APPENDIX A
RECHARGES – EXPLAINED
Definition: Costs incurred for services or materials charged by one
department to another department.
“Total cost also includes an appropriate share of all support services and
other overheads.'' BVACOP 2002
1.
Recharging Summary
1.1
The Council has a policy of recharging the full cost of support services and
facilities to the relevant service area. This is done to comply with accounting
practice, to ensure that services reflect ‘true’ costs i.e. include costs from
supporting service areas, and to ensure that comparisons can be made
between authorities (primarily through the value for money toolkit).
1.2
This practice is not just limited to the public sector, it is also usual in the
private sector where recharges (plus a profit element) are applied to goods
and services to ensure that businesses make a profit. For example, the
purchase price of a new car includes the direct costs of manufacture, plus the
indirect costs that are recharged to the buyer on each car purchased:
1.3
Direct costs, e.g.
Component parts
Construction
Paint
Indirect costs, e.g.
Management
Research & development
Advertising
Showroom
Profit margin
Profit for manufacturer
Profit for dealer
The general criteria for how overhead recharges should be calculated are
that:
- there should be reasonableness in the method of apportionment; and
- a consistent methodology should be applied across the organisation.
1.4
Recharges in themselves do not add to the overall costs of the Council as
they are an internal transfer of costs already incurred. As a result, provided
that the direct costs of all services are reviewed as part of the service review
process, then all of the Council’s budgets will have been reviewed. If
efficiencies are identified as part of these reviews, meaning that less tasks or
reports are required, then costs will fall, the recharge of these costs will also
fall and so the net cost to the Council is reduced.
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1.5
Recharges need to be considered when services carry out their
benchmarking exercises against other Authorities in order to ensure the full
costs (including support) have been assessed. However, recharges form just
one element of further investigation that is needed to understand the costs of
a service.
1.6
Recharging provides a means for service managers to challenge colleagues
for the cost of a service provided. The Corporate Business Planning process
provides service managers with the forum to challenge those costs.
2.
Principles
2.1
When making recharges, in accordance with criteria at 1.3 above, they should
be charged across users and other beneficiaries in accordance with the
seven general principles containing within the Best Value Accounting Code of
Practice and shown in Table 1.
TABLE 1
BVACOP recommendations for charging of overheads to service
users
Principle
BVACOP Recommended Approach
Complete
recharging of
overheads
All overheads not defined as unapportionable central overheads
or costs of democracy should be fully recharged to service
areas.
Correct
recipients
The system used must correctly identify who should receive
overhead charges.
Transparency
Recipients must be clear about what each recharge covers and
be provided with sufficient information to enable them to
challenge the approach being followed.
Flexibility
The recharging arrangements must be sufficiently flexible to
allow recharges to be made regularly enough and to the level of
detail appropriate to meeting both users' and providers' needs.
Reality
Recharging arrangements should result in the distribution of
actual costs based on fact. Even if the link cannot be direct,
reality should be the main aim.
Predictability/sta Recharges should be as predictable as possible, although there
bility
will be practical limitations to this.
Materiality
2.2
It is unlikely that a simple system will be adequate to meet all
other requirements noted above. However, due regard should
be given to materiality to minimise the costs involved in running
the system.
It is important that the bases of charges are given in a sufficient level of detail
to be worthwhile and meaningful. However, there are levels of detail below
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which it may not be sensible to go, as it is not good practice to spend undue
time or other resources in getting unnecessarily precise figures. A balance
must always be made between the time taken to complete the allocation of
costs and the level of accuracy to ensure there are no distortions in the
comparisons of service costs with other Local Authorities.
2.3
Within NHDC the overall costs of administering the recharge system are kept
down by only carrying out the exercise annually and making use of officer
time estimates (see section 4), rather than utilising a formal time recording
system. The recharge allocation process itself is a significant task for
Accountancy at year-end, but the burden on service areas is minimised.
2.4
There are a number of charging methods, depending on the costs to be
recharged, e.g. time allocation, head count, floor space occupied.
3.
How Recharges are calculated
3.1
To understand how recharges are calculated it is important to understand the
rationale for the charges. Paragraphs 3.2 to 3.5 provide an explanation and
Appendix B shows details of the charging basis.
3.2
Government and accounting standards require service accounts to show the
full cost of providing those services, including ‘back office’ support activities.
All administrative costs must therefore be charged to frontline services. The
recharges are as much a part of the service as the front-line providers’ costs.
A proportion of the time (and therefore cost) of the relevant service manager
and head of service is also charged.
3.3
The staff and associated costs recharged are in respect of staff based in the
administrative offices and their associated requirements (furniture, equipment,
IT, etc). These include central and departmental overheads in the
Directorates. Costs are recharged to services through the apportionment
basis as shown in Appendix B.
3.4
Costs are controlled at departmental level in the budgets for business units,
e.g. HR/Payroll Services, Finance, IT; rather than in the services that they are
recharged to. However, as stated in 1.6, service areas can challenge costs.
3.5
Recharges are calculated and charged annually based on actual costs of
services in line with the Best Value Accounting Code of Practice. There is a
two-stage process for calculating recharges:

