Why allocate indirect costs

At the end of reporting period, such as at month's end, records are reviewed, indirect cost rates are calculated and the appropriate indirect costs are allocated.

Indirect cost rate calculations can be determined by dividing an indirect cost by a cost object, such as sales revenues or square footage.

Indirect cost rates for proportional allocation also can be calculated using an overhead cost calculation. An overall overhead cost rate can be calculated by dividing individual or total indirect costs by the direct costs each department incurs.

Then, multiply direct costs for each department to get the total indirect costs to be allocated to each department. Based in Green Bay, Wisc. In addition to writing web content and training manuals for small business clients and nonprofit organizations, including ERA Realtors and the Bay Area Humane Society, Lohrey also works as a finance data analyst for a global business outsourcing company.

By Jackie Lohrey. Fixed Cost Classification Fixed cost classification is the simplest way to allocate indirect costs. The issue of undocumented expenses came up as well when OIG reviewed travel expenses. If an organization is going to charge a funding source for travel-related costs, those costs must be documented to show how the travel was related to the program. Travel documentation should include forms that show authorization to travel prior to the date of the trip.

Organizations should also use specific travel reimbursement forms to which receipts for travel costs are attached once the trip has been completed. OIG also discovered that organizations were including unallowable items in the cost pools that were allocated across all funding sources including federal grants.

In one instance, board meeting snacks and lunches were recorded as indirect costs and included in the indirect pool. These costs were later disallowed and had to be repaid. Another common allocation mistake many organizations make is the way they treat credits received on overpaid bills.

If you receive a refund from an overpayment of an expense and the expense was originally expensed at least in part to a federal grant, the federal government expects that it will receive its fair share of the refund. Make sure that all of your sources of funds and programs are paying their fair share of the costs that are necessary to continue to serve your clients. Save those hard earned unrestricted funds to pay for new programs, capital expenditures or federally unallowable costs!

Does your organization struggle to get your federal grants to cover any overhead costs directly or indirectly? Does your organization have a negotiated indirect cost rate that has to be renegotiated every fiscal year? The new Uniform Guidance has some good news for you—there are new ways to recover indirect costs from your federal awards! Title 2 CFR was implemented by all federal agencies on December 19, The new regulations consolidated eight OMB Circulars, including the Circulars that governed direct and indirect costs A and A , into one location in the Code of Federal Regulations www.

These streamlined and revised regulations include some changes to the calculation and application of indirect costs to federal awards. See Section As mentioned above, if your organization has never negotiated an indirect cost rate NICRA with a cognizant agency, you may elect to use the 10 percent of Modified Total Direct Cost MTDC de minimis indirect rate to recover indirect costs as part of your federal grant budgets.

Other items may only be excluded when necessary to avoid a serious inequity in the distribution of indirect costs, and with the approval of the cognizant agency for indirect costs. A non-federal entity that has never received a negotiated indirect cost rate and that uses the 10 percent de minimis rate does not need to provide proof of its indirect costs. Key Takeaway Overhead costs are allocated to products to provide information for internal decision making, to promote the efficient use of resources, and to comply with U.

Generally Accepted Accounting Principles. Review Problem 3. Financial statements are prepared for the annual report that is provided to shareholders. Management is considering the addition of a new product line. Profits are calculated for each product so management can decide which products to promote.

Management asks for cost information to assist in bidding for a contract. Solutions to Review Problem 3.