Cost Allocation Cost Allocation TechniquesTechniques
presented bypresented byRichard Garrity, Senior AssociateRichard Garrity, Senior Associate
RLS & Associates, Inc.RLS & Associates, Inc.Presented at:Presented at:
1717thth National Rural Public and Intercity Bus National Rural Public and Intercity Bus Transportation ConferenceTransportation Conference
October 22 - 25, 2006October 22 - 25, 2006Stevenson, WA Stevenson, WA
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 2 of 72
Session ObjectivesSession Objectives1. Identify Range of “Cost Allocation” Issues in Transit
2. Understand Concept of Full Cost Identification
3. Define Methods for Computing Fully Allocated Costs
4. Review Methods to Convert FAC to “Price”
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Target AudienceTarget Audience This Workshop is Designed for:This Workshop is Designed for:
Transit Organizations that Provide Transit Organizations that Provide Service Under a Purchase of Service Service Under a Purchase of Service Arrangement to Other Users/GroupsArrangement to Other Users/Groups
Multi-Purpose Human Service Multi-Purpose Human Service Agencies Supported by Multiple Agencies Supported by Multiple Federal GrantsFederal Grants
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What is Cost Allocation?What is Cost Allocation? In Transit, “Cost Allocation” Can In Transit, “Cost Allocation” Can
Refer to a Series of Distinct Refer to a Series of Distinct Management/Accounting Management/Accounting PracticesPractices
Each Requires a Separate Each Requires a Separate Methodology, Yet all are Methodology, Yet all are Technically Cost AllocationTechnically Cost Allocation
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Types of Cost AllocationTypes of Cost Allocation Financial Based Cost Financial Based Cost
AllocationAllocation Service Based Cost Allocation Service Based Cost Allocation
PlansPlans
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Types of Cost AllocationTypes of Cost Allocation Financial Based Cost Financial Based Cost
AllocationAllocation Central Service Cost Allocation Central Service Cost Allocation
PlansPlans Indirect Cost Allocation PlansIndirect Cost Allocation Plans
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 7 of 72
Types of Cost AllocationTypes of Cost Allocation Central Services Cost Allocation PlanCentral Services Cost Allocation Plan
A Publicly Sponsored Transit Program A Publicly Sponsored Transit Program Benefits from the Services of Other Benefits from the Services of Other Governmental Units and Desires to Governmental Units and Desires to Claim Costs Incurred by these Units Claim Costs Incurred by these Units Under its Various Federal AwardsUnder its Various Federal Awards
The Public Entity or Governmental Unit The Public Entity or Governmental Unit Must Prepare a “Central Services Cost Must Prepare a “Central Services Cost Allocation Plan”Allocation Plan”
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 8 of 72
Types of Cost AllocationTypes of Cost Allocation Indirect Cost Allocation PlanIndirect Cost Allocation Plan
An Entity (Public or Private Nonprofit) An Entity (Public or Private Nonprofit) Provides Multiple Program ServicesProvides Multiple Program Services
Certain Overheard and Administrative Certain Overheard and Administrative Costs Incurred by the Entity Benefit All Costs Incurred by the Entity Benefit All Programs and Services, Including Programs and Services, Including TransitTransit
The Agency Seeks to Recoup These The Agency Seeks to Recoup These Costs in Their Billings to Various Federal Costs in Their Billings to Various Federal AgenciesAgencies
The Entity Requires an Approved The Entity Requires an Approved “Indirect Cost Allocation Rate” in Order “Indirect Cost Allocation Rate” in Order for Such Costs to be Reimbursable by for Such Costs to be Reimbursable by the Federal Governmentthe Federal Government
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Types of Cost AllocationTypes of Cost Allocation Service Based Cost AllocationService Based Cost Allocation
Allocate Costs to Various Allocate Costs to Various Types/Modes/Services Types/Modes/Services
Urban/Rural Cost AllocationUrban/Rural Cost Allocation Required by FTARequired by FTA
Charter Cost AllocationCharter Cost Allocation Local Match Allocation PlanLocal Match Allocation Plan
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Types of Cost AllocationTypes of Cost Allocation Service Based Cost AllocationService Based Cost Allocation
A Public Transit Agency Coordinates A Public Transit Agency Coordinates Service With Various Human Service Service With Various Human Service Agencies In The AreaAgencies In The Area
