S59_The Misconceptions of Indirect Cost Funding_LTC2013
Transcript of 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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