Effective Cost Allocation Strategiescysmis.files.cyscopa.com/2011/Cost Allocation_KaySohl_HS.pdfEffective Cost Allocation Strategies Head Start Fiscal Conference April 5, 2011. Cost

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Effective Cost Allocation Strategies

Head Start Fiscal Conference

April 5, 2011

Cost Allocation

Systematic method for determining the portion of specific costs which should be attributed to specific cost centers (final cost objective)

Cost AllocationPleasure Zone

Portion of the brain which transmits sensationsof extreme pleasure when thinking of cost allocation

Nonprofit Compliance Framework

• GAAP• IRS• Funding agreements

GAAP Nonprofit Accounting

Expenses incurred for 3 distinct functions:

• Programs• Management and General• Fund Raising

Administration/Managementin GAAP

• Financial management• Board support• Strategic planning• HR management

Fund Raising in GAAP

• Unsolicited requests for contributions• All forms of contact with individual

donors• Most foundation grant-seeking

activity

IRS – Form 990

• Program services• Management and general• Fundraising

Funding Agreements• Most state and local agreements require

compliance with federal rules• Funder may impose additional

requirements and limitations• Legally obligate recipient of funds to

comply

Federal Funds Framework• OMB Circular A-110 (2 CFR 215)

• Circulars A-122, A-87, A-21 ( 2 CFR 230, 225, 220)

• A-133 Auditing Requirements • Head Start 45 CFR 1300 ….

OMB A-110Administrative Requirements

• Standards for Financial Management Systems

• Allowable Costs• Much, much more!

OMB Cost Allocation Circulars:cost principle requirements

• A-122 –Nonprofit Organizations

• A-21 - Educational Institutions

• A-87 – State, local, & tribal government

OMB Rules address both function and behavior of costs

• Function: Cost is incurred for a program, admin, or fundraising purpose

• Behavior: Cost can be directly or indirectlyattributed to a function/cost center/final cost objective

Behavior of Costs

• Direct Costs: costs that can be identified specifically with a function/program (final cost objective)

• Indirect Costs: costs which are not directly identified with a single function/program (final cost objective)

Direct Costs• Costs easily identified with a specific

cost center• Example:

Head Start teacher easily identified with Head Start cost center

Indirect Costs • Costs incurred for common or joint

objectives• Costs which benefit multiple cost

objectives• Costs which must be shared among

some or all cost centers

Indirect Administrative Cost

• Administrative Costs function as indirect costs

• Not all indirect costs are administrative• Facilities and other shared costs may

behave indirectly but not be administrative

Exhibit 1

Organization A - Indirect cost rate of 6.6%

A B C Admin Indirect Total

Expenses:Salaries & wages $ 18,613 19,500 23,347 18,557 5,150 85,167Employee benefits 2,792 2,925 3,502 2,784 772 12,775Materials & supplies 5,200 8,900 3,581 1,124 0 18,805Postage & shipping 605 987 4,251 895 2,088 8,826Printing & publications 1,000 1,355 756 201 50 3,362Telephone 756 1,222 1,336 2,285 2,263 7,862Occupancy 2,219 4,590 9,675 11,116 0 27,600Depreciation 684 758 95 151 0 1,688

Total direct expenses 31,869 40,237 46,543 37,113 10,323 166,085

Allocation of indirect costs 2,112 2,667 3,084 2,460 (10,323) 0

$ 33,981 42,904 49,627 39,573 0 166,085

1. The effective indirect cost rate = 6.6% [$10,323/($166,085 - $10,323)]

2. The administrative rate = 23.8% [$39,573/$166,085]

[e.g., Program A: 6.6% X $31,869 = $2,112]