The Transit Provider Has A Policy That The Transit Provider Has A Policy That Public Transit Funds Cannot Be Used Public Transit Funds Cannot Be Used To Subsidize Human Service Agency To Subsidize Human Service Agency Client TransportationClient Transportation
The Transit Agency Needs A “Fully The Transit Agency Needs A “Fully Allocated Cost Analysis” To Allocated Cost Analysis” To Determine How To Price Contract Determine How To Price Contract ServicesServices
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Types of Cost AllocationTypes of Cost Allocation Service Based Cost AllocationService Based Cost Allocation
A Transit Agency Receives Funding Under A Transit Agency Receives Funding Under Both FTA Section 5307 And Section 5111Both FTA Section 5307 And Section 5111
FTA Expects the Grantee to Develop a FTA Expects the Grantee to Develop a Reasonable Basis for Allocating Reasonable Basis for Allocating Operating Costs Between the Two Operating Costs Between the Two Funding Sources that is Related to the Funding Sources that is Related to the Service ProvidedService Provided
FTA Requires a “Grant Allocation Plan” to FTA Requires a “Grant Allocation Plan” to Distribute Costs to the Two Different, But Distribute Costs to the Two Different, But Related ProgramsRelated Programs
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Types of Cost AllocationTypes of Cost Allocation Service Based Cost AllocationService Based Cost Allocation
A Transit Agency Provides Charter A Transit Agency Provides Charter Service in Accordance with 49 CFR Service in Accordance with 49 CFR part 604part 604
The Transit Agency Must The Transit Agency Must Demonstrate That it Fully Recovers Demonstrate That it Fully Recovers the Cost of Charter Service the Cost of Charter Service
The Agency Requires a “Charter The Agency Requires a “Charter Service Allocation Plan”Service Allocation Plan”
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Types of Cost AllocationTypes of Cost Allocation Service Based Cost AllocationService Based Cost Allocation
A Regional Transit Authority Provides A Regional Transit Authority Provides Service Over a Multi-Jurisdictional Service Over a Multi-Jurisdictional Service AreaService Area
Each Participating Local Entity Must Each Participating Local Entity Must Share Responsibility for Funding a Share Responsibility for Funding a Portion of the Local Share Portion of the Local Share
The Authority Must Allocate Local The Authority Must Allocate Local Funding Needs In An Equitable Manner Funding Needs In An Equitable Manner To All Participating JurisdictionsTo All Participating Jurisdictions
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Multiple Cost Multiple Cost Allocation NeedsAllocation Needs
Some Public Transportation Some Public Transportation Projects May Require Multiple Projects May Require Multiple Types of Cost AllocationTypes of Cost Allocation
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 15 of 72
Example of Public Agency With Example of Public Agency With Need for Multiple Allocation Need for Multiple Allocation
StrategiesStrategiesMunicipal or County Government
Central Service Departments
Central Service Departments Operating Departments
Individual Operating Departments
Public Works & Transit
Central Service Cost Allocation Plan
Allocable Portion of Central Service Costs
Departmental AdministrationApproved Indriect Cost Rate Approved Indriect Cost Rate
Allocable Portion of Departmental Indirect Costs
Allocable Portion of Departmental Indirect CostsTransit Public Works
Management
Transit Direct Costs:Shared Functions
Dispatch
Allocated on Basis of Service Units
Allocable Portion of
Transit Direct Costs:Direct Functions
Operations Maintenance
Fixed Route JARC Demand Response
Modes
Transit Management Costs (Fixed Costs)
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 16 of 72
Example of Nonprofit Agency With Example of Nonprofit Agency With Need for Multiple Allocation Need for Multiple Allocation
StrategiesStrategiesNonprofit Organization
Direct Expenses
Home Care TransportationCongregate Meals
Indirect Expenses
Approved Indirect Cost Rate
Allocable Portion of Indirect Costs
Management
Transit Direct Costs:Shared Functions
Dispatch
Allocated on Basis ofService Units
Allocable Portion of
Transit Direct Costs:Direct Functions
Operations Maintenance
Medicaid Contract Transit
Rural Public Transit
Title III Client Transit
Services
Transit Management Costs (Fixed Costs)
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 17 of 72
Identifying Transportation Identifying Transportation CostsCosts
Our Goal - To Answer the Our Goal - To Answer the Questions:Questions:
How Much Does the Transportation How Much Does the Transportation Service Cost?Service Cost?
