The Misconceptions about Indirect Cost Allocation

Beverly Hodges, CPA Financial Services Administrator

February 20, 2013

Wallys 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

Why Implement an Indirect Cost Allocation Plan?

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

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

Key Questions
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?

Cost Allocation Methodology

One-Step Process

A quick, simple means to allocate costs May not be as equitable for complex organizations
1
Allocable Costs of All indirect costs are allocated only to direct programs

INDIRECT SUPPORT ACTIVITIES

costs costs

DIRECT CAPITAL PROGRAM

Level of Detail
Allocate detailed costs only to the extent they enhance the level of equity or reasonableness achieved Start with totals by Section or function
Its more meaningful to allocate program costs, rather than individual line items.

Identify program areas within sections as allocable cost centers Move to line-item detail only as needed

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 Accounting Transactions Square Footage Work Orders

Actual Expenditures

Computer Workstations

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

1 2 3
Examine Organization
Identify all indirect and direct costs and program areas

4 5

Make Adjustments
Adjust for non-allocable costs, assigned costs, and other revisions

Utilize Budget & Financial Data

Compile total costs related to indirect services and program areas

Allocate Costs
Allocate indirect costs based on determined rate

Determine Workload Measures

Form basis for the allocation of each indirect service

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 departments 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?

Its 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
OMB Circular A-87

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 units 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?