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Report
Puget Sound Finance Officers Association
Indirect Cost Allocation Plans
May 9, 2012
Peter Moy, Principal
Nathan Reese, Project Consultant
7525 166th Ave NE Suite D-215, Redmond, WA 98052  (425) 867-1802  www.fcsgroup.com
Topics

The Basics
– Cost Allocation Basics
– Analytical Steps
BARS
 A-87 Plans
 Wrap-Up

2
What is an Indirect Cost Allocation Plan?
A method to calculate the cost of support activities and
functions to serve operating programs
Support Activities
Operating Programs
Legislative
Administration/Management
Finance / Accounting / Budget
Human Resources
Legal
Records Management
Facility Maintenance
Information Technology
Etc.
Police
Fire and EMS
Development Services
Public Works
Water, Sewer, Stormwater, and
Solid Waste Utilities
Parks
Library
Etc.
3
Why Implement an Indirect Cost
Allocation Plan?

Reimburse the General Fund from other
funds, external agencies, etc. for overhead
and administrative support costs

Calculate cost-based user fees for public
services, such as development review, parks,
fire permits, licensing

Recover central services costs through
federal program reimbursement, compliant
with A-87 guidelines

State Auditor priority
4
The Basics
Cost Allocation Basics
5
Key Principles
Cost allocation is by
definition an estimate
Strive for a reasonable and
equitable means to allocate
costs
“If you could directly
charge for all of these
costs efficiently, you
would…”
6
Key Principles
(cont.)

Indirect costs are incurred for a common purpose
benefiting more than one cost function, organizational
unit, contract, or grant

Cannot directly assign indirect costs without making
an effort disproportionate to the results achieved
7
Key Questions



What is the purpose of the cost
allocation plan?
What are the full costs of providing
services to the public?
Do cost allocation measures
– Reasonably link to the level of service and/or benefit
received, or (at least)
– Represent an acceptable means for apportioning cost
burden?
8
Key Questions

Does the plan make sense to those responsible
for its implementation and upkeep?

Does the plan make sense to those directly
impacted by its results?
– Can the results be explained to internal stakeholders? To their
constituents?

Is the process by which the plan is updated:
– Feasible to complete thoroughly on a regular basis?
– Acceptable to those who must plan around and defend its
results?
9
Terminology
Indirect Service
An activity that supports the departments
and organizations that provide public
services directly to the public
Indirect Cost Pool
A distinct program area or function within a
department that provides indirect services.
Direct Service
An activity that provides services directly to
or for the public and is supported by indirect
services.
10
Cost Allocation Methodology
One-Step Process


A quick, simple means to allocate costs
May not be as equitable for complex organizations
All indirect costs are allocated
only to direct service programs
1
Allocable Costs of
INDIRECT SERVICE
PROGRAMS
costs
DIRECT SERVICE
PROGRAMS
11
Cost Allocation Methodology(cont.)
Two -Step Process


Provides a more complete portrayal of the full costs of service
Requires a more sophisticated allocation analysis
All indirect costs are allocated to all departments
and programs, both direct and indirect
1
costs
Allocable Costs of
INDIRECT SERVICE
PROGRAMS
costs
DIRECT SERVICE
PROGRAMS
INDIRECT SERVICE
PROGRAMS
share of indirect
costs
2
Costs allocated to indirect programs in Step 1
are distributed to direct service programs
12
Level of Detail
It’s more meaningful to
allocate program costs,
rather than individual
line items.

Allocate detailed costs only to the
extent they enhance the level of
equity or reasonableness achieved

Start with totals by department

Identify program areas within
departments as allocable cost
centers

Move to line-item detail only as
needed
13
Assortment of Measures
The number and variety of workload measures used is
dependent on the complexity of the organization and the goals
of the plan…
FTEs
Actual
Expenditures
Accounting
Transactions
Square
Footage
Utility
Accounts
Agenda
Items
Records
Archived
Work Orders
Actual
Timekeeping
Data
Computer
Workstations
…and should be based on data that can be obtained easily
on a regular basis or is recorded already for some other purpose.
14
Common Pitfalls