When We Sell Transportation Services, When We Sell Transportation Services, What Should We Charge?What Should We Charge?
In Order to Achieve These Goals, In Order to Achieve These Goals, Agency and Program Managers Agency and Program Managers Must Use Financial PlanningMust Use Financial Planning
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Financial Planning:Financial Planning:Why is This Important?Why is This Important?
Transportation Systems Need Transportation Systems Need Complete and Accurate Financial Complete and Accurate Financial Data in Order to: Data in Order to: Manage the System So That its Manage the System So That its
Goals and Objectives are Met Goals and Objectives are Met EfficientlyEfficiently
To Accurately Evaluate Alternative To Accurately Evaluate Alternative Service Delivery ProposalsService Delivery Proposals
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Financial Planning:Financial Planning:Why is This Important?Why is This Important?
Know the True Cost of Operating Know the True Cost of Operating the System so that Costs May be the System so that Costs May be Billed or Allocated Appropriately Billed or Allocated Appropriately to the System's Users to the System's Users
Report to the Funding Sources or Report to the Funding Sources or Purchasing Agencies How Money Purchasing Agencies How Money was Spent, What Revenues were was Spent, What Revenues were Realized, and the Financial Realized, and the Financial Status of the OrganizationStatus of the Organization
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 20 of 72
Financial Planning:Financial Planning:Why is This Important?Why is This Important?
Planning for Planning for ChangeChange Changes We Changes We InstituteInstitute
Changes Changes Forced Upon Forced Upon UsUs
Political Climate
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Framework for Framework for Financial PlanningFinancial Planning
Financial Planning Begins by Financial Planning Begins by Establishing (or Reaffirming) Establishing (or Reaffirming) Overall Strategies and GoalsOverall Strategies and Goals Mission StatementMission Statement
WHAT Will the Transit Service Do?WHAT Will the Transit Service Do? HOW Will the System Operate?HOW Will the System Operate?
This Starts the Financial This Starts the Financial Planning ProcessPlanning Process
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Framework for Framework for Financial PlanningFinancial Planning
Four (4) Fundamental Financial Four (4) Fundamental Financial Management ProcessesManagement Processes Performance Evaluation ProcessPerformance Evaluation Process Budget ProcessBudget Process Accounting SystemAccounting System Financial ReportingFinancial Reporting
All are Inter-RelatedAll are Inter-Related
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Framework for Framework for Financial PlanningFinancial Planning
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 24 of 72
Framework for Framework for Financial PlanningFinancial Planning
Cost Analysis is a Key Element Cost Analysis is a Key Element of Financial Planningof Financial Planning
Knowing the Costs of Knowing the Costs of Individual Routes or Services Individual Routes or Services is Useful for Your Management is Useful for Your Management Purposes and for Billing Your Purposes and for Billing Your Client AgenciesClient Agencies
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 25 of 72
Framework for Framework for Financial PlanningFinancial Planning
The Basic Approach The Basic Approach Recommended and Used by Recommended and Used by Successful Business Successful Business Operations and Transportation Operations and Transportation Systems is Called “Full Cost Systems is Called “Full Cost Accounting”Accounting”
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Framework for Framework for Financial PlanningFinancial Planning
To Use this Approach Requires an To Use this Approach Requires an Understanding of Basic Cost Understanding of Basic Cost Concepts and the Use of a Concepts and the Use of a Consistent Costing Method (Model)Consistent Costing Method (Model)
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Full Cost AccountingFull Cost Accounting Using “Full Cost Accounting” Means Using “Full Cost Accounting” Means
that the Total Costs of Providing that the Total Costs of Providing Transportation Services are Transportation Services are ConsideredConsidered