ProgramsTOTAL EXPENSES

3. Indirect costs are allocated by applying indirect cost rate (6.6%) to each cost center's total direct expenses

Exhibit 3

Organization C - Indirect cost rate of 0%


Expenses:Salaries & wages $ 19,255 21,621 25,388 18,903 -- 85,167Employee benefits 2,881 3,050 3,727 3,117 -- 12,775Materials & supplies 5,200 8,900 3,581 1,124 -- 18,805Postage & shipping 923 1,612 4,541 1,750 -- 8,826Printing & publications 1,025 1,380 800 157 -- 3,362Telephone 1,290 1,417 2,244 2,911 -- 7,862Occupancy 3,219 4,590 8,675 11,116 -- 27,600Depreciation 188 334 671 495 -- 1,688

Total direct expenses 33,981 42,904 49,627 39,573 -- 166,085

Allocation of indirect costs -- -- -- -- -- --

$ 33,981 42,904 49,627 39,573 -- 166,085

1. The indirect cost rate = 0%. No indirect allocation mechanism is used; all expenses are charged directly



Exhibit 4

Organization A - Indirect cost rate of 6.6%; administrative and indirect costs combined

DirectIndirect

A B C Admin Total

Expenses:Salaries & wages $ 18,613 19,500 23,347 23,707 85,167Employee benefits 2,792 2,925 3,502 3,556 12,775Materials & supplies 5,200 8,900 3,581 1,124 18,805Postage & shipping 605 987 4,251 2,983 8,826Printing & publications 1,000 1,355 756 251 3,362Telephone 756 1,222 1,336 4,548 7,862Occupancy 2,219 4,590 9,675 11,116 27,600Depreciation 684 758 95 151 1,688

Total direct expenses 31,869 40,237 46,543 47,436 166,085

Allocation of indirect costs 2,112 2,667 3,084 (7,863) 0

$ 33,981 42,904 49,627 39,573 166,085



Programs

TOTAL EXPENSES


Terminology Challenges

A-122 permits nonprofits to define “indirect” to mean either:

• Administrative Costsor

• Administrative Costs plus other Shared Costs

Other Indirect Costs

• Not all indirect costs are administrative• Facilities and other shared costs may

behave indirectly but not be administrative

Administrative Costs• Costs associated with performing

agency- wide administrative functions• Function as indirect costs• Specific funding sources may impose

limitations on Admin or all indirect costs

Administrative Costs

• Overall agency management• Financial management• HR & IT management• Contract administration• Board support

Direct Federal Funding Agreements

• Federal agency may require obtaining Federal Indirect Cost Rate

• Federal agency may permit use of Cost Allocation Plan without Federal Indirect Cost Rate

Federal Indirect Cost Rate

• Obtained through negotiation with cognizant federal agency

• Submit Indirect Cost Proposal• Rate may be Provisional, Final,

Predetermined, or Fixed with Carry-Forward Provision

Fed $ in State/Local Government Agreements

• State/local government is Recipient –nonprofits are sub-recipients

• Sub-recipients must comply with federalrequirements

Sub-Recipient Cost Allocation

• State/local Recipient is responsible for Sub-recipient compliance

• Sub-recipients must have costallocation plans or federally negotiated indirect rates

Cost Allocation

Systematic method for determining the portion of specific shared costs which should be attributed to specific cost centers

Cost Allocation Plan

• Written description of how costs will be allocated

• Established by nonprofit• Must comply with A-122

Cost Allocation Plan Basics

• Identify direct costs• Identify non-administrative indirect costs

and method used to allocate them• Identify administrative costs and

method used to allocate them

Cost Allocation Plan Basics…

• May include multiple cost allocation methods

• Must apply allocation methods consistently to cost centers

• Key issue in A-133 audits

Cost Allocation Plan Methods

• May use same methods as in Federally Negotiated Indirect Rates

• May also use other reasonable methods

Cost Allocation Methods

• Federally Negotiated Indirect Cost Rate requires calculation of Indirect costs as a % of Base

• Resulting % is applied to direct costs of each program to determine allowable indirect costs

Allowable Allocation Methods

• Indirect $ as % of direct $• Indirect $ as % of personnel costs• % of staff time (FTE) devoted to each

program/cost center• % of square feet devoted to each

program/cost center

Impermissible Allocation Method

• Availability of fundsCannot base allocation of costs on limits on indirect or admin costs imposed by specific funders

