Post on 30-Apr-2018
Cost Allocation Plan (CAP)Training
Presented by:Emilia Reyes, MBAFinance Director
andCarol Davies, MPASustainability Consultant
AGENDA
1:00 p.m. Introduction and Agenda Review1:30 p.m. Cost Allocation (Purpose, Objective,
and Why)2:00 p.m. Agency Wide Budget and Cost
Allocation Procedures2:30 p.m. Break2:45 p.m. Cost Categories and Different Examples
and Cost Methodologies3:15p.m. Common Cost Allocation Challenges3:30p.m Exercise Time!4:00p.m. Conclusion (What is Required?)
• To understand the purpose and objective of a cost allocation plan
• To develop, demonstrate, and implement a comprehensive allocation process
• To understand the importance of accurate, well‐ supported invoices and documentation
Learning Objectives
• Cost allocationmeans the process of assigning to two or more programs the costs of an item shared by the programs.
• The goal is to ensure that each program bears its fair share, and only its fair share, of the total cost of the item.
• Cost allocation planmeans a written account of the methods used by the grantee agency to allocate costs to its various funding sources.
• A written cost allocation procedure should be a part of the agency's written accounting procedures. These procedures can provide an auditor with a clear description of how funds have been allocated when more than one funding source has been awarded. This section should include regulations governing cost allocation and a guide that provides principles and standards for determining costs as they apply to federal, state, and local governments.
Cost Allocation
CAP is a guide for Non‐profit organizations. The CAP should be tailored to fit the specific policies of each organization. If your organization’s policies are different in any of the categories, please specifically identify the methodology used. Although there are different methodologies available for allocating costs, the methodology used should result in an equitable distribution of costs to programs. Recipients must have a system in place to equitably charge costs consistently.
Overall What is a CAP
• Business Analysis
• Cost Recovery
• Its Easier
Why allocate expenses?
• Reasonable: Ordinary and necessary to accomplish the purpose of the contract and comparable to market prices.
• Allowable: As per the regulations. An example of an unallowable cost are costs for fundraising activities. Those costs are not allowed by First 5 Fresno County.
• Allocable: The expense must benefit the cost objective per the Scope of Work.
• Consistently applied: You cannot switch methods to generate more revenue or treat one cost as direct for one contract and indirect for another contract.
• Documented: The methodology for allocating costs must be documented. This includes time studies and functional time sheets.
The Regulatory Environment –Cost Must Be…
Agency Budget
• Current (fiscal or calendar year)
• Shows income and expense by funding source or program
• Shows allocation of shared and indirect costs by funding source or program
• Shows fundraising separate from program expense
• Clearly identifies all funding sources
Standard Monitoring
a. Process for allocation procedures and plan for shared costs is documented in a written narrative or in the footnotes of the current approved agency – wide budget
b. Process for allocating shared program cost is consistent and reasonable
c. Process for cost allocation procedure and plan for indirectcosts is documented in a written narrative or in the footnotes of the current approved agency – wide budget
d. Process for allocating indirect costs is consistent and reasonable
Cost Allocation Procedures
• Categorize expenses
• Choose an allocation basis
• Allocate shared costs
• Allocate administrative/overhead costs
• Calculated indirect rate
The Allocation Process
Cost Categorization Possible AudienceProgram vs. Supporting IRS/Audited Financials
Watchdog AgenciesDonors
Specific vs. Shared Internal ManagementAuditors
Direct vs. Indirect Funders: Foundations and Government Contracts (local, state, federal)
Cost Categorization: Language Matters
• Direct: Program staff salaries, materials and supplies for programs, contractors’ fees
• Indirect: Portion of Executive Director’s salary, Finance staff salary
• Shared: Office Manager’s, salary, rent, telephone, postage
Examples
Full Program Costs Funder’s Guidelines
Know Your Full Program Costs
Cost Categories Methodology of Allocation
Contractual services Actual usage
Depreciation / use allowance Indirect cost
Emergency assistance payments Direct cost
Equipment rental and maintenance Rental and maintenance on equipment used in central office finance office
Equipment / capital Purchasing of office furniture for use in performing administrative services
Equipment / minor Actual usage
Program materials Direct cost
Insurance Actual usage
Occupancy Central office repairs and utilities on basis of square footage used for administrative services
Office supplies Office and janitorial supplies for administrative and program services
Other expenses Based on administrative services actual use
Postage Actual usage
Professional fees Accounting and audit services, payroll processing services, charged on work performed for administrative services
Program supplies Charged to project as costs are incurred; direct cost
Printing Actual usage
Renovations and improvements Direct cost
Telephone Basic services allocated on number of instruments, toll calls charged on basis of logs of such calls for administrative services
Travel Actual usage
The methodologies used in this example are notrecommended methodologies. They are used for demonstration purposes only. Allocation of costs should be accomplished on a cost benefit basis. This cost benefit can be different from one non‐profit to the next. Any change in the allocation methodology (from the prior year) should be explained. Also, include explanatory information for individual cost elements as shown above.
