Transcript Slide 1

Cost Allocation for Rural
Transit Agencies
Presented at the
18th National
Conference on
Rural Public and Intercity Bus Transportation
Presented by
Rich Garrity, Senior Associate
RLS & Associates, Inc.
Session Objectives
1. Defining a Standard Approach to “Cost Allocation”
2. Adopting the Concept of Full Cost Identification
3. Identifying Issues in Cost Allocation
4. Developing of a Cost Allocation Model
5. Using/Automating of the Cost Allocation Model
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 2 of 144
Target Audience

This Session is Designed for:
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Organizations That Need an Approach to Cost
Individuals Service Components
Transit Organizations that Provide Service
Under a Purchase of Service Arrangement to
Other Users/Groups
Multi-Purpose Human Service Agencies
Supported by Multiple Federal Grants
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Defining a Standardized
Approach to Cost
Allocation Issues
Module 1
Issues in Cost Allocation

The Term “Cost Allocation” Has Been
Used to Describe a Wide Range of
Allocation Needs Among Public Transit
Operators
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Issues in Cost Allocation


In Transit, “Cost Allocation” Can Refer
to a Series of Distinct
Management/Accounting Practices
Each Cost Allocation Problem
Requires a Separate Methodology,
Typically Referred to As “Cost
Allocation”
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Types of Cost Allocation
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Financial Based Cost Allocation
Service Based Cost Allocation Plans
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Financial Based Cost Allocation
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Central Service Cost Allocation Plans
Indirect Cost Allocation Plans
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Financial Based Cost Allocation #1

Central Services Cost Allocation Plan
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A Publicly Sponsored Transit Program Benefits
from the Services of Other Governmental Units
and Desires to Claim Costs Incurred by these
Units Under its Various Federal Awards
The Public Entity or Governmental Unit Must
Prepare a “Central Services Cost Allocation
Plan”
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Financial Based Cost Allocation #2

Indirect Cost Allocation Plan
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An Entity (Public or Private Nonprofit) Provides
Multiple Program Services
Certain Overhead and Administrative Costs
Incurred by the Entity Benefit All Programs and
Services, Including Transit
The Agency Seeks to Recoup These Costs in
Their Billings to Various Federal Agencies
The Entity Requires an Approved “Indirect Cost
Allocation Rate” in Order for Such Costs to be
Reimbursable by the Federal Government
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Service Based Cost Allocation
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
Allocate Costs to Various
Types/Modes/Services
Urban/Rural Cost Allocation
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Required by FTA
Charter Cost Allocation
Local Match Allocation Plan
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Service Based Cost Allocation #1

Service Based Cost Allocation
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A Public Transit Agency Coordinates Service
With Various Human Service Agencies In The
Area
The Transit Provider Has A Policy That Public
Transit Funds Cannot Be Used To Subsidize
Human Service Agency Client Transportation
The Transit Agency Needs A “Fully Allocated
Cost Analysis” To Determine How To Price
Contract Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Service Based Cost Allocation #2

Service Based Cost Allocation
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A Transit Agency Receives Funding Under Both
FTA Section 5307 And Section 5111
FTA Expects the Grantee to Develop a
Reasonable Basis for Allocating Operating
Costs Between the Two Funding Sources that
is Related to the Service Provided
FTA Requires a “Grant Allocation Plan” to
Distribute Costs to the Two Different, But
Related Programs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Service Based Cost Allocation #3

Service Based Cost Allocation
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A Transit Agency Provides Charter Service in
Accordance with 49 CFR part 604
The Transit Agency Must Demonstrate That it
Fully Recovers the Cost of Charter Service
The Agency Requires a “Charter Service
Allocation Plan”
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Service Based Cost Allocation #4

Service Based Cost Allocation
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A Regional Transit Authority Provides Service
Over a Multi-Jurisdictional Service Area
Each Participating Local Entity Must Share
Responsibility for Funding a Portion of the Local
Share
The Authority Must Allocate Local Funding
Needs In An Equitable Manner To All
Participating Jurisdictions
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Multiple Cost Allocation Needs

