CASES THE COMPANY MAINTAINED FILM EMPLOYEES' TIME RECORDS BY JOB OR ACTIVITY DURING THE FISCAL YEAR 1955. EXAMINATION OF THE AVAILABLE FILM EMPLOYEES' JOB TIME SUMMARIES FOR THE PERIOD APRIL 1, 1956, TO NOVEMBER 30, 1956, DISCLOSED THAT A TOTAL OF 16,546.9 HOURS OF FILM WORK HAD BEEN PERFORMED BUT ONLY 5,280.1 HOURS COULD BE IDENTIFIED WITH SPECIFIC JOBS. A REVIEW OF THE ACTIVITIES ON WHICH THE 5,280.1 HOURS WERE EXPENDED DISCLOSED THAT APPROXIMATELY 4,131.4 HOURS, OR 78.2 PERCENT, WERE EXPENDED ON JOBS TO PUBLICIZE THE COMPANY'S NAME AND ITS PRODUCTS. CONSIDERATION WAS GIVEN TO OTHER INFORMATION AND ESTIMATES FURNISHED BY THE COMPANY RELATING TO THE FISCAL YEAR 1956 OPERATIONS OF THE ADVERTISING DEPARTMENT AND IT WAS INDICATED THAT ABOUT 79.2 PERCENT OF THE COMBINED ACTIVITIES OF BOTH FILM AND OTHER EMPLOYEES OF THE ADVERTISING DEPARTMENT INVOLVED COSTS WHICH WERE NOT PROPERLY ALLOCABLE TO THE COMPANY'S COST-PLUS-A-FIXED-FEE CONTRACTS WITH THE GOVERNMENT. ALSO, IN REGARD TO THE COMPANY'S FISCAL YEAR 1956 RECLAIM, IT WAS POINTED OUT THAT THE COMPANY HAD ALLOCATED TO CONTRACT NO. AF 29/601/-138 INDIRECT ADVERTISING DEPARTMENT EXPENSES TOTALING $1,081.40, AND THAT IN STATING THE $888.27 EXCEPTION THERE HAD BEEN OVERLOOKED AN ITEM OF $171.28.

CONSIDERING THE PROBABILITY THAT THE FISCAL YEAR 1953, 1954, AND 1955 OPERATIONS OF THE DEPARTMENT WERE SUBSTANTIALLY OF THE SAME NATURE AS THOSE INDICATED IN THE SURVEY OF THE FISCAL YEAR 1956 OPERATIONS, IT APPEARS THAT WE WOULD BE WARRANTED IN THE BELIEF THAT THE USE OF THE 79.2 PERCENTAGE AS UNALLOWABLE COSTS WOULD RESULT IN REASONABLE ADJUSTMENTS OF THE RECLAIMS PRESENTED ON THE INSTANT VOUCHERS. ON THAT BASIS, AND THE CONCLUSION THAT THE GOVERNMENT IS ENTITLED TO A CREDIT OF 79.2 PERCENT OF $1,081.40, INSTEAD OF 79.2 PERCENT OF $910.12, IN THE COMPUTATION OF THE AMOUNT DUE ON THE 1956 FISCAL YEAR RECLAIM, THE AMOUNTS OF $6.69 AND $15.55, OR A TOTAL OF $22.24, WOULD BE PAYABLE ON BUREAU VOUCHER NO. R-84, AND THE AMOUNTS OF $75.14 AND $31.80, OR A TOTAL OF $106.94, WOULD BE PAYBLE ON BUREAU VOUCHER NO. R 182.

ACCORDINGLY, THE VOUCHERS ARE RETURNED HEREWITH AND YOU ARE ADVISED THAT PAYMENT THEREON IS AUTHORIZED TO THE EXTENT INDICATED, IF OTHERWISE CORRECT.