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Indirect Operating CostsIndirect Operating Costs
Shared ExpensesShared Expenses
Can the MFU cover its overhead costs?
Examples : Direct & Indirect Costs
Item Direct Cost Indirect Cost
Interest Expense √
Depreciation/ Amortization √
Litigation/Acquired Assets Expense √
Loan Loss Provision √
Bad Debts Written-off √
Employee’s Compensation/Fringe Benefits MF Staff √
Other Expenses √ √
Fuel & Lubricants *
Traveling *
Repairs & Maintenance *
Stationery & Supplies *
* If these can be tracked separately. Otherwise, should be classified as “Indirect.”
Examples : Direct & Indirect Costs
Item Direct Cost Indirect Cost
Supervision & Examination Fee √
Fines, Penalties & Other Charges √
Taxes & Licenses √
Management & Professional Fees √
Insurance √
Rent √
Light & Water √
Security Services √
Tel., Teleg. & Postage √
Advertisement √
Representation √
Membership Fees & Dues √
Donations √
Miscellaneous √
Cost Allocation
• The method for assigning shares or indirect cost to individual operating units or products.
• Cost Allocation methods– Staff Time– Number of Staff– Number of Transactions– Number of Accounts– Portfolio Volume– Office Space– Equal
Estimating the Indirect Expenses of the Microfinance Product
1. Select and compute the ratio to be used in cost allocation
Using the Number of Accounts as cost allocation basis:
Number of Outstanding Microfinance Loans x 100 Total Number of Outstanding Loans
150 x 100 = 7.5%2,000
Estimating the Indirect Expenses of the Microfinance Product
2. Compute the share of the Microfinance Product in the indirect expense
Item Amount
(A)
Cost Allocation Ratio
(B)
Cost Allocated to the Microfinance Product
(A x B)
Salaries & Benefits - Other Bank Employees 55,000 7.50% 4,125
Management & Other Professional Fees 15,000 7.50% 1,125
Banking Fees - 0.00% -
Taxes & Licenses 5,000 7.50% 375
Fines & Penalties 2,000 7.50% 150
Insurance 1,000 7.50% 75
Depreciation - Other Bank Assets 6,147 7.50% 461
Other Indirect Expenses 22,500 7.50% 1,688
TOTAL INDIRECT EXPENSES 106,647 7,999
Adjustments to avoid double counting
Direct expenses should be deducted from the amounts appearing in the branch income and expense statement to avoid double counting.
Examples:
• Salaries and Benefits
• Depreciation
• Professional Fees
Adjustments to avoid double counting
Some direct expense items should also be excluded in the computation of indirect expenses to avoid double counting.
Examples:
• Other Operating Expenses (e.g., transportation, supplies, communications)
• Interest expense
• Loan-loss provision
• Bad debts written off
Adjusting selected Income Statement entries
Item
Amount, current month
(A)
Amount, previous month
(B)
Expense for current
month (C = A - B)
Direct Cost (D)
Indirect Expense,
net of Direct Cost
(C - D)
Employee Compensation & Benefit
765,000
680,000
85,000
11,000
74,000 *
Depreciation
348,000
312,000
36,000 3,000
33,000
Professional Fee
20,000 13,000
7,000
5,000
2,000
* The compensation of other bank staff not in any way involved in the microfinance operation should also be deducted (e.g. regular loans staff)
Summary
1. Fill up the product performance data section of the report using data from the MIS Reports (AO Performance Report & PAR Report)
2. Fill up the section on financial income. Use the amounts shown in the MIS Report (Interest Collected from MFU) or ask the branch bookkeeper.
3. Compute the interest expense for the funds used to finance the microfinance loan portfolio.
4. Compute the loan-loss provision.
5. Fill up the section on directs costs.
Summary
6. From the branch financial statement, determine the indirect costs of the product.
7. Adjust/exclude the values of indirect expense items that are also classified as direct costs.
8. Select the cost allocation basis and compute the cost allocation ratio.
9. Compute the indirect costs of the microfinance product using the cost allocation ratio.
10. Using the values estimated in step 9, fill-up the indirect cost portion of the income and expense statement.