Cost Allocation Approaches

• Transaction by transaction allocation• Pool shared costs – allocate pool total

using allowable method• Use of “indirect rate” must be

substantiated by tracking actual indirect costs

Documenting Personnel Costs

• Allocate personnel costs based upon actual use of staff time

• Contemporaneously maintained time records are essential

Time Records

• Employee record maintained for each pay period

• Both employee & supervisor must sign• Employees must reflect actual use of

time

Time Record Challenges

• Exempt & Non-Exempt employee format may differ

• Non-Exempt employees track specific hours

• Exempt employees may track % of effort during pay period

Non-Exempt Time Record

Total SupervisorHours Worked 4‐Apr 5‐Apr 6‐Apr 7‐Apr 8‐Apr Period Signature

Head Start 4 3 5 2 6 20CSBG 2 2 0 0 1 5Weatherization 2 3 3 6 1 15Management 0 0 0 0 0 0Total 8 8 8 8 8 40

Exempt Time Record

SupervisorApril 4‐ April 8, 2011 % of time Signature

Head Start 70%CSBG 30%Weatherization 0%Management 0%Total 100%

For all Time RecordsI hereby certify that this is an after-the-fact determination of my actual activity for the above referenced period and is true & accurate to the best of my knowledge.

Signature ___________________Date ______________________

Translating Time into $$$

• Time records result in computing % of time devoted to each cost center

• % of time used to allocate gross pay to cost centers

City of Chicago Challenge

• Must report cost of specific positions each pay period

• When actual use of time exceeds budget plan, payment may be held up

• Strategies to address

Fringe Benefit Costs

• May allocate employee by employee • May establish rates for groups of

employees• May allocate based on overall fringe

benefit rate

Vacation Benefit Issues

• Must have written policy• Accrual method results in matching

allocation of benefit expense to use of time in period “earned”

• Cash method results in allocation based in period “used”

Impact of Growth/Contraction

• Indirect costs generally rise/fall more slowly than direct costs

• Use of out-of-date allocation formulae to apply methods can result in unsubstantiated costs

Indirect as % of Direct Costs

Pre‐Cuts Post‐Cuts

Direct Expenses 20,000,000 16,000,000

Indirect Expenses 3,000,000 2,750,000

Indirect as % of Direct 15% 17%

???? During Constrictions• How will Admin or other Indirect Costs

change as % of Direct costs?• Does revised calculation of share of

Admin costs exceed Admin limits of any source?

• Does org have other sources of funds to cover Admin gap?

Next Steps

• Review Cost Allocation Plan• Review timesheets format• Review procedure for allocating payroll

costs• Determine impact of overall budget

growth or contraction

Resources

• OMB A-122: http://www.whitehouse.gov/omb/circulars/a122

• Sample Federal Indirect Cost Rate Proposal:http://rates.psc.gov/fms/dca/np_exall.pdf

More Resources

Right on the Money: An Annotated Guide to the Federal Cost Principles for Nonprofit Grantees

www.caplaw.org

FY 10-11 Admin FundBudget Raising CSBG Head Start XYZTotal

Support and RevenuesContributions-Indiv & Business 50,000 50,000Contributions-In-Kind 100,000 100,000Annual Auction 125,000 125,000XYC Grant 180,000 180,000Head Start Contract 889,947 789,947CSBG Contract 741,406 741,406TOTAL REVENUES 2,086,353 0 175,000 741,406 889,947 180,000

ExpensesPersonnel Costs 1,267,000 187,000 40,000 360,000 560,000 120,000Professional Fees 37,000Contract Services 10,000 10,000Board Expenses 2,000 2,000Staff Training 20,500 2,000 6,000 8,000 4,500Activities & Supplies 118,000Client Support 55,500Telecommunications 15,000 1,000 500 4,500 6,000 3,000Printing & Copying 15,000 1,000 3,000 4,000 4,000 3,000Occupancy 200,000 29,527 6,314 56,835 88,382 18,942Travel & Transportation 36,000Insurance-Liability 2,900 2,900Dues & Subscriptions 5,000 1,000 3,000 1,000Annual Auction expenses 60,000 60,000Fees & Licences 5,000 5,000Depreciation 22,000 5,000 6,665 5,335 5,000Miscellaneous 5,000 1,000 1,000 1,000 1,000 1,000In-Kind Expenses 100,000 100,000Sub-Total Expenses 1,975,900 277,427 123,814 637,000 765,217 172,442

