s59_the misconceptions of indirect cost funding_ltc2013

7/29/2019 S59_The Misconceptions of Indirect Cost Funding_LTC2013

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The Misconceptions aboutIndirect Cost Allocation

Beverly Hodges, CPA

Financial Services Administrator

February 20, 2013


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Wallys Idea of Indirect

Cost


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What is an Indirect Cost

Allocation Plan?

A method to calculate the cost ofsupport and/oradministrative activities and functions and allocatethat cost to theCapitalprogram

Support Activities

Administration/Management

Accounting/Budget

Human Resources

Legal

Facility Maintenance

Information Technology

Etc.

Capital

Program


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Reimburse the Operating Fund fromother funds, external agencies, etc.for overhead and administrative

support costs

Recover support services coststhrough federal programreimbursement, compliant with A-87

guidelines

Why Implement an IndirectCost Allocation Plan?


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Cost Allocation Basics


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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


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Key Principles (cont.)

Indirect costs are incurred for a commonpurpose benefiting more than one costfunction, organizational unit, contract, or

grant

Cannot directly assign indirect costswithout making an effort disproportionate

to the results achieved


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What is the purpose of the costallocation plan?

What are the full costs ofproviding a capital program to thepublic?

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

benefit received, or (at least)

Represent an acceptable means forapportioning cost burden?

Key Questions


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Does the plan make sense to those responsible for itsimplementation 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


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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

costscostsDIRECT CAPITAL

PROGRAM

All indirect costs are allocated

only to direct programs


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Its more meaningful to

allocate program costs,rather than individual

line items.

Allocate detailed costs only to theextent they enhance the level ofequity or reasonableness achieved

Start with totals by Section orfunction

Identify program areas withinsections as allocable cost centers

Move to line-item detail only asneeded

Level of Detail


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Assortment of Measures

The number and variety of workload measures used isdependent on the complexity of the organization and the goals

of the plan

FTEsSquare

Footage

Computer

WorkstationsAccounting

Transactions

Actual

Expenditures

Work Orders

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

purpose.


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Common Pitfalls

Incomplete or targeted allocations

Not keeping current with

organizational changes, practices,service levels, and costs

Unnecessary complexity

Avoiding discussion


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Analytical Steps


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Basic Analytical Steps

Examine OrganizationIdentify all indirect and direct

costs and program areas

Utilize Budget

& Financial Data

Compile total costs related to

indirect services and program areas

Determine WorkloadMeasuresForm basis for the allocation

of each indirect service

1

2

3

Allocate CostsAllocate indirect costs based on

determined rate

Make Adjustments

Adjust for non-allocable costs,

assigned costs, and other revisions

4

5


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1. Examine Organization

Identify indirect service sections and programs Identify capital expenditures/programs that receive support


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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


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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


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4. Make Adjustments to CostInformation

Adjust for any costs that can be directlyexpensed to specific capital project

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

Add additional outlays that may notnecessarily correlate to the specificorganizational unit but are reasonableinclusions to the cost of service

Make any exclusions needed to comply with

OMB Circular A-87 rules for federalreimbursement of indirect costs


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5. Allocate Overhead

Costs

Step 1: Apply workload measures toproportionately allocate indirect costs

Step 2: Apply rate to capital programexpenditures


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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.


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FederalReimbursement (A-87)Plans


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What is an A-87 Plan?

OMBCircular

A-87

Its an analysis and document that provides a basisfor recovering costs from federal (and state)grants

Definition of allowable indirect costs

Application of results

True-up process

Documentation requirements Approval


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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 relativebenefits received

Allocate an appropriate share of indirect costs to all

activities which benefit from a governmental unitsindirect cost


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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


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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 methodused to distribute costs

A summary schedule showing the allocation

of indirect cost to the capital program


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FY13 Indirect Cost Rate

Summary


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DOTD Indirect Cost Rate

Applied on Federal Fiscal Year Basis

FY12

FHWA ~ 14.93% FY13

FHWA ~ 10.73%


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What does this mean to your

project funding?

Is it an additional funding source?

Is it project specific?

Where does the money go?


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