Cost Allocaton

8/6/2019 Cost Allocaton

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COST ALLOCATION

A reference to help with cost

allocation.


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Course Objective Learn how to correctly apply your cost

allocation plan to your center.

Learn how to implement your costallocation plan and document costsbased on your plan.


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Allocating Costs

If an organization has only one activity that is

funded by one funding source and if all costsassociated with the organization are for thatactivity, no allocation is needed.

If an organization has multiple activities, and oneor more funding sources, a cost allocation isneeded.


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Direct CostsDirect costs are those which are clearly and

easily attributable to a specific program.

Examples of direct cost are:

Employee time devoted to one or moreactivity.

Materials purchased for one or more activity. Equipment bought for a specific activity.


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Indirect CostIndirect costs are those which are not easily

identifiable with a specific program, but which

are, nonetheless, necessary to the operationof the program.

These costs are shared among programs and,

in some cases, among functions (program,management and general, and fundraising).


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Indirect Cost Examples

ExecutiveD

irectors salary Chief Financial Officers salary

Single Audit report costs

Shared office costs, such as rent and utilities


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Why Allocate Indirect Costs to

the Programs?

The full cost of a program rightfully includes ashare of the overall costs of theorganization.

Knowing the full cost of a program sets abasis for financial analysis of the program,

and for requesting reimbursement fromfunders for the full costs of providingservices.


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What Are the Methods for

Allocating Indirect Costs?

There are several methods for allocatingindirect costs . The most common are:

case-by-case allocation,

developing an indirect cost rate, and Full Time Equivalents (FTEs)


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Case-by-Case Allocation

One method of allocating indirect costs is to determine a rateof actual usage for each program. For example:

You may decide to keep track of long distance telephone callsand charge them to the appropriate program when you pay thephone bill each month.

Some organizations use a counter or log to track copying

expenses for each program and/or function. Time sheets may form the basis for allocation of salaries for the

executive director, accountant, and staff whose work benefitsmore than one program or activity.


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Case-by-Case Allocation (cont)

The advantage of this method is that it seemsto make sense.

A major disadvantage, however, is that it

often requires a great deal of timeconsuming record keeping.


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Case-by-Case Allocation

(cont)Even if you keep the records needed to precisely

allocate shared expenses among programs, not all

expenses will be covered.If, for example:

The rent is allocated by square feet, how should

you allocate the hallway and rest rooms?What about local phone calls which can not be

tracked using a code?


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Developing an Indirect Cost RateThe first step in determining an indirect cost rate

is to separate all costs into two groups: direct

and indirect costs.

The indirect costs are aggregated into anindirect cost pool and then allocated to theprograms based on a set proportion or rate.


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Developing an Indirect Cost Rate

(cont)

There are several measures used todetermine the proportion of indirect coststo allocate (apply) to each program.

The following simple example illustrates anindirect cost rate based on the relationship

between total indirect costs and total directcosts.


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Crisis CenterThe Crisis Center has a total budget of

$3,300. The budget is distributed as

follows: Program A has direct costs of $1,000.

Program B has direct costs of $2,000.

Indirect costs to run the programs isbudgeted at $300.

Total costs are $3,300.


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Crisis Center (cont)

Since Program As direct costs are one-third of the total direct cost of theshelter center ($1,000 out of $3,000), it should bear one-third of theindirect costs. Similarly, since Program B incurs two-thirds of the total

direct costs of the shelter center, it should bear two-thirds of theindirect costs, as well.

An indirect cost rate (using direct costs as a base) is established by dividingthe total indirect costs by the total direct cost.

Total Indirect costs divided by Total Direct Costs = $300/$3,000=10percent of total costs


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Full Time Equivalents (FTEs)Training/Conferences/

Seminars-Allocated to the

programbenefiting fromthe training,conferences orseminars. Thefollowing exampleshows how coststhat benefit twoor more specificprograms, but notall programs.

Program Grant FTEs % Amount Allocated

1 A .20 10% $ 500

3 C .80 40% $2,000

5 E 1.0 50% $2,500

Total 2.0 100% $5,000

Expense Amount = $5,000


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OMB Circular A-122 and UGMSPass-through recipients from the HHSC Family

Violence Program funding, are required to

reference the OMB Budget Circular A-122 andUGMS using these same principles.

However, even within these guidelines, indirect costrates for the same organization may vary fromfederal agency to federal agency.


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Direct vs. Indirect AllocationContrary to popular belief, indirect costs are not an

easy measure of an organizations efficiency.

Imagine a multi-service agency where eachprogram has its own bookkeeper, purchases itsown supplies, and has all its own equipment.

Such an organization would have no indirect costsat all, but would be clearly less efficient than ifthe programs shared bookkeeping costs,supplies and equipment.


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Final CommentsBecause the presentation of financial information influences the way we access

a providers finances, the selection of indirect costing methods andaccounting procedures has an important impact on decision-making.

Several urgent and perhaps conflicting demands are made of the indirectcosting process:

to attribute indirect costs in the fairest way possible, to attribute the most indirect costs to the programs that can best afford

them, to eliminate as many indirect costs as possible by having each program buy

its own supplies, etc.

Finding a balance among these demands that clears confusion and informsdecision-makers is a responsibility of all participants in the nonprofit sector.


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HHSC Family Violence Program

Katie Ray-Jones, Program Manager

512-206-5143

[email protected]

Judy Forbes, Program Specialist 512-206-5040

[email protected]

Robyn Mobley, Contract Specialist

512-206-5137

[email protected]

Susie Roberts, Contract Manager 512-206-5517

[email protected]

Humphrey Matthews, Contract Manager

512-206-5123

[email protected]

Helen Oh, Contract Manager

512-206-5565

[email protected]

Sandra Steward, Program Specialist

512-206-5125 [email protected]


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Budget RevisionsThe HHSC Family Violence Program allows each provider to

submit a budget revision to ensure your grant monies are fullyexpended.

According to the HHSC FVP contract, Article 13, Section 13.06 (j),a budget revision should be submitted:

only for allowable expenses,

does not contradict other rules or policies, or

indicate a change in the scope of the contract.

All budget revisions must be submitted using HHSC FVP BudgetRevision forms (included in the Excel BudgetWorkbook).


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Budget Revisions (cont)

If the total amount of the budget revision is:

less than 5.0% of the contract amount or $5,000, (or aprorated portion if the contract term is less than one year,whichever is lower), the budget revision must besubmitted within 30 days of implementation.

More than 5.0% of the contract amount or $5,000, (or a

prorated portion if the contract term is less than one year,whichever is lower), the budget revision must besubmitted prior to implementation and approved by theCommission.

Retroactive budget revisions will not be accepted by HHSC.

Cost Allocaton

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