Total Costs Include Any Commitment Total Costs Include Any Commitment or Use of Time, Money, Physical or Use of Time, Money, Physical Resources, and Other Assets of the Resources, and Other Assets of the Agency in the Delivery of Agency in the Delivery of Transportation ServicesTransportation Services
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Full Cost AccountingFull Cost Accounting In Full Cost Accounting, a Value is In Full Cost Accounting, a Value is
Given to These Commitments Given to These Commitments Whether or Not They Result in Whether or Not They Result in Immediate Out-of-Pocket Immediate Out-of-Pocket ExpendituresExpenditures
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Tools to Assist in Tools to Assist in Full Cost AccountingFull Cost Accounting
The Agency’s Chart of The Agency’s Chart of Accounts is the Basic Tool Accounts is the Basic Tool Used to Ensure that All Used to Ensure that All Transportation Costs are Transportation Costs are Reflected in the Agency’s Reflected in the Agency’s Accounting SystemAccounting System
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Special Issues in Special Issues in Full Cost AccountingFull Cost Accounting
Operating and Capital CostsOperating and Capital Costs
Fixed and Variable CostsFixed and Variable Costs
Direct and Shared CostsDirect and Shared Costs
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Special Issues in Special Issues in Full Cost AccountingFull Cost Accounting
Cost PrinciplesCost Principles State and Local GovernmentsState and Local Governments
OMB Circular A-87OMB Circular A-87 http://www.whitehouse.gov/OMB/http://www.whitehouse.gov/OMB/
circulars/a087/a087-all.htmlcirculars/a087/a087-all.html NonprofitsNonprofits
OMB Circular A-122OMB Circular A-122 http://www.whitehouse.gov/OMB/http://www.whitehouse.gov/OMB/
circulars/122/a122.htmlcirculars/122/a122.html
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Operating and Capital Operating and Capital CostCost
Operating Costs are Consumed in Less Operating Costs are Consumed in Less Than One Year (Than One Year (e.ge.g., Wages, Fuel) and ., Wages, Fuel) and Generally Have a Unit Acquisition Cost Generally Have a Unit Acquisition Cost of Less Than $300.00of Less Than $300.00
Capital Costs are Expenses for Long-Capital Costs are Expenses for Long-Term Assets (Term Assets (e.ge.g., Vehicles, Garages)., Vehicles, Garages)
Definitions May be Set by the Grantor Definitions May be Set by the Grantor AgencyAgency
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Operating and Capital Operating and Capital CostCost
Under FTA Programs, Capital Under FTA Programs, Capital Expenses are Defined in FTA Expenses are Defined in FTA Circulars Circulars
These Documents Can Be Obtained These Documents Can Be Obtained at:at:
http://www.fta.dot.gov/legal/guidance/circulars/9000http://www.fta.dot.gov/legal/guidance/circulars/9000//
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Operating and Capital Operating and Capital CostCost
Defining Capital Costs is Important, Defining Capital Costs is Important, as OMB Circular A-87 States that as OMB Circular A-87 States that Depreciation Will Exclude:Depreciation Will Exclude: Any Portion of the Cost of Buildings and Any Portion of the Cost of Buildings and
Equipment Borne by or Donated by the Equipment Borne by or Donated by the Federal Government Irrespective of Federal Government Irrespective of Where Title was Originally Vested or Where Title was Originally Vested or Where it Presently ResidesWhere it Presently Resides
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Operating and Capital Operating and Capital CostCost
What Does this Mean?What Does this Mean? If the Cost of the Vehicle (Asset) Was If the Cost of the Vehicle (Asset) Was
Paid for by a Federal Program, You May Paid for by a Federal Program, You May NOT Include Depreciation of that Asset in NOT Include Depreciation of that Asset in Your Charges to Other Federal Programs Your Charges to Other Federal Programs in the Cost of Service Provision in the Cost of Service Provision
*Source: OMB Circular A-87, Attachment B, *Source: OMB Circular A-87, Attachment B, Paragraph 15c(2); and OMB Circular A-122, Paragraph 15c(2); and OMB Circular A-122, Attachment B, Paragraph 11c(2).Attachment B, Paragraph 11c(2).
