This section is from the book "The Law Of Contracts", by William Herbert Page. Also available from Amazon: Commercial Contracts: A Practical Guide to Deals, Contracts, Agreements and Promises.
The actual cost of production of the articles hereby contracted for, hereinafter sometimes called "Actual Cost," shall be determined as set forth in Article VII, and is hereby defined as consisting of and including the following elements:
(1) The cost of all direct labor definitely ascertainable as used in the production of the articles herein contracted for.
(2) The cost of all direct materials and supplies definitely ascertainable as entering into or expended in the production of the articles herein contracted for.
(3) A fair amount to cover the depreciation accruing during the period of production of the articles under this contract on that portion of the plant, equipment and facilities owned by the Contractor and used in or necessarily rendered idle on account of the production of the articles herein contracted for and properly chargeable thereto.
(4) A fair proportion of overhead expenses other than that included in item (3). If the method of distributing overhead expenses now and heretofore in use by the Contractor shall be found to be fairly accurate, it shall be followed by the contracting or accounting officer in distributing overhead hereunder. By the term "overhead expenses" is meant the indirect labor and other manufacturing expenses, and the general and administrative expenses applicable to and necessary in connection with the production of the articles contracted for herein, provided that nothing herein shall be deemed to include interest, rent, advertising, collection expense, credit losses, discounts, and such taxes as income and excess profit taxes imposed by the Government of the United States.
The specific definition of the terms used in the foregoing paragraphs (1) to (4), and the determination provided for in Article VII, shall be in general accordance with the provisions of the "Memorandum on Definition of Actual Cost and on Method of Collating Cost Data."
Hereunto attached is Schedule A, which is hereby made a part of this agreement as fully as if the same were incorporated in the body hereof. Elements of cost, not included in the foregoing paragraphs, but provided for in the said Schedule A, shall be included in actual cost, and shall be subject to the provisions of Schedule A.
All of the above provisions shall be equally applicable to the cost of increased facilities in this contract elsewhere provided for.