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Cost Allocation

Cost Allocation. Sponsored by: California Association for Coordinated Transportation Presented by Rich Garrity, Senior Associate RLS & Associates, Inc. September 23-24, 2008 Sacramento, CA. Session Objectives. 1. Develop a Standard Approach to “Cost Allocation”.

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Cost Allocation

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  1. Cost Allocation Sponsored by: California Association for Coordinated Transportation Presented by Rich Garrity, Senior Associate RLS & Associates, Inc. September 23-24, 2008 Sacramento, CA

  2. Session Objectives 1. Develop a Standard Approach to “Cost Allocation” 2. IdentifySpecial Issues in Cost Allocation 3. Build a Cost Allocation Model 4. Understand the Difference Between Cost and Price 5. Automating the Cost Allocation Process

  3. Target Audience • This Session is Designed for: • Organizations That Need an Approach to Cost Individuals Service Components • Transit Organizations that Provide Service Under a Purchase of Service Arrangement to Other Users/Groups • Multi-Purpose Human Service Agencies Supported by Multiple Federal Grants

  4. Defining a Standardized Approach to Cost Allocation Issues Module 1

  5. Issues in Cost Allocation • The Term “Cost Allocation” Has Been Used to Describe a Wide Range of Allocation Needs Among Public Transit Operators

  6. Issues in Cost Allocation • In Transit, “Cost Allocation” Can Refer to a Series of Distinct Management/Accounting Practices • Each Cost Allocation Problem Requires a Separate Methodology, Typically Referred to As “Cost Allocation”

  7. Types of Cost Allocation • Financial Based Cost Allocation • Service Based Cost Allocation Plans

  8. Financial Based Cost Allocation • Central Service Cost Allocation Plans • Indirect Cost Allocation Plans

  9. Financial Based Cost Allocation #1 • Central Services Cost Allocation Plan • A Publicly Sponsored Transit Program Benefits from the Services of Other Governmental Units and Desires to Claim Costs Incurred by these Units Under its Various Federal Awards • The Public Entity or Governmental Unit Must Prepare a “Central Services Cost Allocation Plan”

  10. Financial Based Cost Allocation #2 • Indirect Cost Allocation Plan • An Entity (Public or Private Nonprofit) Provides Multiple Program Services • Certain Overhead and Administrative Costs Incurred by the Entity Benefit All Programs and Services, Including Transit • The Agency Seeks to Recoup These Costs in Their Billings to Various Federal Agencies • The Entity Requires an Approved “Indirect Cost Allocation Rate” in Order for Such Costs to be Reimbursable by the Federal Government

  11. Service Based Cost Allocation • Allocate Costs to Various Types/Modes/Services • Urban/Rural Cost Allocation • Required by FTA • Charter Cost Allocation • Local Match Allocation Plan

  12. Service Based Cost Allocation #1 • Service Based Cost Allocation • A Public Transit Agency Coordinates Service With Various Human Service Agencies In The Area • The Transit Provider Has A Policy That Public Transit Funds Cannot Be Used To Subsidize Human Service Agency Client Transportation • The Transit Agency Needs A “Fully Allocated Cost Analysis” To Determine How To Price Contract Services

  13. Service Based Cost Allocation #2 • Service Based Cost Allocation • A Transit Agency Receives Funding Under Both FTA Section 5307 And Section 5111 • FTA Expects the Grantee to Develop a Reasonable Basis for Allocating Operating Costs Between the Two Funding Sources that is Related to the Service Provided • FTA Requires a “Grant Allocation Plan” to Distribute Costs to the Two Different, But Related Programs

  14. Service Based Cost Allocation #3 • Service Based Cost Allocation • A Transit Agency Provides Charter Service in Accordance with 49 CFR part 604 • The Transit Agency Must Demonstrate That it Fully Recovers the Cost of Charter Service • The Agency Requires a “Charter Service Allocation Plan”

  15. Service Based Cost Allocation #4 • Service Based Cost Allocation • A Regional Transit Authority Provides Service Over a Multi-Jurisdictional Service Area • Each Participating Local Entity Must Share Responsibility for Funding a Portion of the Local Share • The Authority Must Allocate Local Funding Needs In An Equitable Manner To All Participating Jurisdictions

  16. Multiple Cost Allocation Needs • Some Public Transportation Projects May Require Multiple Types of Cost Allocation

  17. Multiple Cost Allocation Needs

  18. Multiple Cost Allocation Needs

  19. Embracing the Concept of Full Cost Identification Module 2

  20. Why Full Cost Identification? • Our Goal - To Answer the Questions: • How Much Does the Transportation Service Cost? • How are We Going to Pay For It? • In Order to Achieve These Goals, Agency and Program Managers Must Use Financial Planning

  21. Why Full Cost Identification? • Assess Performance • Measure Progress Toward the Achievement of Goals and Objectives • Consider Actions Which May Change the Course of Future Events • Modify Policies, Procedures, and Processes

  22. Why Full Cost Identification? • Make Operational Changes, Including Those Leading To: • Service Expansion, Reduction, Or Cessation • Increases Or Decreases In Services, Revenues, And Staff • Changes Or Modifications In Procedures Or Other Activities (Such As Marketing Or Public Relations)

