ALLOCATION OF COSTS - INDIRECT COST RATE DETERMINATION METHODOLOGY - 9213.1

(Renumbered: 01/2022)

(Revised and renumbered from 9202)

Indirect (overhead) costs are incurred for services or activities that benefit one or more programs. Cost allocation is the assignment of indirect (overhead) costs to one or more programs according to a formula. Indirect costs are assigned to the programs they benefit according to a methodology that represents a reasonable and equitable distribution.

The following should be considered when developing a cost allocation process:

• Timeliness—the cost allocation process must produce program cost data on a timely basis.
• Consistency—the cost identification and distribution methods selected must be applied consistently throughout the accounting period.
• Accuracy—the information provided shall be as accurate as possible.
• Auditability—program costs must be fully auditable; e.g., working papers, reports, or system documentation must be retained showing program cost identification, accumulation, and distribution methods.

There are many ways to distribute indirect costs. Some agencies/departments may use one method for a specific type of cost, while others may use another method for the same type of cost. Below are three of the most common methods of distributing indirect costs.

Method A distributes indirect costs using a rate that includes personal services or total costs. This method is typically used for distributing administration (personal services and OE&E) and some other OE&E costs.

Administration costs include all costs for executive staff and staff support organizational units. Examples are executive policy and planning, general administration, budgeting, accounting, personnel, business services, management analysis, training, and legal. Administration costs are distributed to the programs based on the most appropriate method for the work activity.

OE&E indirect costs distributed by method A may include miscellaneous office supplies, postage and printing, equipment rental, telephone charges, and utilities.

The allocation percentage rate for method A is determined by dividing (1) personal services costs for a program by the total personal services costs for all programs or (2) total costs for a program by total costs for all programs.

For example, if the share of the Program 10’s personal services is $1,000 out of the $10,000 total personal services cost for all programs, then Program 10’s allocation percentage of the total personal services cost would be 10%. 10% of the indirect costs would be charged to Program 10.

Method B distributes indirect costs by a rate calculated by hours. This method is typically used for distributing service unit costs. The allocation percentage rate for method B is determined by dividing the total hours required to provide services for a program (Program 10) by the total hours required to provide services for all programs (Programs 10, 20 & 30).

For example, if a reproduction unit spent 132 hours providing services for Program 10 and a total of 176 hours providing services for all programs, the allocation percentage would be 75%. 75% of the service unit’s costs would be charged to Program 10.

Method C distributes indirect costs by a rate calculated by usage. This method may be used for distributing rent, telephone, or other utilities using square footage, number of employees, or other equitable distribution base. For each distribution base, an allocation percentage is determined for each organizational unit. The allocation percentage rate for this method is determined by dividing Program 10’s square footage by the total square footage occupied by all programs (Programs 10, 20 & 30).

For example, if Program 10 staff occupies 10,000 square feet of the total 20,000 square feet of the building, Program 10’s allocation percentage of the space would be 50%. 50% of the rent would be charged to Program 10.

Refer to Illustration 9213.1 for the three methods of distributing costs.