Identifying and Classifying Costs for Indirect
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Identifying and Classifying Costs for Indirect Cost Rates North Carolina Department of Health and Human Services Office of the Controller Cost AnalysisFederal Financial ReportingAdministrative Services October 2016 Objectives Background
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Identifying and Classifying Costs for Indirect Cost Rates North Carolina Department of Health and Human Services
Office of the Controller
Cost Analysis/Federal Financial Reporting/Administrative Services
October 2016<br>
Office of the Controller
Cost Analysis/Federal Financial Reporting/Administrative Services
October 2016<br>
02
Objectives Background
Purpose of Cost Principles
Identifying allowable and unallowable costs
Determining whether cost is direct or indirect
Types of indirect cost rates
Examples of indirect cost rates<br>
Purpose of Cost Principles
Identifying allowable and unallowable costs
Determining whether cost is direct or indirect
Types of indirect cost rates
Examples of indirect cost rates<br>
03
Background Prior to 12/26/2013, cost principles for nonprofits fell under OMB Circular A-122; state and local government cost principles were contained in OMB Circular A-87
Effective 12/26/2013, federal circulars were collapsed to one super circular, the OMB 2 CFR Uniform Administrative Requirements, Cost Principles, and Audit requirements for Federal Awards
Basic cost principles remained largely unchanged<br>
Effective 12/26/2013, federal circulars were collapsed to one super circular, the OMB 2 CFR Uniform Administrative Requirements, Cost Principles, and Audit requirements for Federal Awards
Basic cost principles remained largely unchanged<br>
04
Purpose of Cost Principles To determine the allowable cost of work performed by the non-Federal entity
To provide framework for consistent treatment of costs across grants
Emphasis on identifying types of cost<br>
To provide framework for consistent treatment of costs across grants
Emphasis on identifying types of cost<br>
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Cost Principles Nonprofit organization means any corporation, trust, association, cooperative, or other organization, not including IHEs, that:
(1) Is operated primarily for scientific, educational, service, charitable, or similar purposes in public interest
(2) Is not organized primarily for profit
(3) Uses net proceeds to maintain, improve, and/or expand its operations.
(Major nonprofit organizations receive more than $10 million dollars in Federal funding of direct costs)<br>
(1) Is operated primarily for scientific, educational, service, charitable, or similar purposes in public interest
(2) Is not organized primarily for profit
(3) Uses net proceeds to maintain, improve, and/or expand its operations.
(Major nonprofit organizations receive more than $10 million dollars in Federal funding of direct costs)<br>
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Expenditures that are specifically permitted under grant agreement
Costs that are
Eligible
Reasonable
Necessary
Allocable What is an “allowable” cost?<br>
Costs that are
Eligible
Reasonable
Necessary
Allocable What is an “allowable” cost?<br>
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Examples of Allowable Costs Employee health and welfare – documented policies for improvement of working condition, employee health
Advertising—for recruitment of personnel, procurement of goods and services, etc.
Maintenance and repair costs
Professional service costs
Employee compensation—when reasonable, with time worked on grant documented<br>
Advertising—for recruitment of personnel, procurement of goods and services, etc.
Maintenance and repair costs
Professional service costs
Employee compensation—when reasonable, with time worked on grant documented<br>
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Allowable Costs Requiring Prior Approval Fundraising activities that meet program objectives
Goods and services for personal use in relation to housing and rent
Organization costs for establishing or reorganizing an organization
Participant support costs for trainees in the form of stipends, travel and subsistence allowances
Advisory councils<br>
Goods and services for personal use in relation to housing and rent
Organization costs for establishing or reorganizing an organization
Participant support costs for trainees in the form of stipends, travel and subsistence allowances
Advisory councils<br>
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Unallowable costs Not reasonable
Not allocable to the award
Not necessary
Not allowed by grant agreement<br>
Not allocable to the award
Not necessary
Not allowed by grant agreement<br>
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Examples of Unallowable Costs Alcoholic beverages - for any purpose
Bad debts
Entertainment
Contributions and donations
Lobbying – attempts to influence government officials
Fines and penalties
Defense and prosecution of criminal proceedings<br>
Bad debts
Entertainment
Contributions and donations
Lobbying – attempts to influence government officials
Fines and penalties
Defense and prosecution of criminal proceedings<br>
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Allocable Cost Cost is incurred for benefit of one grant
Cost benefits more than one grant but can be proportioned to each through use of reasonable methods (direct cost)
Each receives appropriate allocation
If applicable, have approved cost allocation plan
Necessary for overall operation of organization (indirect costs)
If difficult to determine, seek prior, written approval for the expenditure<br>
