The Misconceptions about Indirect Cost Allocation

Beverly Hodges, CPA

Financial Services Administrator

February 20, 2013

Wally’s Idea of Indirect

Cost…

What is an Indirect Cost

Allocation Plan?

A method to calculate the cost of support and/or administrative activities and functions and allocate that cost to the Capital program

Support Activities

Administration/Management

Accounting/Budget

Human Resources

Legal

Facility Maintenance

Information Technology

Etc.

Capital

Program

• Reimburse the Operating Fund from other funds, external agencies, etc. for overhead and administrative support costs

• Recover support services costs through federal program reimbursement, compliant with A-87 guidelines

Why Implement an Indirect

Cost Allocation Plan?

Cost Allocation Basics

Key Principles

• Cost allocation is by definition an estimate

• Strive for a reasonable and equitable means to allocate costs

“If you could directly

charge for all of these

costs efficiently, you

would…”

Key Principles (cont.)

• Indirect costs are incurred for a common purpose benefiting more than one cost function, organizational unit, contract, or grant

• Cannot directly assign indirect costs without making an effort disproportionate to the results achieved

• What is the purpose of the cost allocation plan?

• What are the full costs of providing a capital program to the public?

• Do cost allocation measures • Reasonably link to the level of service and/or

benefit received, or (at least)

• Represent an acceptable means for apportioning cost burden?

Key Questions

• Does the plan make sense to those responsible for its implementation and upkeep?

• Does the plan make sense to those directly impacted by its results?

• Can the results be explained to internal stakeholders? To the external stakeholders?

• Is the process by which the plan is updated:

• Feasible to complete thoroughly on a regular basis?

• Acceptable to those who must plan around and defend its results?

Key Questions

Cost Allocation

Methodology

One-Step Process A quick, simple means to allocate costs

May not be as equitable for complex organizations

Allocable Costs of

INDIRECT SUPPORT

ACTIVITIES

1

costs costs

DIRECT CAPITAL

PROGRAM

All indirect costs are allocated

only to direct programs

It’s more meaningful to

allocate program costs,

rather than individual

line items.

• Allocate detailed costs only to the extent they enhance the level of equity or reasonableness achieved

• Start with totals by Section or function

• Identify program areas within sections as allocable cost centers

• Move to line-item detail only as needed

Level of Detail

Assortment of Measures

The number and variety of workload measures used is dependent on the complexity of the organization and the goals of the plan…

FTEs Square

Footage

Computer

Workstations Accounting

Transactions

Actual

Expenditures

Work Orders

…and should be based on data that can be obtained easily on a regular basis or is recorded already for some other

purpose.

Common Pitfalls

• Incomplete or targeted allocations

• Not keeping current with organizational changes, practices, service levels, and costs

• Unnecessary complexity

• Avoiding discussion

Analytical Steps

Basic Analytical Steps

Examine Organization Identify all indirect and direct

costs and program areas

Utilize Budget

& Financial Data

Compile total costs related to

indirect services and program areas

Determine Workload

Measures Form basis for the allocation

of each indirect service

1

2

3

Allocate Costs Allocate indirect costs based on

determined rate

Make Adjustments

Adjust for non-allocable costs,

assigned costs, and other revisions

4

5

1. Examine Organization

• Identify indirect service sections and programs

• Identify capital expenditures/programs that receive support

2. Utilize Financial Data

• Compile the costs of indirect program areas

• Exclude any direct service costs

• Decide if costs need to be broken into programs

3. Determine Workload

Measures

• Determine bases for allocating costs in a way that reasonably measures a department’s use of indirect support

• Calculate percentages from each selected data set

4. Make Adjustments to Cost

Information

• Adjust for any costs that can be directly expensed to specific capital project

• Decide how to account for one-time expenditures (e.g., include, exclude, amortize)

• Add additional outlays that may not necessarily correlate to the specific organizational unit but are reasonable inclusions to the cost of service

• Make any exclusions needed to comply with OMB Circular A-87 rules for federal reimbursement of indirect costs

5. Allocate Overhead

Costs

Step 1: Apply workload measures to proportionately allocate indirect costs

Step 2: Apply rate to capital program expenditures

Sound Practices and

Requirements

A good overhead cost allocation plan will include:

– Allocation factors that are appropriate and are based on current and accurate information.

– An allocation of costs to every project receiving services, regardless of whether they can or will pay for those services.

– Actual costs, or if budgeted costs are used then budgets are updated to actual costs at least annually.

– For each overhead cost center, documentation describing (1) the services provided, (2) any excluded costs, and (3) the data used to allocate those costs.

– Documentation showing how overhead charges were calculated.

Federal

Reimbursement (A-87)

Plans

What is an A-87 Plan?

OMB Circular

A-87

It’s an analysis and document that provides a basis for recovering costs from federal (and state) grants… • Definition of allowable indirect costs

• Application of results

• True-up process

• Documentation requirements

• Approval

General A-87 Concepts

(cont.)

Allocations strive for reason and equity

• Distribute indirect costs on bases that will produce an equitable result in consideration of the relative benefits received

• Allocate an appropriate share of indirect costs to all activities which benefit from a governmental unit’s indirect cost

A-87 Unallowable Costs

• Advertising and public relations designed solely to promote the governmental unit

• Costs of promotional items and memorabilia, including gifts, souvenirs

• Alcoholic beverages

• Contingencies

• Bad Debts

• Entertainment

• Legislative costs

A-87 Documentation

Requirements

• Organizational chart

• Description of services

• Identification of who provides and who receives the services

• Expenses included in the cost of service

• Description of the allocation method used to distribute costs

• A summary schedule showing the allocation of indirect cost to the capital program

FY13 Indirect Cost Rate

Summary

DOTD Indirect Cost Rate

Applied on Federal Fiscal Year Basis

• FY12

– FHWA ~ 14.93%

• FY13

– FHWA ~ 10.73%

What does this mean to your

project funding?

• Is it an additional funding source?

• Is it project specific?

• Where does the money go?