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 36 of 72
Variable and Fixed Variable and Fixed ExpensesExpenses
Variable Costs Change Variable Costs Change Relative to the Amount Relative to the Amount of Service Provided of Service Provided ((e.ge.g., Drivers' Wages)., Drivers' Wages)
Fixed Costs Do Not Fixed Costs Do Not Vary with the Amount Vary with the Amount of Service Provided of Service Provided ((e.ge.g., Administrative ., Administrative Salaries)Salaries)
Fixed
Variable
Total
OutputC
ost
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 37 of 72
Direct and Indirect Direct and Indirect CostsCosts
Direct Costs are Those Direct Costs are Those Expenses Incurred by the Expenses Incurred by the Transit System that are Transit System that are Directly Related and Strictly Directly Related and Strictly Benefit Only the Benefit Only the Transportation ProgramTransportation Program
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Direct and Indirect Direct and Indirect CostsCosts
Indirect Costs are Those Costs Indirect Costs are Those Costs That Have Been Incurred for That Have Been Incurred for Common or Joint PurposesCommon or Joint Purposes
These Costs Benefit More than These Costs Benefit More than One Cost Objective/Program and One Cost Objective/Program and Cannot be Readily Identified with Cannot be Readily Identified with a Particular Final Cost Objective a Particular Final Cost Objective Without Effort Disproportionate to Without Effort Disproportionate to the Results Achievedthe Results Achieved
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 39 of 72
Direct and Indirect Direct and Indirect CostsCosts
The Essential Difference is the The Essential Difference is the Degree of Ease with Which a Degree of Ease with Which a Cost Can be Readily Assigned Cost Can be Readily Assigned to a Particular Cost Objective to a Particular Cost Objective with a High Degree of with a High Degree of Accuracy Accuracy
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Direct and Indirect Direct and Indirect CostsCosts
There are No Universal Rules There are No Universal Rules for Classifying Costs as Direct for Classifying Costs as Direct or Indirect Under Every or Indirect Under Every Accounting SystemAccounting System
But You Must be ConsistentBut You Must be Consistent
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 41 of 72
Recommendations for Recommendations for Preparing Indirect Cost Preparing Indirect Cost
PlansPlans
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 42 of 72
HHS Guide Can be Downloaded HHS Guide Can be Downloaded at:at:
http://www.hhs.gov/grantsnet/statehttp://www.hhs.gov/grantsnet/state//
Recommendations for Recommendations for Preparing Indirect Cost PlansPreparing Indirect Cost Plans
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 43 of 72
Cost AllocationCost Allocation Fad or Management Necessity?Fad or Management Necessity?
An Understanding of Fully Allocated An Understanding of Fully Allocated Costs Provides Management with:Costs Provides Management with:
The Ability to Accurately Price Services The Ability to Accurately Price Services Provided Under ContractProvided Under Contract
An Assessment Tool to Evaluate An Assessment Tool to Evaluate Changes in ServiceChanges in Service
For Example, the Cost of Adding or For Example, the Cost of Adding or Losing a Contract Service Could Be Losing a Contract Service Could Be EstimatedEstimated
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 44 of 72
Why Cost Allocation?Why Cost Allocation?
TransitRidership
More TransitFunds From FTA???
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 45 of 72
Why Cost Allocation?Why Cost Allocation? To Determine How Much It To Determine How Much It
Costs to Provide A Specific Costs to Provide A Specific Transit ServiceTransit Service
$6.80Per
Trip
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 46 of 72
The Cost Allocation The Cost Allocation ProcessProcess
Why Do We Need a Model to Why Do We Need a Model to Determine Cost?Determine Cost? Why Can’t We Simply Divide Total Why Can’t We Simply Divide Total
System Cost by Total System System Cost by Total System Miles?Miles?
Or Total System Cost by Total Or Total System Cost by Total System Hours?System Hours?
Consider the Following:Consider the Following:
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 47 of 72
The Cost Allocation The Cost Allocation ProcessProcess
Do These Trips Cost the Same?Do These Trips Cost the Same?5
Miles
5 M
iles
10
Minutes
5 Miles
5 M
iles
20 Minutes
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 48 of 72
The Cost Allocation The Cost Allocation ProcessProcess
Do These Trips Cost the Same?Do These Trips Cost the Same?
8 Miles
5 M
iles
20
Minutes
5 Miles
5 M
iles20 Minutes
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The Cost Allocation The Cost Allocation ProcessProcess
Transportation Costs are Transportation Costs are Driven by Two Critical Factors:Driven by Two Critical Factors: Time AND DistanceTime AND Distance
Our Model Must Take Both Our Model Must Take Both Factors Into Account When Factors Into Account When Costing Transportation Costing Transportation ServicesServices
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 50 of 72
Developing a Cost Developing a Cost Allocation ModelAllocation Model
How Do We Allocate Costs? How Do We Allocate Costs? Don’t Worry, This Process is Not Don’t Worry, This Process is Not Complicated! This is Complicated! This is NotNot a a Mandate, But a Useful Mandate, But a Useful Management ToolManagement ToolAnother Program
Mandate???? Aaaaaagh!!!