Cost benefits more than one grant but can be proportioned to each through use of reasonable methods (direct cost)
Each receives appropriate allocation
If applicable, have approved cost allocation plan
Necessary for overall operation of organization (indirect costs)
If difficult to determine, seek prior, written approval for the expenditure<br>
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Composition of Costs Total costs = allowable direct costs + allocable indirect costs – applicable credits
May not exceed actual costs incurred
No universal rule for classifying costs as direct or indirect
Must be treated consistently in like circumstances
Must be treated consistently in like circumstances<br>
May not exceed actual costs incurred
No universal rule for classifying costs as direct or indirect
Must be treated consistently in like circumstances
Must be treated consistently in like circumstances<br>
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Direct costs Can be identified specifically with a particular program or objective, such as
Compensation to employees
Cost of materials
Equipment / capital expenditures
Travel expenses
Can be assigned to activity with high degree of accuracy<br>
Compensation to employees
Cost of materials
Equipment / capital expenditures
Travel expenses
Can be assigned to activity with high degree of accuracy<br>
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Examples of direct costs May or may not be allowable
Maintenance of membership rolls, subscriptions, publications, and related functions
Providing services and information to members, legislative or administrative bodies, or public
Advertising, promotion and other forms of public relations
Meetings and conferences except those held to conduct general administration of the organization
Maintenance, protection, and investment of special funds not used in operation of organization
Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirement plans, financial aid, etc.<br>
Maintenance of membership rolls, subscriptions, publications, and related functions
Providing services and information to members, legislative or administrative bodies, or public
Advertising, promotion and other forms of public relations
Meetings and conferences except those held to conduct general administration of the organization
Maintenance, protection, and investment of special funds not used in operation of organization
Administration of group benefits on behalf of members or clients, including life and hospital insurance, annuity or retirement plans, financial aid, etc.<br>
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Indirect costs—Categories Facilities
Depreciation and use allowances on buildings, equipment and capital improvement
Interest on debt associated with certain buildings, equipment and capital improvements
Operations and maintenance expenses
Administration
General administration (director’s office, clerical support
General expenses (human resources, accounting, personnel, library expenses and all other types of expenditures not listed under facilities)<br>
Depreciation and use allowances on buildings, equipment and capital improvement
Interest on debt associated with certain buildings, equipment and capital improvements
Operations and maintenance expenses
Administration
General administration (director’s office, clerical support
General expenses (human resources, accounting, personnel, library expenses and all other types of expenditures not listed under facilities)<br>
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Examples of indirect costs Rent
Square footage used by each program
Utilities
Building maintenance / minor renovation
Accounting or payroll functions
Human Resources
Director and administrative staff
Telephone and postage<br>
Square footage used by each program
Utilities
Building maintenance / minor renovation
Accounting or payroll functions
Human Resources
Director and administrative staff
Telephone and postage<br>
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Direct or Indirect—Rules for use Direct costs based on
Nature of costs
Meeting cost principle guidelines
Group indirect costs
Logically
Distribute equitably to all programs
Based on benefits
Not on funds available or revenues received
Cannot duplicate any direct costs<br>
Nature of costs
Meeting cost principle guidelines
Group indirect costs
Logically
Distribute equitably to all programs
Based on benefits
Not on funds available or revenues received
Cannot duplicate any direct costs<br>
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When can indirect costs be treated as direct costs? Grant project has special need for service or item beyond normal
Can be specifically identified to grant
Costs are specified and justified in budget and narrative—accepted by funding agency
Funding agency does not specifically disapprove in grant agreement<br>
Can be specifically identified to grant
Costs are specified and justified in budget and narrative—accepted by funding agency
Funding agency does not specifically disapprove in grant agreement<br>
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Indirect Cost Rates Creation of a 10% de minimis rate of modified total direct costs (MTDC) for any Non-Federal entity that does not have a Federally negotiated Indirect Cost Rate.
MTDC Include: All direct wages, fringe benefits, materials and supplies, services, travel and sub-awards and sub-contracts up to the first $25,000 of each sub-award or contract.
MTDC Exclude: Equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarship and participant support costs.<br>
MTDC Include: All direct wages, fringe benefits, materials and supplies, services, travel and sub-awards and sub-contracts up to the first $25,000 of each sub-award or contract.