Incomplete or targeted allocations

Not keeping current with
organizational changes, practices,
service levels, and costs

Unnecessary complexity

Avoiding discussion
15
The Basics
Analytical Steps
16
Basic Analytical Steps
1
Examine Organization
4
Identify all indirect and direct
departments and program areas
2
Utilize Budget
& Financial Data
Adjust for non-allocable costs,
assigned costs, and other revisions
5
Determine Workload
Measures
Form basis for the allocation
of each indirect service
Allocate Costs
Allocate indirect costs based on
proportions from workload measures
Compile total costs related to
indirect services and program areas
3
Make Adjustments
6
Calculate Full Overhead
Identify each direct service’s full
share of indirect costs
17
1. Examine Organization


Identify indirect service departments and programs
Identify direct service departments that receive support
Example:
Board of Commissioners
Development
Public Works
Maintenance
Assessor
Auditor
Treasurer
Other
Admin
Purchasing
Financial
Services
Prosecutor
Human
Resources
Sheriff
Coroner
Courts
Etc…
Information
Services
Other
Evaluate Your Specific Organization
All entities are structured differently, and
indirect services will be provided by
different departments from city to city,
county to county, district to district.
18
1. Examine Organization
(cont.)
Indirect Service Department
IDENTIFY & ALLOCATE ACTUAL EXPENSES INTO COST POOLS
Program A
Program B
ALLOCATE COST POOLS
Direct Service Departments
Direct Service Departments
19
2. Utilize Financial Data



Compile the costs of
indirect program
areas
PRO SECUTO R
All C o s ts
T o ta l B u d g e t
$ 4 5 0 ,0 0 0
le ss: N o n -A llo ca b le E xp e n d itu re s
Exclude any direct
service costs
P ro se cu tin g A tto rn e y S a la ry
8 5 ,0 0 0
P ro se cu tin g A tto rn e y B e n e fits
2 0 ,0 0 0
Decide if
departmental costs
need to be broken
into programs
S e rvice s - P u b lic D e fe n d e r - C o u n se l
S e rvice s - P u b lic D e fe n d e r - S cre e n in g
3 ,0 0 0
2 0 ,0 0 0
Ju ro r F e e s - D istrict C o u rt
5 ,0 0 0
W itn e ss/In te rp re te r F e e s
5 ,0 0 0
L e g a l A ssista n t S a la ry & B e n e fits
O th e r O & M E xp e n se s
T o ta l Allo c a b le In d ire c t C o s ts
1 0 ,0 0 0
2 ,0 0 0
$ 3 0 0 ,0 0 0
20
2. Calculate Cost Pools


Indirect service
program areas may not
necessarily be
recognized budget
divisions
A simple allocation of
a departments’ budget
should be completed to
identify costs for each
program area
Budgeted
Department
Auditor
Elections
Budgeted
Divisions
Licensing
Accounting
Program
Areas
Payroll
Accounts Payable
Budget
21
3. Determine Workload Measures