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 51 of 72
The Cost Allocation The Cost Allocation ProcessProcess
Cost Allocation Assumes:Cost Allocation Assumes: Total System Costs Can be Total System Costs Can be
Allocated to Service Based on the Allocated to Service Based on the Level of Service ProvidedLevel of Service Provided
System Average Unit Costs Can Be System Average Unit Costs Can Be Used to Estimate Service CostsUsed to Estimate Service Costs
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 52 of 72
Overview of the Overview of the Cost Allocation ProcessCost Allocation Process
Assemble Data
Assign Expense Line Items
Calculate Unit Costs
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Issues in Assembling Issues in Assembling DataData
Where Do We Get Cost Data?Where Do We Get Cost Data?
What Time Period Should be What Time Period Should be Used?Used?
Projected vs. Actual?Projected vs. Actual?
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 54 of 72
Data RequiredData Required Twelve (12) Months Actual or Twelve (12) Months Actual or
Projected Transit Expense DataProjected Transit Expense Data Expense Data Will be Classified as Either:Expense Data Will be Classified as Either:
Fixed ExpenseFixed Expense Variable ExpenseVariable Expense
Service DataService Data Vehicle-MilesVehicle-Miles Vehicle-HoursVehicle-Hours Passenger TripsPassenger Trips
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 55 of 72
Assigning Expenses Assigning Expenses to Categoriesto Categories
Cost Allocation Involves Taking Cost Allocation Involves Taking Each Expense Line Item and Each Expense Line Item and Assigning It to Either the Fixed or Assigning It to Either the Fixed or Variable CategoryVariable Category
Variable Expenses are Further Variable Expenses are Further Broken Down as Varying Either byBroken Down as Varying Either by:: HourHour MileMile
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 56 of 72
What Are the Rules for What Are the Rules for Assigning Costs?Assigning Costs?
Fixed Costs are Those Costs Fixed Costs are Those Costs that Will Not Change As a that Will Not Change As a Result of an Increase or Result of an Increase or Decrease in Service LevelsDecrease in Service Levels
Variable Expenses are Those Variable Expenses are Those Costs that Will Change if There Costs that Will Change if There is a Change in Service Levelsis a Change in Service Levels
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 57 of 72
Tips for Assigning CostsTips for Assigning Costs There are No Hard and Fast There are No Hard and Fast
Rules…..But:Rules…..But: Project Administration Costs are Project Administration Costs are
Almost Always FixedAlmost Always Fixed Understand the Basis of Each Understand the Basis of Each
Cost Item and Assign AccordinglyCost Item and Assign Accordingly Be LogicalBe Logical BE CONSISTENTBE CONSISTENT
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 58 of 72
Calculate Unit CostsCalculate Unit Costs We Now Have a Total of Fixed We Now Have a Total of Fixed
and Variable Costsand Variable Costs We Need to Calculate Our Unit We Need to Calculate Our Unit
Costs. There are Three (3) Costs. There are Three (3) Calculations:Calculations: Allocated Hours CostAllocated Hours Cost Allocated Miles CostAllocated Miles Cost Allocated Fixed Expense RatioAllocated Fixed Expense Ratio
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 59 of 72
Computation - Computation - Allocated Hours CostAllocated Hours Cost
Allocated Hours Cost:Allocated Hours Cost:
Total Allocated Hours Cost Total Allocated Hours Cost Annual Projected Vehicle HoursAnnual Projected Vehicle Hours
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 60 of 72
Computation - Computation - Allocated Miles CostAllocated Miles Cost
Allocated Miles Cost:Allocated Miles Cost:
Total Allocated Miles Cost Total Allocated Miles Cost Annual Projected Vehicle MilesAnnual Projected Vehicle Miles
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 61 of 72
ComputationsComputations What Do We Do With Fixed What Do We Do With Fixed
Expenses?Expenses? There Are Different Approaches - For There Are Different Approaches - For
Most Demand Response Systems in Most Demand Response Systems in Rural Areas, Fixed Expenses are Rural Areas, Fixed Expenses are Expressed as a Percentage or Ratio Expressed as a Percentage or Ratio of Allocated Variable Expenses of Allocated Variable Expenses (Hours Cost + Miles Cost)(Hours Cost + Miles Cost)
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 62 of 72