  23. Why Full Cost Identification? • Transportation Systems Need Complete and Accurate Financial Data in Order to: • Manage the System So That its Goals and Objectives are Met Efficiently

  24. Why Full Cost Identification? • Know the True Cost of Operating the System so that Costs May be Billed or Allocated Appropriately to the System's Users • Report to the Funding Sources or Purchasing Agencies How Money was Spent, What Revenues were Realized, and the Financial Status of the Organization

  25. Issues in Full Cost Accounting • Lack of Sufficient Account Detail In Organizational Accounting Systems • Failure to Capture and/or Allocate Agency Indirect or Overhead Costs • There Is A Lack Of Common Definitions For Accounts (Non-FTA Programs)

  26. Issues in Full Cost Accounting • Lack of Common Definition of Service • Failure to Capture Service Unit Data • Blended Program Expenditures • Use of Capitated Payments

  27. Financial Planning:Why is This Important? • Planning for Change • Changes We Institute • Changes Forced Upon Us

  28. Financial Planning:Why is This Important? • Consider the Example: • A Manufacturer Produces Two Consumer Products • What are Some of the Costs That Will Be Incurred by this Company?

  29. Exercise No. 1 • Exercise No. 1 - Take a Minute or Two to Jot Your Ideas Down on Paper

  30. Identifying Transportation Costs • Now Consider …. • Since the Ingredients Used are Basically the Same as Product 2, the Product 1 Manager Opts to Include them all In Product 2 and Does Not Include Them in Calculating His Cost • Since Product 1 is Delivered on the Same Trucks as Product 2, the Product 1 Manager Does Not Include Them in Calculating His Cost

  31. Product 1 Research, Development, & Testing Purchase of Ingredients Production Quality Control Distribution Marketing Profit Product 2 Research, Development, & Testing Purchase of Ingredients Production Quality Control Distribution Marketing Profit Identifying Transportation Costs

  32. Identifying Transportation Costs • Do You Disagree with this Approach? • Strongly Disagree • Disagree • Not Sure • Agree • Strongly Agree

  33. Identifying Transportation Costs • What is this Product Line Manager Doing Wrong? • ? • ? • ?

  34. Identifying Transportation Costs • Let’s Talk About a Transportation Related Situation • What About this Example? • A Transportation Provider Reports Their Transportation Expenses as Follows: • Fuel • Maintenance • Insurance

  35. Identifying Transportation Costs • Financial Planning Begins by Establishing (or Reaffirming) Overall Strategies and Goals • Mission Statement • WHAT Will the Transit Service Do? • HOW Will the System Operate? • This Starts the Financial Planning Process

  36. Identifying Transportation Costs • Cost Analysis is a Key Element of Financial Planning • Knowing the Costs of Individual Routes or Services is Useful for Your Management Purposes and for Billing Your Client Agencies

  37. Identifying Transportation Costs • The Basic Approach Recommended and Used by Successful Business Operations and Transportation Systems is Called “Full Cost Accounting”

  38. Identifying Transportation Costs • To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method

  39. Identifying Transportation Costs • Using “Full Cost Accounting” Means that the Total Costs of Providing Transportation Services are Considered • Total Costs Include Any Commitment or Use of Time, Money, Physical Resources, and Other Assets of the Agency in the Delivery of Transportation Services

  40. Identifying Transportation Costs • In Full Cost Accounting, a Value is Given to These Commitments Whether or Not They Result in Immediate Out-of-Pocket Expenditures

  41. Identifying Transportation Costs • Full Cost Accounting Will: • Assist the Manager in Understanding the TRUE Cost of Providing Service • Determine Needed Revenues -- Immediate and Long-Term • Allow Allocation of Costs to System Users • Compare Costs of Service with Other Systems (Peer Analysis)

  42. Identifying Transportation Costs • Full Cost Accounting Will • Assist in Making Decisions to Participate in a Coordinated Services Program • Recognize Value of Donations (Time, Materials, and Supplies) • Permit Accurate Financial and Performance Monitoring/Evaluation

  43. Identifying Transportation Costs • Analyze the Various Functions and Activities that Your Transportation Program Carries Out on a Day-to-Day Basis • Management’s Responsibility is to Identify All Activities That Your Agency Performs in the Delivery of Transportation Services

  44. Identifying Transportation Costs • Understand HOW the Activity Creates Costs for the Transportation Program • Your Transit Program DOES Something • Your Transit Program BUYS Something • Use a Functional Approach to Cost Recognition

  45. Identifying Transportation Costs • Functional Areas of Transportation: • Operations • Maintenance • Non-Vehicle Maintenance • General Administration

  46. Identifying Transportation Costs • The Agency’s Chart of Accounts is the Basic Tool Used to Ensure that All Transportation Costs are Reflected in the Agency’s Accounting System

  47. Issues in Cost Allocation Module 3

  48. Special Issues in Cost Allocation • Direct and Indirect Costs • Operating and Capital Costs • Fixed and Variable Costs

  49. Direct and Indirect Costs • Direct Costs • Those Expenses Incurred by the Grantee That Are Directly Related and Strictly Benefit Only the Public Transportation Program • Generic Examples: • Compensation of Employees for the Time Devoted and Identified Specifically to the Performance of the Grant

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