Cost Categories {adjust to fit your organization}
• A percentage determined by dividing the number of FTEs of each activity by the total number of FTEs from all the activities (excluding any who salaries are treated as common costs).
• A percentage determined by dividing the amount of the payroll expenses of each activity by the payroll expenses of all the activities (excluding common).
• A percentage determined by dividing the square footage used by each activity by the total agency square footage.
• A percentage determined by dividing the amount of the specific expenses of each activity by the total specific expenses of the organization.
Possible Allocation Methodologies
Example
The Centrally Located Copier• Cost to operate includes:
– Lease– Repairs & Maintenance– Toner/Paper/Supplies
• All are direct costs
But what about:
• space it occupies?• electricity is uses?• Office manager’s time
– paying related bills, – ordering paper & supplies, – arranging deliveries and – coordinating servicing, inc.?
• Indirect costs
Example continued
Example continued
Three programs use the copier• Foundation Grant – 3 staff• Federal Grant – 11 staff• First 5 Grant – 6 staff
*All are full time staff positions
How do we apportion or allocate these costs to three different funding streams?
• Equal distribution – proportionate share to each funding source (i.e., 1/3rd each)
– Good
• Number of staff using the copier– A‐ 15%, B‐55%, C‐30%– Better
• User Codes– Measures actual usage of the copier– Best!
Example continued
Regardless of the cost allocation methodologies used, all agency’s cost allocation procedures shall demonstrate the following characteristics:
• Information—It shall provide the appropriate accounting information
• Timeliness—It must produce program cost data on a timely basis.
• Consistency—The cost identification and distribution methods selected will be applied consistently from period to period.
• Accuracy—The information provided shall be as accurate as possible.
• Auditability—Program costs must be fully auditable; i.e., working papers must be retained showing program cost identification, accumulation, and distribution methods.
• Failure to categorize
• Failure to document
• Failure to apply consistently
Common Allocation Mistakes
Sample Unrestricted Budget with Shared Costs
• This budget format is akin to a high‐level “working” budget
• Often not the format presented to an organization’s board for final approval (generally, the board does not get involved in the details of an organization’s cost allocation methodology)
Cost Allocation Plan: A Sample
• Organization uses a bottom‐line allocation for shared costs
• Shared cost allocation methodology: # of Department FTEs/Total # of FTEs in Organization
• Indirect cost allocation methodology: Allocated Administrative costs + Allocated Shared Costs/Total Specific Costs
Contract Budgeting: Key Considerations
• Researching funder guidelines
• Kind of budget
• Allowable costs
• Direct and indirect
Common Cost Allocation Challenges
• “Um, we don’t have a cost allocation plan.”• “Aren’t we supposed to allocate all of the executive director’s
salary to overhead?”• “We have to use different allocation methodologies – we have
lots of different types of expenses. There is no ‘one‐size‐fits‐all’ methodology!”
• “Different funders have different limits on the amount of indirect or shared costs that can be allocated to grants; what are we supposed to do?”
