Cost Allocation Plan Basics

Presented by

Tom Carawan

March 12, 2009

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Presentation Outline

I. Background of Cost Allocation

II. Documenting Fair Share

III. Components of a Cost Plan

IV. Central Service Agency

V. Benefiting Agency

VI. Central Service Expenditures

VII. Activities of Central Service Agencies

VIII. Allocation Bases

IX. Filing the Document

X. Sample Plans and Indirect Cost Rate

XI. How to Use

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Background of Cost Allocation

Why necessary?

In 60’s, Federally-mandated programs pushed down to

state and local governments

No funding to administer programs

California and New York sued and won

Feds pay share of administrative costs

Good ol’ days - Feds paid up to 75%

Now averages below 50%

Golden Rule – “He who has the gold, rules”

Some is better than none

Want to get some? Play by the rules

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Background of Cost Allocation (cont)

OMB Circular A-87 History

Initially effective 7/1/1968

Reissued as FMC 74-4 effective 12/1/1976

Reissued as OMB A-87 effective 1/15/1981

Revised effective 9/1/1995

Codified as 2 CFR Part 225 effective 8/31/2005

http://rates.psc.gov/fms/dca/orgmenu.html

http://rates.psc.gov/fms/dca/2%20cfr%20part%20225.pdf

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Background of Cost Allocation (cont)

ASMB C-10

A Guide: “Cost Principles and Procedures for Developing

Cost Allocation Plans and Indirect Cost Rates for Agreements

with the Federal Government”

Issued 4/8/1997

http://rates.psc.gov/fms/dca/asmb%20c-10.pdf

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Background of Cost Allocation (cont)

“The principles are designed to provide that

federal awards bear their fair share of

cost recognized under these principles

except where restricted or prohibited by

law.”

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Documenting Fair Share

Charge costs

Directly

Indirectly

Direct costs

Specifically identified with a cost objective

Salaries of child support enforcement personnel

Rent

Supplies

Travel

Contractual Services

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Documenting Fair Share (cont)

Indirect costs

“(a) incurred for a common or joint purpose benefiting more

than one cost objective, and

“(b) not readily assignable to the cost objectives specifically

benefited, without effort disproportionate to the results

achieved.”

Indirect costs can originate from

central service departments

benefiting agency

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Documenting Fair Share (cont)

Documentation

Direct costs

Financial reports from entity

Indirect costs

Prepare

Central services cost allocation plan (CAP)

Indirect cost rate proposal (ICRP)

Purpose

Distributes (allocates) costs incurred for a common purpose

to those that benefit

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Components of a Cost Plan

Five primary components

Central service agencies

Benefiting (or receiving) agencies

Expenditures of central service agencies

Functions or activities carried out by central service agencies

Allocation bases

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Central Service Agency

Provides services to other agencies within the government

Consolidation of necessary common services

Payroll

Accounting system

Office needs

Examples of services to other units of government

Departmental oversight

Accounting

Payroll

Custodial services

Utilities

Benefits administration

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Benefiting Agencies

Agency that provides service to the public

Examples

Police or Sheriff

Tax

Solid waste

Engineering

Recorder

Clerk

Board or Council

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Central Service Expenditures

Eligible expenditures of central service agencies are

allocated to those which benefit from the services

provided

Only eligible expenditures may be allocated

Eligibility is determined by 2 CFR Part 225

Examples

Payroll services from Finance

Custodial services from Building Operations

Utility costs in government buildings

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Activities of Central Service Agencies

One or more for each central service agency

Examples

Finance - Accounting, payroll, debt management

Building operations – City Hall/Courthouse, Admin Building

Allows for different allocation bases to distribute the costs of

providing each function

Number of accounting transactions okay for accounting but perhaps

not for payroll

Square footage may okay for both but occupancy differs by building

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Allocation Bases

Identified for each function or activity

Reasonable and measurable means of distributing costs to

those units of government that benefit from the service

Recognizes that the value of providing a service is

proportionate to the service received

Examples

Finance

Accounting – Number of transactions

Payroll – Number of FTEs

Debt management – Disallowed

IT

Computer ops – Number of nodes

Telephone – Number of devices

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Other Requirements

Certification

CFO or above must sign the certification

Organization Chart

CAFR

Reconciliation to CAFR or financials (also include)

Narrative for each central service

Billed services information

Internal service funds >$5 million

Retained earnings balance calculation

Self-insurance funds

Actuarial report

Fringe Benefit information

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Filing the Document

Feds rarely require filing by local governments

Prepare and maintain on file

Virginia Department of Social Services

Federally-mandated programs

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Sample Plans

State of Missouri

http://oa.mo.gov/acct/swcap.htm

Nashville-Davidson Consolidated Government

http://www.nashville.gov/finance/omb/cost_accounting.asp

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Sample CAP

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Sample Indirect Cost Rate

Based on

Actual

FY2008 for

use in

FY2010

Based on

Actual

FY2007 for

use in FY2009

Based on

Actual

FY2006 for

use in FY2008

A

FY 2008 Total Direct Cost (exc. One-Time Katrina-Related Expenses,

Capital Outlay, Subsidies and Loans) $ 10,572,546 $ 9,264,685 $ 8,880,055

B Fixed 2008 Indirect Cost Rate 25.69% 36.63% 26.89%

C Indirect Cost Recovered - FY 2008 (A x B) $ 2,716,495 $ 3,393,704 $ 2,388,052

D Less FY 2006 Carry Forward Under/(Over) Recovery $ (218,586) $ 354,971 $ (330,750)

E Net Indirect Cost Recovered (C - D) $ 2,935,082 $ 3,038,733 $ 2,718,802

F FY 2008 Actual Indirect Costs $ 3,125,298 $ 2,978,840 $ 2,500,216

G FY 2008 Carry-Forward Under/(Over) Recovery (F - E) $ 190,216 $ (59,893) $ (218,586)

H FY 2010 Proposed Indirect Costs (F + G) $ 3,315,514 $ 2,918,947 $ 2,281,629

I FY 2010 Proposed Indirect Cost Rate (H / A) 31.36% 31.51% 25.69%

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How to Use

Recover costs from federal programs

Public assistance programs

Some other grants

ALWAYS ASK TO RECOVER INDIRECT COSTS

Document matching funds

Negate audit exceptions

Estimate indirect costs for new program

Enhance management information

Add allocated costs to actual expenditures for full cost of

service

Include in setting fees for service

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Questions / Discussion