Some Public Transportation Projects
May Require Multiple Types of Cost
Allocation
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Multiple Cost Allocation Needs
Municipal or County Government
Central Service Departments
Operating Departments
Central Service Departments
Individual Operating Departments
Central Service Cost
Allocation Plan
Allocable Portion of Central Service Costs
Public Works &
Transit
Departmental
Administration
Approved Indriect Cost Rate
Allocable Portion of
Departmental Indirect Costs
Transit
Allocable Portion of
Departmental Indirect Costs
Public Works
Transit Direct Costs:
Direct Functions
Operations
Approved Indriect Cost Rate
Transit Direct Costs:
Shared Functions
Maintenance
Management
Dispatch
Modes
Allocable Portion of
Fixed Route
JARC
Demand Response
Allocated on Basis of Service
Units
Transit Management Costs
(Fixed Costs)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Multiple Cost Allocation Needs
Nonprofit Organization
Indirect Expenses
Direct Expenses
Approved Indirect
Cost Rate
Allocable Portion of Indirect Costs
Transportation
Home Care
Congregate Meals
Transit Direct Costs:
Shared Functions
Transit Direct Costs:
Direct Functions
Management
Maintenance
Operations
Dispatch
Services
Medicaid
Contract Transit
Rural Public
Transit
Title III Client
Transit
Allocable Portion of
Allocated on Basis of
Service Units
Transit Management Costs
(Fixed Costs)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 18 of 144
Embracing the Concept
of Full Cost Identification
Module 2
Why Full Cost Identification?

Our Goal - To Answer the Questions:
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How Much Does the Transportation Service
Cost?
How are We Going to Pay For It?
In Order to Achieve These Goals, Agency
and Program Managers Must Use
Financial Planning
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Why Full Cost Identification?
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Assess Performance
Measure Progress Toward the
Achievement of Goals and Objectives
Consider Actions Which May Change the
Course of Future Events
Modify Policies, Procedures, and
Processes
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Why Full Cost Identification?

Make Operational Changes, Including
Those Leading To:
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Service Expansion, Reduction, Or Cessation
Increases Or Decreases In Services,
Revenues, And Staff
Changes Or Modifications In Procedures Or
Other Activities (Such As Marketing Or
Public Relations)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Why Full Cost Identification?

Transportation Systems Need Complete
and Accurate Financial Data in Order to:

Manage the System So That its Goals and
Objectives are Met Efficiently
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Why Full Cost Identification?
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Know the True Cost of Operating the System
so that Costs May be Billed or Allocated
Appropriately to the System's Users
Report to the Funding Sources or
Purchasing Agencies How Money was
Spent, What Revenues were Realized, and
the Financial Status of the Organization
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Issues in Full Cost Accounting
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Lack of Sufficient Account Detail In
Organizational Accounting Systems
Failure to Capture and/or Allocate Agency
Indirect or Overhead Costs
There Is A Lack Of Common Definitions
For Accounts (Non-FTA Programs)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Issues in Full Cost Accounting
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Lack of Common Definition of Service
Failure to Capture Service Unit Data
Blended Program Expenditures
Use of Capitated Payments
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Financial Planning:
Why is This Important?

Planning for
Change
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Political Clim ate
Changes We
Institute
Changes Forced
Upon Us
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Financial Planning:
Why is This Important?

Consider the Example:

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A Manufacturer Produces Two Consumer
Products
What are Some of the Costs That Will Be
Incurred by this Company?
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Identifying Transportation Costs

Now Consider ….

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Since the Ingredients Used are Basically the
Same as Product 2, the Product 1 Manager
Opts to Include them all In Product 2 and
Does Not Include Them in Calculating His
Cost
Since Product 1 is Delivered on the Same
Trucks as Product 2, the Product 1 Manager
Does Not Include Them in Calculating His
Cost
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Identifying Transportation Costs
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Product 1
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Research, Development,
& Testing
Purchase of Ingredients
Production
Quality Control
Distribution
Marketing
Profit
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Product 2

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
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Research, Development,
& Testing
Purchase of Ingredients
Production
Quality Control
Distribution
Marketing
Profit
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Identifying Transportation Costs

Do You Disagree with this
Approach?
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Strongly Disagree
Disagree
Not Sure
Agree
Strongly Agree
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 31 of 144
Identifying Transportation Costs

What is this Product Line Manager Doing
Wrong?