A Source Budget Should:• Reflect the program reality (be based on the
most realistic program plan and budget)• Adhere to all proposal or grant agreement
guidelines• Support the proposal narrative by explaining
the costs of the proposed project• Enable management to monitor the use of
restricted funds• Not be mistaken for an activity budget – it
only represents a part of the activity
A Slight DetourSource Budget v. Activity Budget
An Activity Budget Should:• Reflect actual program costs or our best projection of what
the true costs will be• Reflect real program services and organizational structures• Match program costs with program income to give a realistic
bottom line• Enable management to plan, monitor, and adjust program
execution
A Slight DetourSource Budget v. Activity Budget
• Excellent supporting documentation for overall budget
• Helps in conversations you have with First 5 staff regarding how the organizational budget was developed
• It’s another way to check invoicing –does the invoice accurately reflect the organizational budget and the program budget?
Sample Program by Source Budget
“Draft Budget”
Assessment Exercise
Your Turn
• The budget does not delineate the income by specific streams, e.g., government contracts, interest and dividends, etc.
• The budget does not delineate specific First 5 funding sources.
• The budget does not include any detail regarding allocation of shared costs or indirect costs.
• The budget does not show income and expense by funding source or specific program.
• The budget does not show the difference between total income and total expenses.
Issues Identified –“Draft Budget”
• Compensation for Personal Services• Travel Costs• Professional Services Costs• Office Expense and Supplies• Equipment• Printing (including supplies, maintenance and repair)• Insurance• Telephone/Communications• Facilities Expenses• Training/Conference Seminars• Other Costs
The CAP Narrative
Salaries
Grant Personnel Costs % Amount Allocated
A $20,000 20% $1,000
C $30,000 30% $1,500
E $50,000 50% $2,500
Total $100,000 100% $5,000
Example 1: Expense amount = $5,000Costs that benefit two or more specific programs, but not all programs, are allocated to those programs based on the ratio of each program’s personnel costs (salaries & applicable benefits) to the total of such personnel costs
What cost might this represent? When would you use it?
Salaries
Grant Personnel Costs % Amount Allocated
A $20,000 13% $1,300
B $10,000 7% $700
C $30,000 20% $2,000
D $40,000 27% $2,700
E $50,000 33% $3,300
Total $100,000 100% $10,000
Example 2: Expense amount = $10,000Costs that benefits all programs are allocated based on a ratio of each program’s personnel costs (salaries & applicable benefits) to total personnel costs
What cost might this represent? When would you use it?
Salaries
Grant Program Expenses % Amount Allocated
A $120,000 30% $1,200
C $130,000 33% $1,320
E $150,000 37% $1,480
Total $400,000 100% $4,000
Example 3: Expense amount = $4,000Costs that benefit two or more specific programs, but not all programs, are allocated to those programs based on the ratio of each program’s expenses (direct costs other than salaries & benefits) to the total of such expenses
What cost might this represent? When would you use it?
Grant Program Expenses % Amount Allocated
A $120,000
B $110,000
C $130,000
D $140,000
E $150,000
Total $650,000 $8,000
Exercise Time!
Example 4: Expense amount = $8,000Costs that benefit all programs will be allocated based on a ratio of each program’s salaries to total salaries.
What cost might this represent? When would you use it?
Program costs
Grant Program Expenses % Amount Allocated
A $120,000 18% $1,440
B $110,000 17% $1,360
C $130,000 20% $1,600
D $140,000 22% $1,760
E $150,000 23% $1,840
Total $650,000 100% $8,000
Example 4: Expense amount = $8,000Costs that benefit all programs will be allocated based on a ratio of each program’s salaries to total salaries.
What cost might this represent? When would you use it?
Grant
Square Footage
% Amount Allocated G&A Allocated
Total Amount Allocated
A 300 30% $3,000 $340 $3,340
B 100
C 200
D 200
E 100
G&A 100
Total 1,000 100% $10,000 $1,000 $10,000
Exercise Time!
Example 5: Facilities expense amount = $10,000Facilities costs are allocated based on square footage. Square footage for each programand general & administrative activity is considered in the analysis. General and administrative facilities costs are further allocated to each program based on the square footage of each grant program to the total square footage of all grant programs.