Determine bases for
allocating costs in a
way that reasonably
measures a
department’s use of
indirect support
Calculate percentages
from each selected data
set
FTEs
T o ta l F u ll T im e E q u iva le n ts
P e rc e n t o f
T o ta l
T o ta l
146
100%
L e g isla tive
-
0 .0 0 %
E xe cu tive
4
2 .7 4 %
Legal
2
1 .3 7 %
10
6 .8 5 %
F a cility M a in te n a n ce
1
0 .6 8 %
A d m in istra tive S e rvice s
1
0 .6 8 %
F in a n cia l S e rvice s
P e rc e n t o f
D ire c t D e p t.
O n ly
100%
P u b lic S a fe ty
60
4 1 .1 0 %
4 6 .8 8 %
C o m m u n ity S e rvice s
14
9 .5 9 %
1 0 .9 4 %
D e ve lo p m e n t S e rvice s
10
6 .8 5 %
7 .8 1 %
P a rk s
10
6 .8 5 %
7 .8 1 %
P ro se cu to r
1
0 .6 8 %
0 .7 8 %
W a te r
7
4 .7 9 %
5 .4 7 %
W a ste w a te r
4
2 .7 4 %
3 .1 3 %
S to rm w a te r
2
1 .3 7 %
1 .5 6 %
1 3 .7 0 %
1 5 .6 3 %
P u b lic W o rk s
20
22
3. Determine Workload Measures
Examples
Indirect Service Department
City Council
Mayor - Administration
Mayor - Civil Service Examiner
City Clerk - Legislative Support
City Clerk - Records
Information Technology
Human Resources
Finance - General
Finance - Payroll
Finance - AP
Finance - Utilities
Finance - State Auditor
Finance - General Liability Insurance
Finance - Property Insurance
Finance - Vehicle Insurance
Finance - Claims & Judgments
City Attorney
Public Works - Facilities
Parks Maintenance - City Buildings
Public Works – Facilities: Telephone
Allocation Factor
Agenda Items
Total Actual Expenditures
Police & Fire FTEs
Agenda Items
Records count
Computers
FTEs
Total Actual Expenditures
FTEs
Purchase orders
Utility bills
Total Actual Expenditures
FTEs
Property value and building square feet
Cost of insured vehicles
Claims & Judgments
Number of times general services used and total
direct bills for special matters
Square feet
Staff time and square feet
Telephone connections
23
4. Make Adjustments to Cost
Information

Adjust for any costs that can be directly
assigned to specific departments or
functions

Decide how to account for one-time
expenditures (e.g., include, exclude,
amortize)

Add additional outlays that may not
necessarily correlate to the specific
organizational unit but are reasonable
inclusions to the cost of service