?
?
?
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 32 of 144
Identifying Transportation Costs

Let’s Talk About a Transportation Related
Situation

What About this Example?

A Transportation Provider Reports Their
Transportation Expenses as Follows:

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Fuel
Maintenance
Insurance
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 33 of 144
Identifying Transportation Costs

Financial Planning Begins by Establishing
(or Reaffirming) Overall Strategies and
Goals
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Mission Statement
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WHAT Will the Transit Service Do?
HOW Will the System Operate?
This Starts the Financial Planning
Process
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 35 of 144
Identifying Transportation Costs

The Basic Approach Recommended and
Used by Successful Business Operations
and Transportation Systems is Called
“Full Cost Accounting”
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 36 of 144
Identifying Transportation Costs

To Use this Approach Requires an
Understanding of Basic Cost Concepts
and the Use of a Consistent Costing
Method
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 37 of 144
Identifying Transportation Costs

To Use this Approach Requires an
Understanding of Basic Cost Concepts and the
Use of a Consistent Costing Method
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 38 of 144
Identifying Transportation Costs
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
Using “Full Cost Accounting” Means that
the Total Costs of Providing
Transportation Services are Considered
Total Costs Include Any Commitment or
Use of Time, Money, Physical
Resources, and Other Assets of the
Agency in the Delivery of Transportation
Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 39 of 144
Identifying Transportation Costs

In Full Cost Accounting, a Value is Given to
These Commitments Whether or Not They
Result in Immediate Out-of-Pocket
Expenditures
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 40 of 144
Identifying Transportation Costs
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Full Cost Accounting Will:
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Assist the Manager in Understanding the TRUE
Cost of Providing Service
Determine Needed Revenues -- Immediate and
Long-Term
Allow Allocation of Costs to System Users
Compare Costs of Service with Other Systems
(Peer Analysis)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Identifying Transportation Costs
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Full Cost Accounting Will
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Assist in Making Decisions to Participate
in a Coordinated Services Program
Recognize Value of Donations (Time,
Materials, and Supplies)
Permit Accurate Financial and
Performance Monitoring/Evaluation
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 42 of 144
Identifying Transportation Costs
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Analyze the Various Functions and
Activities that Your Transportation
Program Carries Out on a Day-to-Day
Basis
Management’s Responsibility is to
Identify All Activities That Your Agency
Performs in the Delivery of
Transportation Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 43 of 144
Identifying Transportation Costs


Analyze the Various Functions and
Activities that Your Transportation
Program Carries Out on a Day-to-Day
Basis
Management’s Responsibility is to
Identify All Activities That Your Agency
Performs in the Delivery of
Transportation Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 44 of 144
Issues in Cost Allocation
Module 3
Special Issues in Cost Allocation
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Direct and Indirect Costs
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Operating and Capital Costs
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Fixed and Variable Costs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 46 of 144
Direct and Indirect Costs
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Direct Costs
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Those Expenses Incurred by the Grantee
That Are Directly Related and Strictly Benefit
Only the Public Transportation Program
Generic Examples:

Compensation of Employees for the Time
Devoted and Identified Specifically to the
Performance of the Grant
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 47 of 144
Direct and Indirect Costs
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Direct Costs

Generic Examples:
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Cost of Materials Acquired, Consumed, or
Expended Specifically for the Purpose of
Providing Public Transit Service
Equipment and Other Approved Capital
Expenditures
Travel Expenses Incurred Specifically to Carry
Out the Award
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 48 of 144
Direct and Indirect Costs
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Direct Costs
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Transit Examples:
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501.01 – Operator's Salaries & Wages
501.03 – Dispatcher's Salaries & Wages
503.05 – Contract Vehicle Maintenance
504.01 – Fuel & Lubricants Consumed
504.02 – Tires and Tubes Consumed
508.00 – Purchased Transportation
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 49 of 144
Direct and Indirect Costs
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Indirect Costs
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Generic Examples
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Certain Central Service Costs
General Administration of the Organization
Accounting and Personnel Services Performed
Within the Organization the Delivers Public
Transit Services
Costs of Operating and Maintaining Facilities
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 50 of 144
Direct and Indirect Costs