Allocated Admin Costs (16.3%) -277,427 20,183 104,406 124,730 28,108

Total Expenses (including Admin Costs) 1,975,900 0 143,997 741,406 889,947 200,550

Net Revenue Over Expense 110,453 0 31,003 0 0 -20,550

Exhibit 1

Organization A - Indirect cost rate of 6.6%





$ 33,981 42,904 49,627 39,573 0 166,085



[e.g., Program A: 6.6% X $31,869 = $2,112]



Exhibit 2

Organization B - Indirect cost rate of 65.8%


Expenses:Salaries & wages $ 12,500 14,950 19,635 15,400 22,682 85,167Employee benefits 1,875 2,243 2,945 2,310 3,402 12,775Materials & supplies 3,300 6,000 895 1,400 7,210 18,805Postage & shipping 500 1,035 3,675 1,682 1,934 8,826Printing & publications 950 1,184 642 120 466 3,362Telephone 1,672 1,724 1,126 2,418 922 7,862Occupancy 0 0 0 0 27,600 27,600Depreciation 0 0 0 0 1,688 1,688



$ 33,981 42,904 49,627 39,573 0 166,085



of total direct salaries and wages


3. Indirect costs are allocated based on each cost center's direct salaries & wages as a percentage

Exhibit 3

Organization C - Indirect cost rate of 0%


Expenses:Salaries & wages $ 19,255 21,621 25,388 18,903 -- 85,167Employee benefits 2,881 3,050 3,727 3,117 -- 12,775Materials & supplies 5,200 8,900 3,581 1,124 -- 18,805Postage & shipping 923 1,612 4,541 1,750 -- 8,826Printing & publications 1,025 1,380 800 157 -- 3,362Telephone 1,290 1,417 2,244 2,911 -- 7,862Occupancy 3,219 4,590 8,675 11,116 -- 27,600Depreciation 188 334 671 495 -- 1,688

Total direct expenses 33,981 42,904 49,627 39,573 -- 166,085

Allocation of indirect costs -- -- -- -- -- --

$ 33,981 42,904 49,627 39,573 -- 166,085

1. The indirect cost rate = 0%. No indirect allocation mechanism is used; all expenses are charged directly



Exhibit 4

Organization A - Indirect cost rate of 6.6%; administrative and indirect costs combined

DirectIndirect

A B C Admin Total

Expenses:Salaries & wages $ 18,613 19,500 23,347 23,707 85,167Employee benefits 2,792 2,925 3,502 3,556 12,775Materials & supplies 5,200 8,900 3,581 1,124 18,805Postage & shipping 605 987 4,251 2,983 8,826Printing & publications 1,000 1,355 756 251 3,362Telephone 756 1,222 1,336 4,548 7,862Occupancy 2,219 4,590 9,675 11,116 27,600Depreciation 684 758 95 151 1,688

Total direct expenses 31,869 40,237 46,543 47,436 166,085

Allocation of indirect costs 2,112 2,667 3,084 (7,863) 0

$ 33,981 42,904 49,627 39,573 166,085



Programs

TOTAL EXPENSES


Exhibit 5

Organization A - "Fully loaded" cost model

Direct





Total direct & indirect costs 33,981 42,904 49,627 39,573 0 166,085

Allocation of admin costs 10,629 13,420 15,524 (39,573) 0 0

$ 44,610 56,324 65,151 0 0 166,085

Programs

TOTAL EXPENSES



[e.g., Program A: 6.6% X $31,869 = $2,112]