Make any exclusions needed to comply
with OMB Circular A-87 rules for federal
reimbursement of indirect costs
24
5. Allocate Overhead Costs
Step 1: Apply workload measures to proportionately
allocate indirect costs to all departments
P rim a ry A llo c a tio n
F IN AN C IAL S E R V IC E S
A llo ca tio n F a cto r
Finance
receives
$43,028 of
itself.
T o ta l A llo ca b le C o sts
L e g isla tive
$
R e s u ltin g
Budget
U tility B illin g
P a yro ll
In fo . T e c h .
D is trib u tio n
Budget
A cco u n ts
FTEs
PCs
C a lcu la te d
5 0 0 ,0 0 0
$
1 0 0 ,0 0 0
$
1 0 0 ,0 0 0
$
1 0 0 ,0 0 0
100%
1 ,2 5 3
-
-
-
1 2 ,5 3 1
-
2 ,7 4 0
6 ,4 5 2
7 ,5 1 9
-
1 ,3 7 0
3 ,2 2 6
2 0 ,0 5 0
-
6 ,8 4 9
1 6 ,1 2 9
F a cility M a in te n a n ce
7 ,5 1 9
-
685
-
A d m in istra tive S e rvice s
1 ,2 5 3
-
685
1 ,6 1 3
1 5 0 ,3 7 6
-
4 1 ,0 9 6
3 2 ,2 5 8
C o m m u n ity S e rvice s
2 5 ,0 6 3
-
9 ,5 8 9
8 ,0 6 5
6 .0 2 %
D e ve lo p m e n t S e rvice s
3 0 ,0 7 5
-
6 ,8 4 9
1 2 ,9 0 3
7 .0 2 %
P a rk s
3 7 ,5 9 4
-
6 ,8 4 9
3 ,2 2 6
6 .7 1 %
3 ,7 5 9
-
685
1 ,6 1 3
0 .8 5 %
W a te r
6 2 ,6 5 7
3 3 ,9 5 3
4 ,7 9 5
3 ,2 2 6
1 4 .7 3 %
W a ste w a te r
7 5 ,1 8 8
3 3 ,0 2 4
2 ,7 4 0
1 ,6 1 2
1 5 .8 5 %
S to rm w a te r
1 5 ,0 3 8
3 3 ,0 2 3
1 ,3 7 0
1 ,6 1 2
7 .1 9 %
P u b lic W o rk s
5 0 ,1 2 5
-
1 3 ,6 9 8
8 ,0 6 5
1 0 .1 2 %
E xe cu tive
Legal
F in a n cia l S e rvice s
P u b lic S a fe ty
P ro se cu to r
Used in
Allocation
Step 2…
3 1 .5 1 %
25
5. Allocate Overhead Costs (cont.)
Step 2: Allocate remaining indirect costs to direct service
departments
S e c o n d a ry A llo c a tio n
F IN AN C IAL S E R V IC E S
L e g is la tive
A llo ca tio n F a cto r
T o ta l A llo ca b le C o sts
E x e c u tive
Legal
F in . S e rvic e s
F a c . M a in t.
Ad m in . S vc s .
C a lcu la te d D istrib u tio n o f F in a n ce to D ire ct S e rvice D e p a rtm e n ts fro m P rim a ry A llo ca tio n
$
4 ,2 4 1
$
2 7 ,3 6 2
$
1 5 ,0 0 0
$
4 3 ,0 2 8
$
2 0 ,5 4 8
$
1 ,5 0 0
L e g isla tive
E xe cu tive
Legal
F in a n cia l S e rvice s
F a cility M a in te n a n ce
A d m in istra tive S e rvice s
P u b lic S a fe ty
1 ,3 3 6
8 ,6 2 1
4 ,7 2 6
1 3 ,5 5 6
6 ,4 7 4
473
C o m m u n ity S e rvice s
255
1 ,6 4 6
902
2 ,5 8 8
1 ,2 3 6
90
D e ve lo p m e n t S e rvice s
298
1 ,9 2 0
1 ,0 5 2
3 ,0 1 9
1 ,4 4 2
105
P a rk s
285
1 ,8 3 7
1 ,0 0 7
2 ,8 8 8
1 ,3 7 9
101
36
233
128
367
175
13
W a te r
625
4 ,0 3 2
2 ,2 1 0
6 ,3 4 0
3 ,0 2 8
221
W a ste w a te r
672
4 ,3 3 7
2 ,3 7 8
6 ,8 2 0
3 ,2 5 7
238
S to rm w a te r
305
1 ,9 6 7
1 ,0 7 8
3 ,0 9 3
1 ,4 7 7
108
P u b lic W o rk s
429
2 ,7 7 0
1 ,5 1 8
4 ,3 5 6
2 ,0 8 0
152
P ro se cu to r
Allocate
Finance’s
share of
indirect
services
based on how
direct service
departments
use the entire
Finance
department
26
6. Calculate Full Overhead
Add all components of the indirect cost allocation to determine
each direct service department’s share
G ra n d T o ta l In d ire c t C o s t A llo c a tio n
F IN AN C IAL S E R V IC E S
L e g is la tive
T o ta l A llo ca b le C o sts
$
7 8 ,4 8 5
E x e c u tive
$
5 0 3 ,2 5 1
Legal
$
F in . S e rvic e s
2 3 3 ,9 4 6
$
8 2 1 ,8 0 5
G ra n d T o ta l
F a c . M a in t.
$
3 0 8 ,4 6 7
Ad m in . S vc s .
$
5 4 ,0 4 3
$ 1 ,9 9 9 ,9 9 7
L e g isla tive
E xe cu tive
Legal
F in a n cia l S e rvice s
F a cility M a in te n a n ce
A d m in istra tive S e rvice s
P u b lic S a fe ty
1 4 ,8 5 4
1 6 0 ,8 8 0
6 8 ,3 0 1
2 5 8 ,9 1 5
1 3 7 ,3 0 1
3 ,1 3 0
6 4 3 ,3 8 1
4 ,0 9 8
3 1 ,9 6 3
1 6 ,5 3 6
4 9 ,4 3 5
3 1 ,8 8 1
1 ,0 0 3
1 3 4 ,9 1 6
4 5 ,2 2 1
9 1 ,1 2 2
1 2 2 ,2 8 7
5 7 ,6 6 3
3 8 ,7 4 7
4 0 ,4 9 4
3 9 5 ,5 3 4
2 ,0 2 7
3 6 ,3 0 2
1 ,9 2 7
5 5 ,1 6 6
2 1 ,8 2 8
1 ,0 7 7
1 1 8 ,3 2 7
104
3 ,4 3 0
190
7 ,0 1 0
2 ,1 8 3
558
1 3 ,4 7 5
W a te r
3 ,4 5 5
5 3 ,4 2 4
2 ,9 0 3
1 2 1 ,0 8 6
1 6 ,3 6 2
807
1 9 8 ,0 3 7
W a ste w a te r
2 ,4 9 3
5 7 ,5 3 7
3 ,2 9 9
1 3 0 ,2 6 7
1 0 ,5 2 3
898
2 0 5 ,0 1 7
S to rm w a te r
2 ,7 9 6
1 3 ,7 8 5
1 5 ,7 0 2
5 9 ,0 7 0
6 ,7 3 2
199
9 8 ,2 8 4
P u b lic W o rk s
3 ,4 3 7
5 4 ,8 0 8
2 ,8 0 1
8 3 ,1 9 4
4 2 ,9 1 0
5 ,8 7 7
1 9 3 ,0 2 7
C o m m u n ity S e rvice s
D e ve lo p m e n t S e rvice s
P a rk s
P ro se cu to r
27
Reconciliation
Financial Services Budget
$800,000
Less: Costs allocated to other
indirect services
<$ 46,846>
Plus: Costs allocated from other
indirect services
Financial Services Allocated Overhead
$ 68,651
$ 821,805
28
BARS - Overhead Cost
Allocations for Local
Governments
29
Guiding Principles

