Cost Allocation

Prepared by:Colleen B. Mendel, Executive Director

&Chris Watkins, Management Specialist

T/TAS @ WKU2009 FSS Fiscal Conference

Overview

Workshop will have three sections Very Brief Overview of

Regulations-not everyone is subject to same sets of regulations

Presentation of Cost Allocation Methods

Quick Case Study and Discussion of Methodologies

The Regulations (for those providing services to children using Federal H.H.S funds)

2 CFR Part 215 --Uniform Administrative Requirements

2 CFR Part 220,225,230 --Cost Principles

Definitions: Costs Direct Cost- A cost which benefits

only a single funding source. No allocation is necessary.

Indirect Cost- An administrative cost which usually benefits all funding sources and is not readily assignable to each funding source without undue burden

Definitions Single funder only costs - cost for

services which are not allowable under under funding programs

Directly allocable costs -an administrative or programmatic cost that benefits more than one one funding source but maybe not all funding sources

Definitions: Allowable and Reasonable

Reasonable Cost - a cost that a prudent person would approve under the conditions at the time the cost was incurred

Allowable Cost - Cost that meets the requirements of the funding regulations, is uniformly applied and is in accordance with GAAP

What is a Cost Allocation Plan? A methodology by which costs that

benefit more than one program are assigned to the correct funding streams

The well documented method based on actual circumstances to distribute costs that benefit more than just a single funder

Keep it as simple and straight forward as possible

Typical costs that could be allocated Shared Staff Facilities Equipment Transportation Insurance Medical, Food, other costs IF ANY OF THESE ARE DIRECT BILLED

THEN NO ALLOCATION IS REQUIRED

Steps to allocation Clearly define what is to be

allocated Develop bases for allocation,

different bases can be used for different cost categories

Allocate and record in accounting records

Review allocation and bases to actual and correct if needed

Defining what to allocate Cost allocation procedures should be

developed in the planning stage for program operations

For HS/EHS this is a fiscal tie-in with the Planning System

For all others this is good business The actual accounting will have to be

recorded and reviewed This promotes greater accountability

Develop bases Does the base match the cost category? Some typical bases include

Number of employees Amount of expenses Number of children Square Footage DOES NOT INCLUDE FUNDING AMOUNTS.

The share is determined by cost allocation plan not funder dollars as a percentage of total agency budget

Sample of Bases

Head Start/EHS Wrap TotalEmployees 63 9 72Expenses $2,078,000 $98,000 $2,176,000Children 350 60 410

Base: Number of EmployeesHS: 63/72 HS:88%, Wrap 12%

Base: ExpensesHS:2,078/2,176 HS:95%, Wrap: 5%

Base: Number of ChildrenHS: 350/410 HS:85%, Wrap 15%

Salary Using Number of Children Total Number of Children= 55 Number funded by source 1= 20, by source 2= 35 Director’s Salary= 50,000 Allocation percentages

20/55=35%, 35/55=65% Applying percentages

65% X 50,000 = 32,500 35% X 50,000 = 17,500

The salary should be charged off to source 1 and 2 at this amount

Salary Using Number of Staff Director’s Salary= 50,000 Staff positions funded by source 1=3 Staff positions funded by source 2=2 Director manages 5 staff Allocation Percentages

Source 1 = 3/5=60% Source 2=2/5=40% Applying Percentages 60% X 50,000= $30,000 40% X 50,000= $20,000

There is no one way to develop the plan The plan should make sense to

someone outside the situation-perhaps finance committee of the Board

The plan should have the costs and benefits equaling out

The plan should be approved by auditors and filed as part of grant application

Simple ExamplesHead Start/EHS Wrap Total

Employees 75 25 100Expenses $2,600,000 $400,000 $3,000,000Children 400 100 500

Base: Number of EmployeesHS: HS:??%, Wrap ?%What cost center would you allocate this base to and why?

Base: ExpensesHS: HS:??%, Wrap ?%What cost center would you allocate this base to and why?

Base: Number of ChildrenHS: HS:??%, Wrap ?%What cost center would you allocate this base to and why?

Reminder-Cost Allocation Plan Should: Provide detailed information on the

sources of revenue for the program, supported by historical or other data to substantiate the amounts

Reminder-Cost Allocation Plan Should Also: Describe how many children, of the

total number of Head Start enrollees, are in the portion of the program covered by the cost allocation plan

Include a description of the methodology used to determine the allocation of the costs of services to the various funding sources

Cost Allocation Plan Should Also: Include the basis for allocating costs

within specific cost categories (personnel, space, supplies, etc.) and a description of how expenditures within the major cost categories will be apportioned and recorded in the grantee's accounting system

Still be allowable, reasonable, and consistently applied

Good Luck Keep it simple Be able to explain it to others Apply it consistently Revisit the plan regularly to

determine if the assumptions are true

Talk to agency auditors or FSS fiscal staff if questions arise.