Grant Square Footage
% Amount Allocated G&A Allocated
Total Amount Allocated
A 300 30% $3,000 $340 $3,340
B 100 10 $1,000 $110 $1,110
C 200 20 $2,000 $220 $2,220
D 200 20 $2,000 $220 $2,220
E 100 10 $1,000 $110 $1,110
G&A 100 10 $1,000 0 0
Total 1,000 100% $10,000 $1,000 $10,000
Example 5: Facilities expense amount = $10,000Facilities costs are allocated based on square footage. Square footage for each programand general & administrative activity is considered in the analysis. General and administrative facilities costs are further allocated to each program based on the square footage of each grant program to the total square footage of all grant programs.
Payrolla. State and federal payroll tax returns were filed by the end of the
month following the end of the quarter for monitoring under reviewb. Payroll taxes due were actually paid
Timesheets:c. If employee time is paid by more than one source, it is recorded by
funding source or program on timesheetsd. Employee & supervisor signatures on timesheet in inke. All changes to timesheet are initialed by supervisor in inkf. Employees and hours charged to First 5 programs, agree to
timesheets and to payroll journals
Standard Monitoring Form
• Time spent on activity is accurately reflected, including breaks
• Activity is clearly defined
• Time is recorded by program or funding source
• Employee’s and supervisor’s signatures
• Any changes are initialed by supervisor
Timesheets: What to Look Out For
• Daily timesheets
• Weekly timesheets
• Time studies
Different ways to track time
InvoicesExpenses:a. Expenses tested on invoices have supporting documentation: credit card
charges and/or petty cash expenditures are all documented with an original receipt and reasonably tie to the cost allocation plan
b. Contractor follows its policies for writing checks, credit card use, petty cash use, and/or reimbursement for expenses tested on invoices
c. Tested expenses on invoices appear to be reasonably associated with the program budget
If payments to subcontractors are included on invoices:d. Subcontractor authorized by contracte. Contractor paid if subcontractors’ invoices per the schedule established in the
subcontracting agreement and/or prior to receiving First 5 reimbursement for the services delivered
f. Subcontractor invoices show basis for work billed as performed (units of service, hours, reimbursable costs)
Standard Monitoring Form
• Payroll register for the months selected• Paystubs• Time Sheets for the staff of interest to verify time worked
on the program• Fringe benefit documentation (e.g., bills from health
benefits plan)• Operating expenses (e.g., items that are either integral to
the program, like participant stipends, subcontractor expenses, or any expense that is charged to the contract)
• Bank statements• Cancelled checks• Petty cash vouchers• Credit card statements• Itemized bill
Supporting Documentation for Invoices
All agencies will document their cost allocation procedures and methods in a Cost Allocation Plan (CAP). Each CAP will contain detailed information regarding the costs being allocated, the allocation method, and the following additional information:
• The frequency of allocating various costs to programs.
• The rationale for selecting an allocation base. • How often the allocation base is evaluated to
determine its continued accuracy. • Anticipated changes in the bases used to allocate
costs.
Documentation of Cost Allocation Methodology
• Office of Management and Budget – Circular No. A‐122 (Cost Principles for Non‐Profit Organizations) http://www.whitehouse.gov/omb/circulars_a122_2004/
• Office of Management and Budget – Circular No. A‐87(Cost Principles for State, Local, and Indian tribal governments)http://www.whitehouse.gov/omb/rewrite/circulars/a087/a087‐all.html
• Code of Fedral Regulations ‐2 CFR Part 230PART 230—COST PRINCIPLES FOR NON‐PROFIT ORGANIZATIONS (OMB CIRCULAR A–122)http://ecfr.gpoaccess.gov/
• Nonprofit Finance Fund:http://www.nonprofitfinancefund.org/details.php?autoID=82
• Sample Cost Allocation Plan Narrative: www.danecountyhumanservices.org/pdf/Sample_Org_Cost_Allocation_Plan.pdf
Other Resources