RCW 43.09.210: When one fund charges another, the fund
being charged may only pay for the actual costs of the
services that it receives (except for the General Fund).
– The General Fund can subsidize other funds, because a large
portion of its revenues (e.g. sales and property tax) are
unrestricted.
– If you have an overhead cost allocation plan that equitably
shares overhead costs, then you are well on your way to
demonstrating compliance with this statute. This plan should
document:
• The cost of each overhead cost center,
• Level of service provided to benefitting funds/department
and how it was determined, and
• The amount charged to each fund/department.
30
Guiding Principles (cont.)


Other RCWs indicate that the value of services
provided by general government staff may be
charged to utilities.
An overhead cost allocation plan should guide and
document the cost allocation process.
31
General Government Costs



Local governments should not charge general
government costs that benefit the public at large to
the utilities or other funds with restricted revenues.
What are general government costs?
Some examples of general government costs that
should not be part of a cost allocation plan include:
– Police
– Worker apprenticeship
programs
– Parks and recreation
– Community and economic – Economic development
development
32
Elected Officials

The costs of elected officials (e.g. mayor, council, etc.) can be
charged to utilities, but there is some risk that this could change in the
future.
– Because councils/boards of commissioners benefit both the public at
large and the operations they oversee, there is no easy, clear-cut answer.
– There are conflicting court decisions at the local level as to whether these
costs can be charged, and no statewide court decision.
– According to A-87 regulations the costs of elected officials must be
excluded from overhead cost allocation plans. However, the regulations
only apply to reimbursement of overhead costs related to federal grants
– Receiving federal money does not automatically mean your cost
allocation plan needs to follow A-87 regulations. However, an A-87 plan
is needed to recover overhead costs related to grants.

If you choose to include the costs of your council/commissioners, use
agenda items to allocate costs.
33
Sound Practices and Requirements



A good overhead cost allocation plan will include:
– Allocation factors that are appropriate and are based on current and
accurate information.
– An allocation of costs to every fund/department receiving services,
regardless of whether they can or will pay for those services.
– Actual costs, or if budgeted costs are used then budgets are updated to
actual costs at least annually.
– For each overhead cost center, documentation describing (1) the
services provided, (2) any excluded costs, and (3) the data used to
allocate those costs.
– Documentation showing how overhead charges to funds/departments
were calculated.
Remember to charge departments/funds only after overhead services are
provided.
If questionable/general government costs are included in the plan, they
should only be charged to departments in the General Fund.
34
Recommended Allocation Factors
Type of Cost
Allocation Factors
Maintenance and
Janitorial
Square feet
Electric and other
externally provided
utilities
Square feet
Accounting
Actual expenses or # of transactions
Budget
Actual expenses, budgeted expenses,
or # of staff (FTEs)
Payroll
FTEs or payroll warrants
Human resources
FTEs
IT services
# of computers, servers, databases, or
ports
Legal – indirect costs
Actual expenses or hours worked
Insurance
FTEs, claims or loss history, square feet,
property values insured, and risk factor
Accounts payable
# of transactions (including vouchers or
invoices)
Purchasing
# of transactions (procurements)