Indirect Costs

Transit Examples
 501.04 – Administrative Salaries & Wages
 512.12 – Other Administrative Facilities
 505.02 – Telephone
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 51 of 144
Direct and Indirect Costs
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Why Is the Identification of Indirect Costs
Important?
Full Costs =

Direct Costs + Allocable Portion of Indirect
Costs – Rebates/Credits
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 52 of 144
Direct and Indirect Costs

Will All Transit Agencies Incur Indirect
Costs?
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No
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Independent Transit Authorities
Other Units That Do Not Rely on Central
Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 53 of 144
Direct and Indirect Costs

How Can We Tell if We Need An Indirect
Cost Allocation Plan? If a Transit System
Incurs Costs That Are:
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
Accumulated in the Accounts of Another
Department or Division of the Organizations
Incurred by Nonprofit Agency Management
That Benefits Multiple Programs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 54 of 144
Direct and Indirect Costs

Indirect Costs Must Be Allocated in a Manner
Consistent with Procedures Set Forth in OMB
Circulars A-87 or A-122
Expense
Funct ion
Transport at ion
Facilit y Expenses
Meals
Vocat ional Services
Homemaker Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 55 of 144
Direct and Indirect Costs

How are Indirect Costs Claimed Under
Federal Awards?

OMB Circular A-87, Attachment A, “General
Principles for Determining Allowable Costs,”
paragraph C3(d) states:
Where an accumulation of indirect costs will
ultimately result in charges to a Federal award,
a cost allocation plan will be required

OMB Circular A-122 contains similar language
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 56 of 144
Indirect Cost Allocation

You MUST Have An Indirect Cost
Allocation Plan or Indirect Cost Rate in
Order to Claim Reimbursement Under
Federal Awards
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 57 of 144
Indirect Cost Allocation

Indirect Cost Rate Proposals or Cost
Allocation Plans Must Either:
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Be Submitted to a Federal Cognizant
Agency; or
Be Maintained on File by the Governmental
Unit
Similar Rules Apply to Nonprofits
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
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Indirect Cost Allocation
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"Cognizant Agency" Means the Federal
Agency Responsible for Reviewing,
Negotiating, and Approving Cost Allocation
Plans or Indirect Cost Proposals Developed
on Behalf of All Federal Agencies
OMB Publishes a Listing of Cognizant
Agencies
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 59 of 144
Indirect Cost Allocation
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Negotiation and Approval of Rates
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Generally, the Federal Agency with the Largest
Dollar Value of Awards to the Nonprofit
Organization Will be Designated as the Cognizant
Agency for the Negotiation and Approval of the
Indirect Cost Rates
The Designation Is Not Changed Unless There is a
Major Long-Term Shift in the Dollar Volume of
Federal Awards
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 60 of 144
Indirect Cost Allocation

In No Case Shall an Indirect Cost
Allocation Plan or Indirect Cost Rate
Proposal Be Acceptable Unless it Has
Been Certified by the Governmental Unit
Using the Certificate of Cost Allocation
Plan or Certificate of Indirect Costs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 61 of 144
Indirect Cost Allocation

The Certification Must be Signed on
Behalf of the Governmental Unit by an
Individual at a Level No Lower than Chief
Financial Officer of the Governmental
Unit that Submits the Proposal or
Component Covered by the Proposal
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 62 of 144
Indirect Cost Allocation
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Where a Local Government Only Receives
Funds as a Subrecipient, the Primary
Recipient Negotiates the Indirect Cost Rates
and/or Monitors the Subrecipient's Plan
Section 5311
 Primary Recipient: State DOT
 Subrecipient: Grantee
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 63 of 144
Indirect Cost Allocation

Indirect Cost Rates and Cost Allocation
Plans Have Specific Documentation
Requirements:
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

Organization Chart
Comprehensive Annual Financial Report
Certification
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 64 of 144
Indirect Cost Allocation

Indirect Cost Rates and Cost
Allocation Plans Where an
Organization’s “Central Services” are
Included Must:
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
Identify the Unit Rendering the Service and
the Operating Agencies Receiving the
Service
Detail the Items of Expense Included in the
Cost of the Service
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 65 of 144
Indirect Cost Allocation