Computation of Fixed Computation of Fixed ExpensesExpenses
In Rural Systems, Fixed Expenses In Rural Systems, Fixed Expenses are Expressed as a Percent of are Expressed as a Percent of Variable Expenses:Variable Expenses:
Fixed Cost Factor = Fixed Cost Factor =
Total Fixed ExpensesTotal Fixed ExpensesTotal Allocated Hours Expenses + Total Allocated Miles Total Allocated Hours Expenses + Total Allocated Miles
ExpensesExpenses
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 63 of 72
Computation of Fixed Computation of Fixed ExpensesExpenses
Fixed Expenses are Expressed as Fixed Expenses are Expressed as Follows:Follows:
Total Fixed ExpensesTotal Fixed Expenses Total Peak Period VehiclesTotal Peak Period Vehicles
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Completing Our Completing Our CalculationsCalculations
The Fully Allocated Cost of Service The Fully Allocated Cost of Service is Equal to:is Equal to:{(Total Annual/Projected Hours x Allocated {(Total Annual/Projected Hours x Allocated
Hours Cost)+(Total Annual/Projected Hours Cost)+(Total Annual/Projected Miles x Allocated Miles Cost)} Miles x Allocated Miles Cost)}
++ {Fixed Cost Factor *[(Total {Fixed Cost Factor *[(Total
Annual/Projected Hours x Total Allocated Annual/Projected Hours x Total Allocated Hours Cost)+(Total Annual Projected Hours Cost)+(Total Annual Projected Miles x Allocated Miles Cost)]}Miles x Allocated Miles Cost)]}
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 65 of 72
Putting It All TogetherPutting It All Together Congratulations … You Have Congratulations … You Have
Just Developed a Cost Just Developed a Cost Allocation Model!Allocation Model!
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 66 of 72
Putting Our Model to Putting Our Model to WorkWork
Now that We Have Our Model, Now that We Have Our Model, We Will Put it to WorkWe Will Put it to Work
We'll Sort Through The X's and O's By Looking At Allocating the Costs
of Various System Users
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 67 of 72
Developing Unit RatesDeveloping Unit Rates Our Objectives in the Process:Our Objectives in the Process:
SimpleSimple EquitableEquitable Reflect Actual Cost of Service Reflect Actual Cost of Service
ProvisionProvision Appropriate Use of Public Appropriate Use of Public
SubsidiesSubsidies
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 68 of 72
Alternative Rate Alternative Rate StructuresStructures
Price Per Passenger TripPrice Per Passenger Trip Price Per MilePrice Per Mile Price Per HourPrice Per Hour Price Per ZonePrice Per Zone
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 69 of 72
Issues with Cost Issues with Cost AllocationAllocation
This Procedure Has Not Been Reviewed This Procedure Has Not Been Reviewed or Certified by Federal Grantor Agenciesor Certified by Federal Grantor Agencies
Complexities Arise When a Complexities Arise When a Transportation Provider Uses Transportation Provider Uses Ridesharing (Mixing Clients of Two or Ridesharing (Mixing Clients of Two or More Programs) When Using a Mileage More Programs) When Using a Mileage or Time Based Unit Rate of Serviceor Time Based Unit Rate of Service
Treatment of Capital Paid for, in Whole Treatment of Capital Paid for, in Whole or In Part, By the Federal Governmentor In Part, By the Federal Government
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 70 of 72
Automating the Cost Automating the Cost Allocation and Rate Setting Allocation and Rate Setting
ProcessProcess The Procedures Employed in The Procedures Employed in
Cost Allocation Can be Cost Allocation Can be Replicated Each Fiscal YearReplicated Each Fiscal Year
Process Lends Itself to the Process Lends Itself to the Development of a Spreadsheet-Development of a Spreadsheet-Based Cost Allocation ModelBased Cost Allocation Model
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 71 of 72
Automating the Cost Automating the Cost Allocation and Rate Setting Allocation and Rate Setting
ProcessProcess Several States Have Developed Several States Have Developed
Such Models for Their Section Such Models for Their Section 5311 Grantees5311 Grantees
Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 72 of 72
PresenterPresenterRichard Garrity, Senior AssociateRichard Garrity, Senior Associate
RLS & Associates, Inc.RLS & Associates, Inc.3131 S. Dixie Highway, Suite 5453131 S. Dixie Highway, Suite 545
Dayton, OH 45439Dayton, OH 45439(937) 299-5007(937) 299-5007
Direct Line: (910) 328-5770Direct Line: (910) [email protected]@cris.com
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