Cost Allocation: A Case Study Approach

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Cost Allocation A Case Study Approach

• J.C. Watkins
• T/TAS _at_ WKU
• 2006 Head Start/EHS Financial
• Pre-Institute

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Overview

• Workshop will have three sections
• Very Brief Overview of Regulations
• Presentation of Cost Allocation Methods
• Case Study and Discussion of Methodologies

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The Regulations

• 2 CFR Part 215 --Uniform Administrative
  Requirements with Institutions of Higher
  Education, Hospitals, and Other Non-Profit
  Organizations (OMB Circular A-110) 
• 2 CFR Part 220 --Cost Principles for Educational
  Institutions

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The Regulations

• 2 CFR Part 225 --Cost Principles for State,
  Local, and Indian Tribal Governments 
• 2 CFR Part 230 --Cost Principles For Non-Profit
  Organizations

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The Regulations

• 45 CFR Part 74 --Uniform Administrative
  Requirements for Awards and Subawards to
  Institutions of Higher Education, Hospitals,
  Other Nonprofit Organizations, and Commercial
  Organizations and Certain Grants and Agreements
  with States, Local Governments and Indian Tribal
  Governments 

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• 45 CFR Part 92 Uniform Administrative Rules for
  Federal Grants and Cooperative Agreements and
  Subawards to State, Local and Indian Tribal
  Governments.

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Definitions

• 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

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Definitions-2

• Indirect Cost Rate-An approvable methodology for
  charging indirect costs to all funding sources
  based upon an approved fixed percentage of direct
  costs. Comes in two styles provisional or fixed.
  Provisional means it must be adjusted for actual
  costs.

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Definitions-3

• Head Start only costs- cost for services which
  are not allowable 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

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Definitions-4

• 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, (necessary and
  reasonable for performance of the grant), is
  uniformly applied and is in accordance with GAAP.

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What is a Cost Allocation Plan?

• The Cost Allocation Plan is a methodology by
  which costs that benefit more than one program
  are assigned to the correct funding streams.
• Put another way this plan is the well documented
  method based on actual circumstances to
  distribute costs that benefit more than just Head
  Start/EHS
• Keep it as simple and straight forward as possible

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Typical costs that could be allocated

• Shared Staff
• Facilities
• Equipment
• Transportation
• Insurance
• Medical
• Food

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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

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Defining what to allocate

• Cost allocation procedures should be developed in
  the planning stage for program operations. This
  is a fiscal tie-in with the Planning System
• The actual accounting will have to be recorded
  and reviewed. Tie-in with recordkeeping,
  monitoring and self assessment systems

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Develop bases

• Does the base match the cost category?
• Some typical bases include
• Number of employees
• Amount of expenses
• Number of children
• DOES NOT INCLUDE FUNDING AMOUNTS, Head Start
  share is determined by cost allocation plan not
  Head Start dollars as a percentage of total
  agency budget

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Sample of Bases
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There is no one way to develop the plan

• The plan should make sense to someone outside the
  situation-perhaps finance committee of the Bd.
• The plan should have the costs and benefits
  equaling out
• The plan should be approved by auditors and filed
  as part of grant application

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Simple Examples
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Case Study

• Using pages 12 of BCCA do you need a cost
  allocation agreement? If so when?
• Using Twist 1 on page three do we need a cost
  allocation plan and what expenses should it cover?

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Case Twists

• Using twist 2 what should our cost allocation
  now look like? How have we justified it?
• Using Twist 3 what should our cost allocation
  plan look like? How have we justified it?

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Generic Answers

• Twist 1 In the example on page 3, services are
  being expanded to eligible children. In this
  case, no cost allocation would be required.
  However, if the grantee is expanding services to
  include non-eligible children, then costs
  associated with those children must be allocated
  to each funding source, as appropriate. Rework
  budget to capture revenue and expenses.

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Answers

• Twist 2. Ed Mgn Salary, Space/Utilities, HSDir,
  would need some form of allocation
• Twist 3. Salaries, Space/Utils, Equipment (?),
  Supplies, transportation, insurance would need
  some form of allocation

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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.

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Reminder-Cost Allocation Plan Should Also

• Describe how many children, out 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.

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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.

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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 Federal staff if
  questions arise.