Indirect Cost Allocation Plans Must:
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Describe the Method Used to Distribute the
Cost of the Service to Benefitted Agencies
Contain a Summary Schedule Showing the
Allocation of Each Service to the Specific
Benefitted Agencies
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 66 of 144
Indirect Cost Allocation
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Guidelines for Nonprofits are Similar to Those for
Government Agencies
Procedures for Nonprofits Are Prescribed in OMB
Circular A-122, Attachment A, Paragraph C
Procedures for Educational Institutions Different –
Consult A-21
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 67 of 144
Indirect Cost Allocation

Prescribed Methodologies
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Simplified Allocation Method
Multiple Allocation Base Method
Direct Allocation Method (Nonprofits Only)
Special
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 68 of 144
Indirect Cost Allocation

A-122 States that Indirect Costs be
Classified within Two Broad Categories:
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
Facilities
Administration
A-21 Provides Similar Classification
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 69 of 144
Indirect Cost Allocation

A Nonprofit Organization Which Has Not
Previously Established an Indirect Cost Rate
with a Federal Agency Shall Submit its Initial
Indirect Cost Proposal Immediately After the
Organization is Advised that an Award will be
Made and, in No Event, Later Than Three
Months After the Effective Date of the Award
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 70 of 144
Indirect Cost Allocation

Use of a Standardized Chart of Accounts
Is Essential to Indirect Cost Allocation

Modify or Expand the Chart of Accounts to
Meet Needs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 71 of 144
Indirect Cost Allocation Plan
Preparation Guide
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 72 of 144
Indirect Cost Allocation Plan
Preparation Guide

HHS Guide Can be Downloaded at:
http://rates.psc.gov/fms/dca/asmb%20c-10.pdf
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 73 of 144
Capital vs. Operating Costs
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Operating Costs are Consumed in Less
Than One Year (e.g., Wages, Fuel)
and Generally Have a Unit Acquisition
Cost of Less Than $300.00
Capital Costs are Expenses for LongTerm Assets (e.g., Vehicles, Garages)
Definitions May be Set by the Grantor
Agency
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 74 of 144
Capital vs. Operating Costs
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
Under the Section 5311 Program,
Capital Expenses are Defined in FTA
Circular 9040.1F, Chapter III,
Paragraph 2e(2)
This Document Can Be Obtained at
http://www.fta.dot.gov/documents/FTA_C
_9040.1F.pdf
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 75 of 144
Capital vs. Operating Costs

Defining Capital Costs is Important, as
OMB Circular A-87 States that
Depreciation Will Exclude:

Any Portion of the Cost of Buildings and
Equipment Borne by or Donated by the
Federal Government Irrespective of
Where Title was Originally Vested or
Where it Presently Resides
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 76 of 144
Capital vs. Operating Costs

What Does this Mean?

If the Cost of the Vehicle (Asset) Was Paid
for by a Federal Program, You May NOT
Include Depreciation of that Asset in Your
Charges to Other Federal Programs in the
Cost of Service Provision
 Source: OMB Circular A-87, Attachment
B, Paragraph 15c(2); and OMB Circular
A-122, Attachment B, Paragraph 11c(2).
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 77 of 144
Fixed vs. Variable Expenses

Variable Costs Change
Relative to the Amount
of Service Provided
(e.g., Drivers' Wages)
Fixed Costs Do Not
Vary with the Amount of
Service Provided (e.g.,
Administrative Salaries)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Total
Variable
Cost

Fixed
Output
Page 78 of 144
Developing a Cost
Allocation Model
Module 4
Capital vs. Operating Costs

Fad or Management Necessity?

An Understanding of Fully Allocated Costs
Provides Management with:



The Ability to Accurately Price Services
Provided Under Contract
An Assessment Tool to Evaluate Changes in
Service
For Example, the Cost of Adding or Losing
a Contract Service Could Be Estimated
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 80 of 144
Why Cost Allocation?
More Grant
Funds From FTA??
General Public
Ridership
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 81 of 144
Why Cost Allocation?

