Cost Allocation Plans

1. DETERMINE FEDERAL / STATE REIMBURSEMENTS.  Historically, indirect cost allocation plans were developed to identify and document the cost incurred by local governments to administer state and federal programs.   When a local government accepts a state or federal grant, there are additional rules and regulations that accompany the grant, which in turn, amounts to extra cost to manage these grants.  These extra costs are referred to as “indirect cost”.  Many state and federal grants / contracts provide for some funding to reimburse those governments the additional expense “indirect costs” for administering these programs.  The reimbursements are usually capped or limited to a per cent of the administrative cost which includes the “indirect costs”.  Additionally, these “indirect costs” can be used as the local government’s share of the matching costs required to obtain these grants.  “Indirect costs” have also been used to offset audit exceptions and questioned costs.  In order to receive these reimbursements “indirect costs”, the recipients must prepare a cost allocation plan.

  The preparation of the cost plan is governed by US OMB Circular A-87.  This circular provides a description of the process that local governments must comply with, those cost eligible for inclusion in the cost plan, the recommended allocation bases and the process of getting the plan approved.

  The GSS Indirect Cost Module Software provides the required schedules, the audit trail, and the necessary documentation to assist local governments in preparing a defensible cost allocation plan. However, the software package does not replace the manual effort required in preparing a successful cost plan that maximizes federal reimbursements.

2. DETERMINE COST OF SERVICES.  Through inter-agency agreements, many local governments agree to provide some services that would be cost prohibitive for the other levels of governments.  An example of such a service might be the incarceration of federal prisoners in local jails or prisons.  The Federal Government often contracts with local governments to house federal prisoners or illegal aliens.  Local governments utilize the cost allocation plan to determine the full cost of housing these prisoners.  Another example is to charge Federal and State agencies rent for space occupied in local owned buildings.

3.  DOCUMENT TRANSFERS.  Many governments transfer dollars between the General Fund and Proprietary or Special Revenue funds to pay for services provided by the General Fund on behalf of these other funds.  The cost allocation plan can identify and document these costs, thus providing some basis for the transfer. 

4.  DETERMINE FULL COST FOR PERFORMANCE MEASUREMENT PROJECT.  Many local governments are participating in or planning to initiate a performance measurement project.  The participating governments will identify similar  services, determine the full costs and compare the operations in order to identify “best practices.”  The cost allocation plan provides a uniform method of determining the indirect costs associated with the services provided.  The cost allocation plan can also be used to identify the direct cost of providing that service if the accounting system does not identify cost at the lowest level.

5.   DETERMINE COST FOR SETTING FEES.  Many governments provide services that only benefit a particular portion of the population.  The cost of these services is usually funded by “user fees” or “cost of service fees”.  Most accounting systems do not reflect the cost of providing services, rather they track the consumption of assets.  The cost allocation plan can allocate the direct and indirect cost down to the individual service, thus, identifying the full cost of providing that service.  The decision makers will then be more informed on what the actual cost is, do the outcomes justify the costs, can the private sector provide the services more efficiently and what is the appropriate level of service provision.