COST ALLOCATION

1
COST ALLOCATION

• A reference to help with cost allocation.

2
Course Objective

• Learn how to correctly apply your cost allocation
  plan to your center.
• Learn how to implement your cost allocation plan
  and document costs based on your plan.

3
Allocating Costs

• If an organization has only one activity that is
  funded by one funding source and if all costs
  associated with the organization are for that
  activity, no allocation is needed.
• If an organization has multiple activities, and
  one or more funding sources, a cost allocation is
  needed.

4
Direct Costs

• Direct costs are those which are clearly and
  easily attributable to a specific program.
• Examples of direct cost are
• Employee time devoted to one or more activity.
• Materials purchased for one or more activity.
• Equipment bought for a specific activity.

5
Indirect Cost

• Indirect costs are those which are not easily
  identifiable with a specific program, but which
  are, nonetheless, necessary to the operation of
  the program.
• These costs are shared among programs and, in
  some cases, among functions (program, management
  and general, and fundraising).

6
Indirect Cost Examples

• Executive Directors salary
• Chief Financial Officers salary
• Single Audit report costs
• Shared office costs, such as rent and utilities

7
Why Allocate Indirect Costs to the Programs?

• The full cost of a program rightfully includes a
  share of the overall costs of the organization.
• Knowing the full cost of a program sets a basis
  for financial analysis of the program, and for
  requesting reimbursement from funders for the
  full costs of providing services.

8
What Are the Methods for Allocating Indirect
Costs?

• There are several methods for allocating indirect
  costs . The most common are
• case-by-case allocation,
• developing an indirect cost rate, and
• Full Time Equivalents (FTEs)

9
Case-by-Case Allocation

• One method of allocating indirect costs is to
  determine a rate of actual usage for each
  program. For example
• You may decide to keep track of long distance
  telephone calls and charge them to the
  appropriate program when you pay the phone 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 benefits more than one
  program or activity.

10
Case-by-Case Allocation (cont)

• The advantage of this method is that it seems to
  make sense.
• A major disadvantage, however, is that it often
  requires a great deal of time consuming record
  keeping.

11
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?

12
Developing an Indirect Cost Rate

• The 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 an
  indirect cost pool and then allocated to the
  programs based on a set proportion or rate.

13
Developing an Indirect Cost Rate (cont)

• There are several measures used to determine the
  proportion of indirect costs to allocate (apply)
  to each program.
• The following simple example illustrates an
  indirect cost rate based on the relationship
  between total indirect costs and total direct
  costs.

14
Crisis Center

• The 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 is budgeted at
  300.
• Total costs are 3,300.

15
Crisis Center (cont)

• Since Program As direct costs are one-third of
  the total direct cost of the shelter center
  (1,000 out of 3,000), it should bear one-third
  of the indirect costs. Similarly, since Program B
  incurs two-thirds of the total direct costs of
  the shelter center, it should bear two-thirds of
  the indirect costs, as well.
• An indirect cost rate (using direct costs as a
  base) is established by dividing the total
  indirect costs by the total direct cost.
• Total Indirect costs divided by Total Direct
  Costs 300/3,00010 percent of total costs

16
Full Time Equivalents (FTEs)

• Training/Conferences/Seminars- Allocated to the
  program benefiting from the training, conferences
  or seminars. The following example shows how
  costs that benefit two or more specific programs,
  but not all programs.

Expense Amount 5,000
17
OMB Circular A-122 and UGMS

• Pass-through recipients from the HHSC Family
  Violence Program funding, are required to
  reference the OMB Budget Circular A-122 and UGMS
  using these same principles.
• However, even within these guidelines, indirect
  cost rates for the same organization may vary
  from federal agency to federal agency.

18
Direct vs. Indirect Allocation

• Contrary to popular belief, indirect costs are
  not an easy measure of an organizations
  efficiency. Imagine a multi-service agency where
  each program has its own bookkeeper, purchases
  its own supplies, and has all its own equipment.
• Such an organization would have no indirect
  costs at all, but would be clearly less efficient
  than if the programs shared bookkeeping costs,
  supplies and equipment.

19
Final Comments

• Because the presentation of financial information
  influences the way we access a providers
  finances, the selection of indirect costing
  methods and accounting procedures has an
  important impact on decision-making.
• Several urgent and perhaps conflicting demands
  are made of the indirect costing 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 informs decision-makers is a
  responsibility of all participants in the
  nonprofit sector.

20
HHSC Family Violence Program

• Humphrey Matthews, Contract Manager
• 512-206-5123
• Humphrey.matthews_at_hhsc.state.tx.us
• Helen Oh, Contract Manager
• 512-206-5565
• Helen.oh_at_hhsc.state.tx.us
• Sandra Steward, Program Specialist
• 512-206-5125
• Sandra.steward_at_hhsc.state.tx.us

• Katie Ray-Jones, Program Manager
• 512-206-5143
• Katie.ray-jones_at_hhsc.state.tx.us
• Judy Forbes, Program Specialist
• 512-206-5040
• Judy.forbes_at_hhsc.state.tx.us
• Robyn Mobley, Contract Specialist
• 512-206-5137
• Robyn.mobley_at_hhsc.state.tx.us
• Susie Roberts, Contract Manager
• 512-206-5517
• Susie.roberts_at_hhsc.state.tx.us

21
Budget Revisions

• The HHSC Family Violence Program allows each
  provider to submit a budget revision to ensure
  your grant monies are fully expended.
• 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 Budget Revision forms (included in the Excel
  Budget Workbook).

22
Budget Revisions (cont)

• If the total amount of the budget revision is
• less 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 be submitted 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 be submitted prior to
  implementation and approved by the Commission.
• Retroactive budget revisions will not be accepted
  by HHSC.