(3) Payments according to a definite pension plan to disabled and veteran employes or their families, and not included in liability insurance or other items mentioned herein.

(4) Net results of operating the contractor's restaurants.

(5) Vacation allowances to wage earners.

(6) Expenses in connection with employes' welfare, such as group insurance, conducting club rooms, rest rooms, reading rooms, and educational classes.

Discounts. - Trade discounts and discounts allowable for prompt payments shall be deducted from material costs.

Miscellaneous Deductions from Actual Cost. - There may be deducted from actual cost of production miscellaneous items of revenue accruing to the contractor in connection with the present contract.

Depreciation. - The rate of depreciation depends upon the following factors:

(a) Nature and construction of buildings and equipment, together with their condition.

(b) Deterioration of plant in general and of machinery in particular due to wear and tear.

(c) Amount spent for maintenance in the way of repairs and renewals.

(d) The invention of new methods or new machines which may or may not entirely replace the old ones.

(e) Permanency of business, and likelihood of increase or decrease in the same.

(f) Amounts previously written off for depreciation.

(g) There are many additional factors, such as peculiar and excessive uses of machines, rate of production, idleness of plant.

Jigs, Etc. - The cost of all small tools, jigs, dies, patterns, machine tool fixtures, and other appliances of the same general nature, provided exclusively for the purpose of making the articles contracted for shall! be included in Actual Cost.

Methods of Compiling and Ascertaining Costs

The contractor should use the following methods in presenting his final cost figures:

Method of Ascertaining Material Cost. - The following information should be compiled to support the material costs:

(1) Summary showing the totals of the cost value of the various kinds of material used, and supported by original records, such as material reports and requisitions, bills of materials, specifications and production reports.

(2) In determining the material cost, the actual prices paid should be used; where this is not practicable, fair average prices may be used.

(3) In ascertaining the material cost, all discounts should be deducted from the purchase price.

(4) Duties, import, expense, freight, cartage and express inward may be added to the purchase price of the material for the purpose of ascertaining the material cost, or those items may be included as forming a part of the overhead expense items as heretofore mentioned.

Method for Ascertaining Direct Labor Cost. - The following information should be compiled to support the direct labor costs:

(1) Summary showing the totals of the direct labor cost and supported by original records showing the operation, time and amount of wages paid to the employes engaged upon Government work. These original records may take the form of daily, weekly, or monthly time reports or other payroll records.

(2) Wage-rate records should be prepared, dated, and any changes therein noted, with the date thereof.

(3) All labor costs should be represented by wages, computed as above, and actually paid to the respective employes. These wages must be in agreement with the payroll records.

Method of Ascertaining Overhead Cost - The following information should be compiled to support the overhead costs:

(1) Final summary showing the totals of overhead by productive departments.

(2) Summaries showing the overhead in each productive department, giving the amount distributed and applicable to Government work. These summaries will include all overhead charged to the productive departments.

(3) Summaries of the detailed items composing the overhead directly charged to each productive department where Government work is done.

(4) Summaries showing the detailed items composing the overhead directly charged to each non-productive department and the distribution of these items.

(5) Summaries showing the detailed items composing the general operating expenses and the distribution of these items.

(6) Summaries showing the detailed items included in general and other overhead expense, if any, directly applicable and chargeable to the production of the articles contracted for.

(7) The methods or bases used in the distribution of the overhead should be specified. This includes the following: (a) The method or basis used for applying the productive department overhead to the job, order, article, or contract; (b) the method or basis used for distributing the non-productive department overhead; (c) the method or basis used for distributing the general operating expenses.

(8) When mentioning the methods which are used, the various percentages or rates of overhead used should be specified.

Principles of Distribution of Overhead Expenses. - (1) If a cost system is in use and the method of distributing the overhead of departments and product is one that is based on well-defined principles, the method of distribution may be accepted by the Accounting Officer.

(2) The period of time covered by the distribution of the overhead should be in accordance with the cost period, which should not be more than five weeks. If a cost system is not in use, the distribution of costs should be made at least monthly, according to the calendar month, if possible.

(3) Standard methods of distribution of overhead are first, direct labor cost; second, direct labor hours; third, machine hours.

First. - If the wages in an individual operating department are fairly uniform, it will not make any particular difference whether the overhead is distributed on labor costs or labor hours. If, however, there is high and low priced labor in an operating department, it is more accurate to use direct labor hours, especially if both Government and commercial work is being handled in that department.

Second. - The method of distribution of overhead by the direct labor hours is, in the majority of cases, the most accurate method.

Third. - As between direct labor distribution and machine hour distribution, the guiding principle is that wherever the work depends upon the skill of the workman, and the machine or implements that he uses are' merely his tools, the direct labor or cost is the logical method to use. If, however, automatic machines are used, or in cases where one man may run two or more machines, the machine rate is the logical one to use.

Fourth. - Overhead is often distributed on a fixed basis determined in advance of incurring the expense and estimated on the basis of past experience. Where thus is done the estimate must be reduced to actual figures from time to time during the life of the contract; and, in any case, in the cost determination at the termination of the contract.

For contracts of the United States, see Sec. 1842 et seq.