How are indirect costs allocated to DoD programs?

• A. Direct labor only; no overhead.
• B. Overhead costs allocated via approved rate structures like overhead pools.
• C. Random distribution to programs.
• D. Based on program size, not rates.

Answer: (B)

Indirect costs are those that support multiple programs and can’t be traced to a single effort. To make sure these costs are shared fairly and consistently, DoD uses approved overhead rate structures organized into overhead pools. Each pool has a predetermined rate, and costs are assigned to programs by applying the rate to an allocation base (such as direct labor hours, machine hours, or another driver applicable to that pool). This method yields auditable, pre-approved charges and prevents arbitrary or random allocations. For example, if the overhead rate for facilities is a fixed amount per direct labor hour and a program uses a certain number of hours, the allocated overhead equals the rate times the hours, summed across all pools. Choosing any approach that ignores overhead or allocates randomly would misstate program costs and undermine cost accountability.