Puget Sound Finance Officers Association
May 9, 2012
Peter Moy, Principal
Nathan Reese, Project Consultant
7525 166 th Ave NE Suite D-215, Redmond, WA 98052 
( 425) 867-1802  www.fcsgroup.com


– Cost Allocation Basics
– Analytical Steps



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
Legislative
Administration/Management
Finance / Accounting / Budget
Human Resources
Legal
Records Management
Facility Maintenance
Information Technology
Etc.
Operating Programs
Police
Fire and EMS
Development Services
Public Works
Water, Sewer, Stormwater, and
Solid Waste Utilities
Parks
Library
Etc.
3

 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

5

“If you could directly charge for all of these costs efficiently, you would…”
6

(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

 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

 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

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



A quick, simple means to allocate costs
May not be as equitable for complex organizations
Allocable Costs of
INDIRECT SERVICE
PROGRAMS
1 costs
All indirect costs are allocated only to direct service programs
DIRECT SERVICE
PROGRAMS
11

(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
Allocable Costs of
INDIRECT SERVICE
PROGRAMS
1 costs costs
DIRECT SERVICE
PROGRAMS
INDIRECT SERVICE
PROGRAMS
2 share of indirect costs
Costs allocated to indirect programs in Step 1 are distributed to direct service programs
12

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

The number and variety of workload measures used is dependent on the complexity of the organization and the goals of the plan…
FTEs Square
Footage
Agenda
Items
Work Orders
Actual
Expenditures Utility
Accounts
Records
Archived
Accounting
Transactions
Computer
Workstations
Actual
Timekeeping
Data
…and should be based on data that can be obtained easily on a regular basis or is recorded already for some other purpose.
14

 Incomplete or targeted allocations
 Not keeping current with organizational changes, practices, service levels, and costs
 Unnecessary complexity
 Avoiding discussion
15

16

1
Examine Organization
Identify all indirect and direct departments and program areas
2
Utilize Budget
& Financial Data
Compile total costs related to indirect services and program areas
3
Determine Workload
Measures
Form basis for the allocation of each indirect service
4
Make Adjustments
Adjust for non-allocable costs, assigned costs, and other revisions
5
Allocate Costs
Allocate indirect costs based on proportions from workload measures
6
Calculate Full Overhead
Identify each direct service’s full share of indirect costs
17



Identify indirect service departments and programs
Identify direct service departments that receive support
Example:
Board of Commissioners
Development Public Works Assessor Auditor Treasurer Admin Prosecutor Sheriff Coroner Courts Etc…
Maintenance Other Purchasing
Human
Resources
Information
Services
Financial
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

(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

 Compile the costs of indirect program areas


Exclude any direct service costs
Decide if departmental costs need to be broken into programs
PROSECUTOR
Total Budget less: Non-Allocable Expenditures
Prosecuting Attorney Salary
Prosecuting Attorney Benefits
Services - Public Defender - Screening
Services - Public Defender - Counsel
Juror Fees - District Court
Witness/Interpreter Fees
Legal Assistant Salary & Benefits
Other O&M Expenses
Total Allocable Indirect Costs
All Costs
$ 450,000
85,000
20,000
3,000
20,000
5,000
5,000
10,000
2,000
$ 300,000
20

 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
Auditor
Elections
Licensing
Accounting
Payroll
Accounts Payable
Budget
Budgeted
Department
Budgeted
Divisions
Program
Areas
21

 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
Total Full Time Equivalents
Legislative
Executive
Legal
Financial Services
Facility Maintenance
Administrative Services
Public Safety
Community Services
Development Services
Parks
Prosecutor
Water
Wastewater
Stormwater
Public Works
Total
Percent of
Percent of
Direct Dept.
Total
Only
146 100%
0.00%
4
2
10
2.74%
1.37%
6.85%
1
1
60
14
10
10
1
7
4
2
20
100%
0.68%
0.68%
41.10% 46.88%
9.59% 10.94%
6.85% 7.81%
6.85%
0.68%
4.79%
2.74%
7.81%
0.78%
5.47%
3.13%
1.37% 1.56%
13.70% 15.63%
22