To Determine How Much It Costs to
Provide A Specific Transit Service
$6.80
Per
Trip
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 82 of 144
The Cost Allocation Process

Why Do We Need a Model to
Determine Cost?



Why Can’t We Simply Divide Total
System Cost by Total System Miles?
Or Total System Cost by Total System
Hours?
Consider the Following:
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 83 of 144
The Cost Allocation Process

Do These Trips Cost the Same?
5 Miles
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
20
Minutes
5 Miles
5 Miles
10
Minutes
5 Miles
Page 84 of 144
The Cost Allocation Process

Do These Trips Cost the Same?
8 Miles
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
20
Minutes
5 Miles
5 Miles
20
Minutes
5 Miles
Page 85 of 144
The Cost Allocation Process

Transportation Costs are Driven by
Two Critical Factors:


Time AND Distance
Our Model Must Take Both Factors Into
Account When Costing Transportation
Services
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 86 of 144
Developing a Cost Allocation
Model

How Do We Allocate Costs? Don’t
Worry, This Process is Not Complicated!
Another Program Mandate????
Aaaaaagh!!!
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 87 of 144
Capital vs. Operating Costs

Cost Allocation Assumes:


Total System Costs Can be Allocated to
Service Based on the Level of Service
Provided
System Average Unit Costs Can Be Used
to Estimate Service Costs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 88 of 144
Overview of Cost Allocation Process
Assemble Data
Assign Expense Line Items
Calculate Unit Costs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 89 of 144
Issues in Assembling Data

Where Do We Get Cost Data?

What Time Period Should be Used?

Projected vs. Actual?
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 90 of 144
Required Data

Twelve (12) Months Actual or Projected
Transit Expense Data

Expense Data Will be Classified as Either:



Fixed Expense
Variable Expense
Service Data



Vehicle-Miles
Vehicle-Hours
Passenger Trips
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 91 of 144
Assigning Cost to Categories


Cost Allocation Involves Taking Each
Expense Line Item and Assigning It to
Either the Fixed or Variable Category
Variable Expenses are Further Broken
Down as Varying Either by:


Hour
Mile
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 92 of 144
Assigning Cost to Categories


Fixed Costs are Those Costs that Will
Not Change As a Result of an Increase
or Decrease in Service Levels
Variable Expenses are Those Costs that
Will Change if There is a Change in
Service Levels
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 93 of 144
Assigning Cost to Categories

There are No Hard and Fast
Rules…..But:




Project Administration Costs are Almost
Always Fixed
Understand the Basis of Each Cost Item
and Assign Accordingly
Be Logical
BE CONSISTENT
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 94 of 144
Exercise No. 1, Part A

Using the Provided Budget, Classify Each
Line Item Expense as Either:



Fixed
Variable (by Hours)
Variable (by Miles)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 95 of 144
Exercise No. 1, Part B

Now that We Have Classified Each
Expense Line Item, We Want to Total All
Fixed Expenses, All Variable - Hours
Expenses, and All Variable - Miles
Expenses
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 96 of 144
Calculation of Unit Costs


We Now Have a Total of Fixed and Variable
Costs
We Need to Calculate Our Unit Costs. There
are Three (3) Calculations:
 Allocated Hours Cost
 Allocated Miles Cost
 Allocated Fixed Expense


Demand Response: Ratio
Fixed Route: Fixed Cost Per Vehicle
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 97 of 144
Calculation of Unit Costs

Allocated Hours Cost:

Total Allocated Hours Cost ÷
Annual Projected Vehicle Hours
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 98 of 144
Calculation of Unit Costs

Allocated Miles Cost:

Total Allocated Miles Cost ÷
Annual Projected Vehicle Miles
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 99 of 144
Calculation of Unit Costs


What Do We Do With Fixed Expenses?
There Are Different Approaches - For
Most Demand Response Systems in
Rural Areas, Fixed Expenses are
Expressed as a Percentage or Ratio of
Allocated Variable Expenses (Hours
Cost + Miles Cost)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 100 of 144
Calculation of Unit Costs

In Rural Systems, Fixed Expenses are
Expressed as a Percent of Variable
Expenses:

