Budgeting: Indirect Cost

Facilities & Administrative Costs (i.e., Indirect Costs or Overhead)

• Costs of necessary administrative and service functions related to the grant project.

Updating Indirect Cost Rate-Proposal

Periodically, the Director of Financial Accounting & Reporting must submit an updated Indirect Cost Rate following the steps outlined in the Federal Regulations.

Process Overview for updating IDC rate:

In calculating the allowable indirect cost rate, ACC complies with the Uniform Guidance, which can be found at §200.57 Indirect cost rate proposal.

A copy of the approved Indirect Cost Rate Agreement is posted on the Restricted Accounting

website at:https://drive.google.com/file/d/0B68fVqznGv7ecjZwakxCSmNNNm8/view

• Periodically, the Director of Restricted Accounting must submit an updated Indirect Cost Proposal following the steps outlined for the Simplified Method on the following page.
• In doing so, the Director must refer to the most recent Comprehensive Annual Financial Report for the college.
• Once the proposal has been completed according to the guidelines provided, it should be submitted to the Department of Health and Human Services in Dallas, TX, ACC’s cognizant agency.
• The Department of Health and Human Services will review ACC’s proposal and provide a “Colleges and Universities Rate Agreement” for ACC’s review. This agreement must be signed and returned to the Department of Health and Human Services in order to be official.

Indirect Cost Proposal Format – Simplified Method

The following information can be found at http://rates.psc.gov/fms/dca/shortform1.pdf. It contains the instructions for calculating and formatting the proposed indirect cost rates. SAMPLE INDIRECT COST PROPOSAL FORMAT – SIMPLIFIED METHOD. This Appendix illustrates the development of an indirect cost rate under the Simplified Method described in Section H. of Circular A-21. The illustration includes two schedules. Schedule 1 shows the expenditures in the institution’s financial statements and the reclassifications commonly required to recast the data in the financial statements into the classifications needed to compute an indirect cost rate under the Simplified Method. Schedule 2 shows a number of additional adjustments to the data in the financial statements, the classification of the adjusted costs as direct or indirect, and the computation of the indirect cost rate. The reclassifications and adjustments shown in the schedules

are explained in notes to the schedules.

NOTES TO SCHEDULE 1

A. The expenditure classifications shown in the financial statements conform to the classifications recommended in “College and University Business Administration” published by the National Association of College and University Business Officers and incorporated into the audit guide “Audits of Colleges and Universities” published by the American Institute of Certified Public Accountants.

B. To compute an indirect cost rate under the simplified method in Circular A-21, a number of reclassifications are usually needed to recast the data in the financial statement into the classifications required by the Circular. The reclassifications commonly required are shown in Schedule 1 and described more fully below.

* “Unallowable activities” are activities whose costs are unallowable under Section J. of Circular A-21. Examples of these activities include fundraising, investment management, alumni activities, and public relations. The treatment of “unallowable activities” differs from the treatment of other unallowable costs (e.g. bad debt expense) in that the former includes the salaries of personnel which must be included in the salary and wage distribution base in the computation of the indirect cost rate, while the latter are excluded from the rate computation entirely. The elimination of unallowable costs is shown in Schedule 2.

** Computer centers are classified as “specialized service facilities” in Section J.44 of Circular A-21. These facilities are defined in that Section as “highly complex or specialized facilities” which provide services to an institution’s activities, such as computer centers, wind tunnels, and reactors. If the costs of a facility are material, Section J.44 requires that they be treated as direct costs and be charged to users based on actual usage of the services. Paragraph (b) of Section J.44 also requires that the costs of a specialized service facility normally include its direct costs as well as its allocable share of indirect costs.

In this illustration, the institution included the direct costs of its computer center in Institutional Support Costs and reduced the costs by the revenues recorded by the Center. In order to properly establish the direct salary and wage base, the reclassification shown in Schedule 1 applies the computer center revenue to the “other costs” of the center rather than to the salaries and wages of the center. The amounts shown in Schedule 1 were computed as follows:

NOTES TO SCHEDULE 2

A. Under the College Work Study Program, students may work in a number of activities at an institution. The wages paid to these students are usually included in the costs of the activities in which the students work. These ages should be treated in the following manner for purposes of computing indirect cost rates:

1. The Federal share of the wages (80%) should be eliminated from the computation.

2. The institution’s share of the wages (20%) should be treated as follows:

• If the work was performed in an indirect cost activity, the wages should be included in the appropriate indirect cost category.
• If the work was performed on a sponsored agreement and the wages charged to the agreement, the wages should be included in the direct salary and wage base.
• If the work was performed in a non-sponsored direct cost activity, the wages may be eliminated from the computation.