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

 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

Step 1 : Apply workload measures to proportionately allocate indirect costs to all departments
Finance receives
$43,028 of itself.
FINANCIAL SERVICES
Allocation Factor
Total Allocable Costs
Legislative
Executive
Legal
Financial Services
Facility Maintenance
Administrative Services
Public Safety
Community Services
Development Services
Parks
Prosecutor
Water
Wastewater
Stormwater
Public Works
Budget
Budget
Primary Allocation
Utility Billing Payroll
Accounts FTEs
Info. Tech.
PCs
$ 500,000
1,253
12,531
7,519
20,050
7,519
1,253
150,376
25,063
30,075
37,594
3,759
62,657
75,188
15,038
50,125
$ 100,000
-
-
-
-
-
-
-
-
-
-
-
33,953
33,024
33,023
-
$ 100,000
-
2,740
1,370
6,849
685
685
41,096
9,589
6,849
6,849
685
4,795
2,740
1,370
13,698
$ 100,000
-
6,452
3,226
16,129
-
1,613
32,258
8,065
12,903
3,226
1,613
3,226
1,612
1,612
8,065
Resulting
Distribution
Calculated
100%
31.51%
6.02%
7.02%
6.71%
0.85%
14.73%
15.85%
7.19%
10.12%
Used in
Allocation
Step 2…
25

(cont.)
Step 2 : Allocate remaining indirect costs to direct service departments
FINANCIAL SERVICES
Allocation Factor
Total Allocable Costs
Legislative
Executive
Legal
Financial Services
Facility Maintenance
Administrative Services
Public Safety
Community Services
Development Services
Parks
Prosecutor
Water
Wastewater
Stormwater
Public Works
Legislative Executive
Secondary Allocation
Legal Fin. Services Fac. Maint.
Admin. Svcs.
Calculated Distribution of Finance to Direct Service Departments from Primary Allocation
$ 4,241 $ 27,362 $ 15,000 $ 43,028 $ 20,548 $ 1,500
1,336
255
298
285
36
625
672
305
429
8,621
1,646
1,920
1,837
233
4,032
4,337
1,967
2,770
4,726
902
1,052
1,007
128
2,210
2,378
1,078
1,518
13,556
2,588
3,019
2,888
367
6,340
6,820
3,093
4,356
6,474
1,236
1,442
1,379
175
3,028
3,257
1,477
2,080
473
90
105
101
13
221
238
108
152
Allocate
Finance’s share of indirect services based on how direct service departments use the entire
Finance department
26

Add all components of the indirect cost allocation to determine each direct service department’s share
FINANCIAL SERVICES
Total Allocable Costs
Legislative
$ 78,485
Grand Total Indirect Cost Allocation
Executive Legal Fin. Services Fac. Maint.
Admin. Svcs.
Grand Total
$ 503,251 $ 233,946 $ 821,805 $ 308,467 $ 54,043 $ 1,999,997
Legislative
Executive
Legal
Financial Services
Facility Maintenance
Administrative Services
Public Safety
Community Services
Development Services
Parks
Prosecutor
Water
Wastewater
Stormwater
Public Works
14,854
4,098
45,221
2,027
104
3,455
2,493
2,796
3,437
160,880
31,963
91,122
36,302
3,430
53,424
57,537
13,785
54,808
68,301
16,536
122,287
1,927
190
2,903
3,299
15,702
2,801
258,915
49,435
57,663
55,166
7,010
121,086
130,267
59,070
83,194
137,301
31,881
38,747
21,828
2,183
16,362
10,523
6,732
42,910
3,130
1,003
40,494
1,077
558
807
898
199
5,877
643,381
134,916
395,534
118,327
13,475
198,037
205,017
98,284
193,027
27

Financial Services Budget $800,000
Less: Costs allocated to other <$ 46,846> indirect services
Plus: Costs allocated from other $ 68,651 indirect services
Financial Services Allocated Overhead
$
821,805
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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
– Parks and recreation
– Community and economic development
– Worker apprenticeship programs
– Economic 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
Maintenance and
Janitorial
Electric and other externally provided utilities
Accounting
Allocation Factors
Square feet
Square feet
Budget
Payroll
Human resources
Actual expenses or # of transactions
Actual expenses, budgeted expenses, or # of staff (FTEs)
FTEs or payroll warrants
FTEs
IT services # of computers, servers, databases, or ports
Legal – indirect costs Actual expenses or hours worked
Insurance
Accounts payable
Purchasing
FTEs, claims or loss history, square feet, property values insured, and risk factor
# of transactions (including vouchers or invoices)
# 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

37

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

(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

(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

OMB
Circular
A-87





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






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

 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)
– 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%)
OMB
Circular
A-87
42

OMB
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

44

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

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!
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