4. Administrative costs are allocated based on pro rata distribution of total direct & indirect costs of each program

[e.g., Program A: $33,981 X ($39,573/($166,085 - $39,573)) = $10,629]

3. Indirect costs are allocated by applying rate (6.6%) to each cost center's total direct expenses

Exhibit 6

Organization A - Adjustment of fully loaded model for GAAP purposes




Allocation of certain administrative costs 3,223 4,070 4,707 (12,000) 0 0

35,092 44,307 51,250 25,113 10,323 166,085

Allocation of indirect costs 2,326 2,936 3,397 1,664 -10,323 0

$ 37,418 47,243 54,647 26,777 0 166,085



2. $12,000 of administrative costs are allocated to programs based on total direct expenses

[e.g., $31, 869 X ($12,000/($31,869+$46,543))=$3,223]

the allocation of selected administrative costs [e.g., Program A: 6.6% X $35,092 = $2,326]

3. Indirect costs are allocated by applying rate (6.6%) to each cost center's total direct expenses after

Exhibit 7

Organization A - 5% cap on indirect costs that can be charged to Program A




Allocation of 5% approved indirectcost cap 1,593 0 0 0 (1,593) 0

Total expenses of Program A reportable to contractor 33,462

Allocation of Program A's 1.6% excess 519 0 0 0 (519) 0Allocation of remaining indirect costs 0 2,667 3,084 2,460 (8,211) 0

$ 33,981 42,904 49,627 39,573 0 166,085


1. $31,869 X 5% = $1,593 = maximum indirect costs chargeable to Program A

2. Total indirect cost rate remains 6.6% [$10,323/($166,085 - $10,323)]

Exhibit 8

Organization B - Multiple cost pools

TOTAL EXPENSES

A B C Admin 1 2 3 Total

Expenses:Salaries & wages $ 12,500 14,950 19,635 15,400 22,682 0 0 85,167Employee benefits 1,875 2,243 2,945 2,310 3,402 0 0 12,775Materials & supplies 3,300 6,000 895 1,400 7,210 0 0 18,805Postage & shipping 500 1,035 3,675 1,682 0 1,934 0 8,826Printing & publications 950 1,184 642 120 466 0 0 3,362Telephone 1,672 1,724 1,126 2,418 0 922 0 7,862Occupancy 0 0 0 0 12,589 15,011 0 27,600Depreciation 0 0 0 0 0 0 1,688 1,688

Total direct expenses 20,797 27,136 28,918 23,330 46,349 17,867 1,688 166,085

Allocation of indirect costs 1 9,272 11,089 14,565 11,423 (46,349) 0 0 0

Allocation of indirect costs 2 6,497 3,249 4,872 3,249 0 (17,867) 0 0

Allocation of indirect costs 3 359 467 718 144 0 0 (1,688) 0

$ 36,925 41,941 49,073 38,146 0 0 0 166,085

FTEs 2.0 1.0 1.5 1.0 0.0 0.0 0.0 5.5

square footage utilized 500 650 1000 200 0 0 0 2350

1. Indirect cost pool 1: costs allocated to programs based on direct salaries and wages

2. Indirect cost pool 2: costs allocated to programs based on FTE

3. Indirect cost pool 3: costs allocated to programs based on squared footage

Programs Indirect cost pools

Exhibit 9

Organization A - Federal indirect cost proposal format - simplified allocation method

A B C Fundraising Admin Total

Expenses:Salaries & wages $ 18,613 19,500 23,347 0 23,707 85,167Employee benefits 2,792 2,925 3,502 0 3,556 12,775Materials & supplies 5,200 8,900 3,581 0 1,124 18,805Postage & shipping 605 987 4,251 0 2,983 8,826Printing & publications 1,000 1,355 756 0 251 3,362Telephone 756 1,222 1,336 0 4,548 7,862Occupancy 2,219 4,590 9,675 0 11,116 27,600Depreciation 684 758 95 0 151 1,688