In the illustration, the students worked in instruction, research, auxiliary enterprises, and general administration (e.g. accounting office, personnel office, etc.) The exclusions shown in Schedule 2 for these wages are detailed below:

B. These adjustments eliminate capital expenditures and other unallowable costs identified in section J. of Circular A-21 from the indirect cost pool. Capital expenditures include expenditures for land, buildings, equipment, and improvements which materially increase the value or useful life of land, buildings, and equipment (regardless of whether the improvements were made by outside contractors or the institution’s staff.) Examples of other allowable costs include interest expense, entertainment expense, bad debts and allowances for doubtful accounts, fines and penalties, losses on the disposition of capital assets, and losses on sponsored agreements.

C. These adjustments reduce the costs reflected in the financial statements for “applicable credits” (e.g., purchase discounts, rebates, and allowances, adjustments for overpayments or erroneous charges, etc.) as required by section C.5. of Circular A-21. “Applicable credits” also include income generated by employee morale, health and welfare services (e.g., health services, parking services, etc.) unless the income is irrevocably set over to employee welfare organizations.

D. Paragraph H.2.b.(2) of Circular A-21 requires an adjustment to eliminate Operation and Maintenance (O&M) expenses attributable to “other institutional activities”. This adjustment should be based on a cost analysis study, a gross square footage ratio, or some other reasonable method. In some cases, an allocation of O&M expenses to “other institutional activities” may be reflected in the institution’s financial statements. If this has been done, and if the amount allocated is a reasonable approximation of the actual O&M expenses attributable to the activities, an additional adjustment to the O&M indirect cost pool is not necessary. However, the salaries and wages of “other institutional activities” might include salaries and wages allocated from O&M costs. If this is the case, the institution may exclude the allocated O&M salaries and wages from the direct salary and wage base used to compute the indirect cost rate.

If an allocation of O&M expenses to “other institutional activities” is not reflected in the financial statements, or if the amount allocated is not a reasonable approximation of the actual O&M expenses attributable to the activities, the following adjustments are necessary:

• The O&M expenses allocated to “other institutional activities” on the financial statements (if any) should be transferred back to the O&M pool.
• The proper amount of O&M expenses attributable to the activities should be computed and this amount should be removed from the pool.

In this illustration, it has been assumed that the O&M expenses allocated to “other institutional activities” in the financial statements are not a reasonable approximation of the actual O&M expenses attributable to the activities.

Therefore, the following adjustments have been made:

• The $275,000 allocated to “other institutional activities” in the financial statements has been transferred back to the O&M pool.
• The proper amount of O&M expenses attributable to the activities has been computed ($391,000) and this amount has been removed from the O&M pool.

E. In this illustration, the institution charged certain types of O&M expenses directly to sponsored agreements, but not to non-sponsored activities which received the same services. Generally accepted cost accounting principles require that costs incurred for the same purpose, in like circumstances be treated consistently as either direct or indirect costs. To meet this requirement and avoid an over-allocation of O&M expenses to sponsored agreements, an adjustment has been made to reduce O&M expenses by the approximate amount of expenses attributable to non-sponsored activities which are equivalent to those charged directly to sponsored agreements. In addition in this illustration, the direct charges to sponsored agreements were not removed from the O&M expenses shown in the financial statements. Therefore, the adjustment also includes removal of these charges from the O&M expenses.

(NOTE: The requirement for consistent treatment of costs applies to all costs – e.g., fringe benefits, telephone expenses, postage, etc.)

F. This adjustment removes rare (museum-type) books and costs paid by a Federal library assistance grant from library expenses. Rare book purchases must be excluded from allowable library expenses under Section F.8.a. of Circular A-21. The adjustment for costs paid by the library assistance grant is necessary to preclude duplicative reimbursement of the costs.

G. Under paragraph H.2.b.(2) of Circular A-21, depreciation or use allowances on buildings, equipment, and capital improvements may be included in indirect costs. These costs, however, must be adjusted to eliminate depreciation or use allowances on assets used by “other institutional activities”. In many cases, the assets used by these activities can be readily identified and, in these cases, the adjustment should be made on that basis. If the assets cannot be readily identified, the adjustment should be based on a cost analysis study, a square footage ratio, or some other reasonable method. For purposes of this illustration, the allowable amount of use allowance has

been computed as follows:

H. In this example, the direct salary and wage base excludes fringe benefits. If fringe benefits are treated as direct costs, they may be included in the direct salary and wage base.

I. The rate of 48.71% developed in the sample format is applicable to all direct salaries and wages of the institution. Generally, off-campus rates are not negotiated with institutions that use the simplified method. Therefore, it is essential that consistency of treatment be afforded to all indirect cost elements, (e.g., rental of separate facilities should be treated as an indirect (O&M) cost rather than as a direct cost on sponsored agreements). To the extent that sponsored agreements have been funded in a manner that reflects a need for an off-campus rate, the rate should be developed in a manner similar to the development of a “regular” rate, except that it should exclude use

allowances/depreciation, O&M expenses, and libraries expenses.