Fixed Cost Factor =
Total Fixed Expenses ÷ (Total Allocated Hours
Expenses + Total Allocated Miles Expenses)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 101 of 144
Calculation of Unit Costs

In Urban Systems, Fixed Expenses are
Expressed as Follows:
(Total Fixed Expenses ÷ Total Vehicles In
Maximum Revenue Service)
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 102 of 144
Exercise No. 2

Calculate the Unit Rates



Allocated Hours Cost
Allocated Miles Cost
Fixed Costs


Cost Per Peak Period Bus
Fixed Cost Ratio
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 103 of 144
Completing the Computations

The Fully Allocated Cost of Service is Equal
to:
{(Total Annual Projected Hours x Allocated Hours Cost)
+
(Total Annual Projected Miles x Allocated Miles Cost)}
+
{Fixed Cost Factor x
[(Total Annual Projected Hours x Total Allocated Hours Cost)
+ (Total Annual Projected Miles x Allocated Miles Cost)]}
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 104 of 144
Completing the Computations

To Test our Unit Average Costs, Plug
in Total Annual Projected Hours and
Total Annual Projected Miles into the
Above Equation to Ensure the Result =
Total Annual Expenses
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 105 of 144
Completing the Computations

Congratulations … You Have Just
Developed a Cost Allocation Model
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 106 of 144
Applying the Model

Now that We Have Our Model, We Will
Put it to Work
We'll Sort Through The X's and O's
By Looking At Allocating the Costs
of Various System Users
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 107 of 144
Review


We Built a Cost Allocation Model that
Uses Generally Accepted Accounting
Principles to Allocate Transportation
Costs Among Various Agency Users
We Learned How to Use the Model to
Determine or Project the Costs for
Individual Agency Users
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 108 of 144
Use and Automation of the
Cost Allocation Model
Module 5
Using the Model

We Will Examine the Ways in Which A
Transit System Can Use Fully Allocated
Costs to Develop Unit Pricing for
Contracted Services



Various Types of “Unit” Costs
Pro’s and Con’s of Each Unit Cost Type
We Will Calculate Various Units Costs
for Our Transit System
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 110 of 144
Using the Model



Are Our Contract Rates Fully
Recovering Our Costs of Providing
Service?
What Does Route 1 Cost Our Agency to
Operate?
What Rate Should We Use in Providing
Service Under Contract Next Year?
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 111 of 144
Exercise No. 3

Using the Parameters Given, and Our
Cost Model Unit Costs, Calculate
Answers to the Three Problems Facing
Management
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 112 of 144
Automation of the Process

As You Can See from the Cost
Allocation Model Built Earlier in this
Workshop


Cost Allocation Can be Repeated on an
Annual Basis
The Process Lends Itself to Spreadsheet
Application
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 113 of 144
Generic Cost Allocation Model


The Course CD-ROM Contains a
Generic Cost Allocation Model
Let’s Take A Look at the Model
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 114 of 144
Generic Cost Allocation Model



Copy the File “Cost Allocation Model.xls”
to a Folder on Your Computers Local or
Network Drive
Start MS Excel
Navigate to Folder and Open the Model
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 115 of 144
Generic Cost Allocation Model

Cautions

Excel Will Generate One of Two Messages,
Depending on Your Security Level

Excel Will Not Permit You to Open the File

Action:

Reset Security Level to Medium

From the Menu, Click on Tools, Options,
Security Tab, Click on the Macro Security
Button and Select Medium
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 116 of 144
Generic Cost Allocation Model

Cautions



Once Set to Medium, Excel Will Permit You
to Open the File, But Will Generate a
Warning Message
You Must Click on “Enable Macros” in
Order for the Cost Allocation Model to Work
You are Not Jeopardizing Your Computer
or Network Security
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 117 of 144
Adjourn

Good Luck in Using this Information at
Your Own Transit Programs
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 118 of 144
Presenter
Richard Garrity, Senior Associate
RLS & Associates, Inc.
3131 S. Dixie Highway, Suite 545
Dayton, OH 45439
(937) 299-5007
Direct Line: (910) 328-5770
[email protected]
Cost Allocation – Rich Garrity, RLS & Associates, Inc.
Page 119 of 144