Total expenses 31,869 40,237 46,543 0 47,436 166,085

Less Direct Cost Adjustments:Materials & supplies (1,645) (2,499) (866) 0 0 (5,010)Alterations & Improvements (980) (1,210) 0 0 0 (2,190)Depreciation (684) (758) (95) 0 0 (1,537)

(2,625) (3,709) (866) 0 0 (7,200)

Less Indirect Cost Adjustments:Occupancy (interest) 0 0 0 0 (762) (762)Depreciation 0 0 0 0 (151) (151)

0 0 0 0 (913) (913)

Reclassifications:Fundraising 0 0 0 4,263 (4,263)Public relations 0 0 0 2,044 (2,044)Membership administration 0 0 0 1,700 (1,700)

0 0 0 8,007 (8,007)

$ 29,244 36,528 45,677 8,007 38,516 157,972

1. Indirect cost rate = $38,516($157,972 - $38,516) = 32.2%


Indirect

Exhibit 10

Organization A - Federal indirect cost proposal format - direct allocation method

A B C Fundraising Admin Total

Expenses:Salaries & wages $ 18,613 19,500 23,347 4,390 19,317 85,167Employee benefits 2,792 2,925 3,502 790 2,766 12,775Materials & supplies 5,200 8,900 3,581 0 1,124 18,805Postage & shipping 605 987 4,251 0 2,983 8,826Printing & publications 1,000 1,355 756 0 251 3,362Telephone 756 1,222 1,336 861 3,687 7,862Occupancy 2,219 4,590 9,675 1,966 9,150 27,600Depreciation 684 758 95 0 151 1,688

Total expenses 31,869 40,237 46,543 8,007 39,429 166,085

Less Direct Cost Adjustments:Materials & supplies (1,645) (2,499) (866) 0 0 (5,010)Alterations & Improvements (980) (1,210) 0 0 0 (2,190)Depreciation (684) (758) (95) 0 0 (1,537)

(2,625) (3,709) (866) 0 0 (7,200)

Less Indirect Cost Adjustments:Occupancy (interest) 0 0 0 0 (762) (762)Depreciation 0 0 0 0 (151) (151)

0 0 0 0 (913) (913)

$ 29,244 36,528 45,677 8,007 38,516 157,972

1. Indirect cost rate = $38,516($157,972 - $38,516) = 32.2%


Indirect

Exhibit 11

Organization A - Program A by funding source with multiple caps and limitations

Total

Expenses:Salaries & wages $ 5,000 0 13,613 18,613Employee benefits 0 0 2,792 2,792Materials & supplies 2,600 0 2,600 5,200Postage & shipping 0 605 0 605Printing & publications 0 1,000 0 1,000Telephone 115 0 641 756Occupancy 400 0 1,819 2,219Depreciation 0 0 684 684

Total direct expenses 8,115 1,605 22,149 31,869

Allocation of indirect costs 243 106 1,763 2,112

$ 8,358 1,711 23,912 33,981

PROGRAM A

1. Government grant caps salaries at $5,000, benefits and depreciation at 0, and indirect costs at 3%

2. Private grants pays only postage and shipping, and printing and publications, but accepts the 6.6% indirect cost rate

Gov'tgrant

Privategrant

Generalops.

Exhibit 12

Organization A - Illustration of capital expenditures charged to a government grant

Total

Expenses:Salaries & wages $ 5,000 0 13,613 18,613Employee benefits 0 0 2,792 2,792Materials & supplies 2,600 0 2,600 5,200Postage & shipping 0 605 0 605Printing & publications 0 1,000 0 1,000Telephone 115 0 641 756Occupancy 400 0 1,819 2,219Depreciation 0 0 684 684Capital expenditures 10,000 0 0 (10,000) 0

Total direct expenses $ 18,115 1,605 22,149 (10,000) 31,869

Fixed asset elimin

PROGRAM AGov'tgrant

Privategrant

Generalops.

Documents

Effective Cost Allocation Strategiescysmis.files.cyscopa.com/2011/Cost Allocation_KaySohl_HS.pdfEffective Cost Allocation Strategies Head Start Fiscal Conference April 5, 2011. Cost