Indirect & Pooled Cost Allocations Policy

Policy Overview

Federal regulations require that universities establish consistent practices for defining and charging costs either directly or indirectly. UIS/OAS cost allocation practices are derived from Cost Accounting Standards and require consistency in the following:

• Estimating, accumulating and reporting of costs
• Allocating costs incurred for the same purpose. Proper accounting and managing of costs usually considered indirect is important
• Managing the cost accounting period, necessary for the accuracy of costs used in rate development and rate application

Definitions

Direct Costs

Direct costs are those that are specifically associated and identified to a particular project, program or activity. Within UIS/OAS, direct costs related to an individual business, group, or department are posted directly to the Org/Activity/Sub-Activity that has been defined for that group.

Indirect Costs

Indirect costs are those incurred for a common or joint purpose benefiting more than one organization or cannot be readily assigned to a particular project, program or activity. Within UIS/OAS, indirect costs (e.g. department management and support activities, such as human resources and finance) are collected in cost pools defined by their own Org/Activity/Sub-Activity that are then distributed equitably across the organization.

Cost Pools

A cost pool is a group of individual costs that is allocated to cost objects using a single cost driver. An example of a cost pool is the UIS/OAS Human Resources Support, which collects the costs associated with Human Resources. Specific cost objects include salaries, space and technical support costs. For UIS/OAS, the allocation of the Human Resources department is based on the total number of FTEs within each business.

Cost Accounting Period

In general, a cost accounting period is the period of time in which expenses are allocated to a given pool of costs and then distributed. The University's cost accounting period and fiscal year must coincide. Fiscal year covers an accounting period for which financial statements are regularly prepared, generally a 52 week period. Within the University, the 12 month academic fiscal year begins on July 1st and ends June 30th.

Cost Allocation Principles

Once the various cost pools have been established, it is essential that they be appropriately distributed across the organization using an acceptable method.

Allocation Methodologies

The distribution method(s) used to allocate a cost pool should be based on actual conditions at the University. The following guidelines should be considered when managing an allocation methodology:

• Allocation methodologies must be documented and auditable. Documentation should include support for the specific costs allocated and indicate how the allocation methodology is logically related to the cost being allocated.
• Allocation methodologies should be reviewed periodically to ensure they are reasonable.

Activity-Based

Activity-Based cost allocation method is the preferred method for cost distribution and is appropriate for large indirect cost pools when there is a metric that can equitably assign the costs of the activities to those that derive the benefits. Examples of activity-based metrics include:

• Number of orders and invoices processed
• Number of computers within a department

Estimated Time Spent

Estimated Time Spent methodology to allocate pooled costs is appropriate when there are no obvious or apparent activity-based metrics that can be employed, and the majority of the costs in the pool are for personnel and related costs. Under this methodology, each person in the cost pool estimates the amount of time spent on each activity on an annual basis. The costs are then allocated to those businesses based on an average of all of the individuals in the cost pool. One example is how UIS/OAS Financial Services costs are allocated using time estimates from each of the Financial Partners.

Organization Size

Organization Size methodology to allocate cost pools is appropriate when there are no objective activity-based metrics and it is difficult to estimate amount of time spent. Activities in these types of cost pools typically benefit the entire organization equally and each group should contribute based on its size relative to the entire organization. Examples of allocation methodologies based on organization size include:

• Number of FTE’s
• Square footage
• Total revenue and/or expenses

UIS/OAS Cost Pools and Cost Allocation Models

The metric used for the activity is determined annually during the development of the Corporation Budget and is not adjusted during the fiscal year unless a material change in the organization occurs.

Department-wide Administrative Support Groups

The Office of the CIO has several administrative indirect groups supporting the entire organization. The cost allocation methods used to distribute the costs of these groups are:

Space Costs

Space costs for UIS are billed at the organization level. Costs for the rent of the space and other related costs (e.g. building activities such as beverage service, copiers, supplies, etc.) are collected in building cost pools and distributed to each department that occupies the space based on its raw square footage utilization plus a pro rata share of the building common areas (e.g. hallways, restrooms, conference rooms, kitchens, etc.). Space costs for OAS are charged to the department level and allocated to individual practices based on budgeted FTE counts.

Technology Costs

UIS/OAS is billed at the department level for a number of technology related costs, including software maintenance on switches, The Microsoft Campus Agreement, and file and print storage usage. These and other related costs are pooled together and distributed across the organization based on CPU counts.

Business Management Costs

Departments within UIS/OAS that incur overall management and administration costs benefiting more than one group in their organization typically collect these expenses in cost pools that can be distributed equitably across their business units. Estimated time spent is the most common method for distributing these types of costs.

Transaction Posting and Reconciliations

Distributions Based on Monthly Standard Recurring Entry

When the total annual cost in the cost pool is known prior to the beginning of the fiscal year, the cost allocation is calculated and a standard monthly recurring journal entry is established to distribute the costs equally on a monthly basis to individual organizations. The UIS space distribution allocation is one example of this type of journal entry.

Distributions Based on Year-to-Date Actual Costs

For the UIS/OAS indirect cost pools, allocation percentages are calculated prior to the beginning of the fiscal year. In order to more accurately distribute the indirect costs to specific business groups, the cost allocations are posted monthly using the calculated allocation percentages and are based on actual incurred year-to-date costs as reported in the general ledger. Examples of these allocations include administrative and business management costs.

Year-end Adjustments and True-Ups

It may become necessary to adjust the allocation as a result of changes in the cost pool. Material adjustments should be made in the current fiscal year; however, small variances can be carried forward and accounted for in the next fiscal year model.

For More Information

If you have any questions or concerns, please contact your Financial Partner.