For other overhead costs not
included on the list, choose
allocation factors that result in
allocations that are fair,
equitable, and reflect the value
of services received by
benefitting departments/funds.
A combination of several
allocation factors is also
acceptable.
35
Recent Applicable Performance Audits
from the State Auditor’s Office


Local Government Allocation Overhead Costs (11/2011)
Seattle City Light (03/2010)
36
Federal
Reimbursement (A-87)
Plans
37
What is an A-87 Plan?
OMB
Circular
A-87
It’s an analysis and document that provides a
basis for recovering costs from federal (and state)
grants…

Definition of allowable indirect costs

Application of results

True-up process

Documentation requirements

Approval
38
General A-87 Concepts (cont.)
OMB
Circular
A-87
Allocations strive for reason and equity

Distribute indirect costs on bases that will produce
an equitable result in consideration of the relative
benefits received

Allocate an appropriate share of indirect costs to all
activities which benefit from a governmental unit’s
indirect cost
39
General A-87 Concepts (cont.)

OMB
Circular
A-87
Treat indirect costs consistently
– Do not assign costs to one grant as a direct cost while
allocating similar costs as an indirect cost for another grant

Do not charge any cost allocable to a particular
grant or cost objective to other grants to:
– Overcome fund deficiencies, and/or
– Avoid restrictions imposed by law and terms of
federal grants
40
A-87 Unallowable Costs





Advertising and public
relations designed solely to
promote the governmental unit
Costs of promotional items and
memorabilia, including gifts,
souvenirs
Alcoholic beverages
Bad debts
Contingencies






OMB
Circular
A-87
Contributions and donations
Entertainment
Investment counseling and
staff
Legislative costs (e.g.,
Board or Council)*
Chief Executive costs (e.g.
City Manager or County
Administrator, etc.)*
Lobbying
* Unless specific timekeeping documentation is
available to substantiate costs on the specific
program
41
Make Adjustments to Cost
Information

Adjust for any costs that can be directly
assigned to specific departments or
functions

Decide how to account for one-time
expenditures (e.g., include, exclude,
amortize)
OMB
Circular
A-87
– Must exclude capital outlay for A-87 and
replacement charges

Add additional outlays that may not
necessarily correlate to the budget but are
reasonable or allowed inclusions to the
cost of service
– A-87 Building use component (2%)
– A-87 Equipment use component (6.67%)
42
A-87 Documentation
OMB
Requirements Circular
A-87

Organizational chart

Description of services

Identification of who provides and who receives the services

Expenses included in the cost of service

Description of the allocation method
used to distribute costs

A summary schedule showing the allocation
of each service to the benefiting agencies

Description of internal service funds and
other billed services
43
Wrap Up: Application
and Cost Recovery
Issues
44
Application of Indirect
Cost Allocation
Most common need for developing or updating a plan:

Reimburse the General Fund for costs associated with providing
services to other funds
Primary Use:

Charging special revenue, internal service, and enterprise funds
(“interfund charge for service”) and federal/state grant-funded
programs for services provided
Other areas of application becoming more common:

Setting user fees based on the “full cost of service”

Establishing an appropriate cost basis for interagency agreements
45
Tips for Internal Success
collaboration
communication
consistency

Involve your peers in
other departments and try
to incorporate their
feedback

Keep the door open for
future communication
about cost allocation

Things change: Don’t let
your hard work sit on the
shelf in future
years….update!
46
Questions and
Discussion
47

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