firstly all the central services that are being recharged, charge each other
as necessary. This could be, for example, Payroll Services being charged
I.T. costs for supporting the Payroll computerised system and I.T. being
charged for Accountancy support in preparing budgets. In this example,
Payroll will have a charge for I.T. and this charge would then become
income for I.T. The total cost of I.T. would increase by its charge from
Accountancy less the income from Payroll.

secondly all the central services costs, which include the costs of
recharges in from other central services and income from other central
services, are charged to the rest of the organisation.
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3.6
The recharges in Appendix B are presented in the order that they are
charged.
3.7
Where costs are directly attributable to particular services, these are charged
to that service. For example, legal work on a specific lease. The remaining
costs are then apportioned by either:
time allocation - percentages are applied to the actual salary costs
together with any departmental running costs to allocate them to services
(further explanation below);

number based - where the central service is more of a function e.g.
payroll, payments or IT, the costs of these activities are recharged to
services based on relevant data i.e. headcount, transactions processed in
the accountancy system, number of computers.

Area occupied – office accommodation is charged out based on the floor
space used by a service area
4.
Time Allocation
4.1
Rather than apportioning the cost of a team by analysing the time allocation
on a team level, we ask for an allocation of time spent on activities by each
member of the team. This is done because the allocation of costs is depends
on the grade/pay of the specific officer. This is more accurate as clearly the
time of a higher grade officer will cost more.
4.2
These are estimates based on officer records of time allocated for the year.
The estimates of time allocation are updated at the year end before the final
recharges are completed in the accounts. These are necessarily estimates as
the authority has chosen not to incur the cost and administrative overhead of
implementing a formal time recording system.
4.3
In respect of a related query regarding time recording systems it is worth
noting that, at Cabinet on 31st March 2009, it was resolved that “CMT be
instructed to take no action in respect of the development of a staff time
apportionment system for use during projects. This was because “Cabinet
was unable to support this proposal, as Members felt that the there would be
limited benefits to be obtained from such a system when measured against
the resources needed to introduce and monitor it”.
4.4
Although the issue at hand in this report is in respect of recharges, not
projects, the principle remains the same.
5.
Recharge “Myths”
5.1
It is sometimes said that a particular service or function should be retained
because of the recharges it absorbs and that if the service ceased to function
those recharge costs would have to be met by other areas. Additionally it is
sometimes stated that a service would offer better value for money if
recharges were discounted. Both of these views are misleading for the
following reasons:
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1. As stated at 1.4, recharges do not add to the overall costs of the Council
as they are an internal transfer of costs already incurred. However, this
also means that, if a service or function stops and therefore provides
savings, then the areas generating recharges should also review their
service to determine if further savings can be made. Even if it is not
possible when an individual change is made, it becomes increasingly
likely as more services/functions make changes.
2. The ‘true’ costs of a service or function include the costs from supporting
service areas. If these were discounted this would give an unrealistic
impression of the service. Support services are necessary for the frontline function to operate and, therefore, should be recharged and probably
equate to a percentage of the time of one or more officers. However, as
stated in the point above, if the front-line service ceases, then there will be
no requirement for the support service.
5.2
Front-line services cannot exist in isolation of the “back-office” functions that
support them (whether provided in-house or via an external arrangement,
such as shared services). It is important to recognise the close linkage, not
only to ensure “true-costs” are identified, but also to help ensure that the
impact of decisions in one area are understood and assessed, in another.
Cuts to back-office functions, without due regard to front-line requirements,
could have significant adverse effects. Cuts to front-line services, without due
regard to back-office provision, could lead to waste.
6. Glossary
1.
2,
3.
4.
5.
BVACOP
Best Value Accounting Code of Practice
Direct costs costs specific to delivery, such as staff, equipment,
stationery, furniture
Net costs
residual cost after allowing for any income received
Overheads the ongoing administrative expenses of the Council that
can’t be attributed to a specific service activity, but are still required
for the Council to function
Apportionment
basis on which costs are charged between
users.
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