MTDC Exclude: Equipment, capital expenditures, charges for patient care, rental costs, tuition remission, scholarship and participant support costs.<br>
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Indirect Cost Rates Appendix IV to Part 200 – Indirect (F&A) Costs Identification and Assignment, and Rate Determination for Nonprofit Organizations
Allocation of Indirect Costs and Determination of Indirect Cost Rates
Negotiation and Approval of Indirect Cost Rates
Certificate of Indirect (F&A) Costs<br>
Allocation of Indirect Costs and Determination of Indirect Cost Rates
Negotiation and Approval of Indirect Cost Rates
Certificate of Indirect (F&A) Costs<br>
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Simplified Allocation Method Organization’s major functions benefit from its indirect cost to the same degree
Separate total costs into direct and indirect categories
Eliminate applicable credits, unallowable costs and capital expenditures
Include adjustments such as depreciation expense.
Divide allowable indirect costs by the direct cost base
The equitable distribution base can be the total direct cost base (less subawards of $25,000 or greater), direct salaries and wages or other base providing equitable distribution
The indirect cost rate is applied is applicable to all awards of the organization<br>
Separate total costs into direct and indirect categories
Eliminate applicable credits, unallowable costs and capital expenditures
Include adjustments such as depreciation expense.
Divide allowable indirect costs by the direct cost base
The equitable distribution base can be the total direct cost base (less subawards of $25,000 or greater), direct salaries and wages or other base providing equitable distribution
The indirect cost rate is applied is applicable to all awards of the organization<br>
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Other Allocation Methods Multiple Allocation Base Method
indirect cost pools developed in the Facilities and Administration categories
Each cost pool has its unique indirect Cost Rate
Indirect Costs distributed to Federal awards based on Modified Total Direct Cost<br>
indirect cost pools developed in the Facilities and Administration categories
Each cost pool has its unique indirect Cost Rate
Indirect Costs distributed to Federal awards based on Modified Total Direct Cost<br>
23
Other Allocation Methods Direct Allocation Method
All costs, with the exception of general administration, are classified as direct costs
Three categories of cost:
General Administration
Fundraising
Other Direct Functions (projects)
Joint costs, such as depreciation, rent, operation/maintenance of facilities, telephone, are allocated (prorated) as direct costs<br>
All costs, with the exception of general administration, are classified as direct costs
Three categories of cost:
General Administration
Fundraising
Other Direct Functions (projects)
Joint costs, such as depreciation, rent, operation/maintenance of facilities, telephone, are allocated (prorated) as direct costs<br>
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Types of Rates Fixed Rate – Most common rate used – rate is based on an estimate of costs. The difference between the estimated costs and the actual costs of the period covered by the rate, is carried forward as an adjustment in the subsequent rate
Predetermined Rate – Like the fixed rate, the predetermined rate is based upon an estimate of costs for the period covered. No adjustment is made.
Final Rate – this rate is applicable to a past period based upon that period’s expenses. Not subject to adjustment
Provisional Rate – A temporary rate used until the final rate is established at the end of the period
Rates are commonly set for the entity’s fiscal year<br>
Predetermined Rate – Like the fixed rate, the predetermined rate is based upon an estimate of costs for the period covered. No adjustment is made.
Final Rate – this rate is applicable to a past period based upon that period’s expenses. Not subject to adjustment
Provisional Rate – A temporary rate used until the final rate is established at the end of the period
Rates are commonly set for the entity’s fiscal year<br>
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Submitting the Indirect Cost Rate Proposal Introduction stating the purpose of the organization and the programs administered by the entity
Narrative of the Cost Allocation Methodology including explanations of how different categories of costs are treated, (i.e. “Supplies and Materials”: General office supplies are charged according to the number of staff per program in that facility.)
Chart of cost allocation methods used – type of service and basis for direct allocation
Schedules depicting summary of cost components (direct costs, indirect costs and summary of all costs with the rate calculation
Agreed Upon Procedures – an independent accountant’s report attesting to the validity of the procedures performed in calculating the rates.<br>
Narrative of the Cost Allocation Methodology including explanations of how different categories of costs are treated, (i.e. “Supplies and Materials”: General office supplies are charged according to the number of staff per program in that facility.)
Chart of cost allocation methods used – type of service and basis for direct allocation
Schedules depicting summary of cost components (direct costs, indirect costs and summary of all costs with the rate calculation
Agreed Upon Procedures – an independent accountant’s report attesting to the validity of the procedures performed in calculating the rates.<br>
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Certification All rate proposals should include the following form:
Certificate of Indirect (F&A) Costs
This is to certify that to the best of my knowledge and belief;
(1) I have reviewed the indirect cost proposal submitted herewith;
(2) All costs included in this proposal [date] to establish indirect cost rates for [date of period covered] are allowable in accordance with the requirement of the Federal awards to which they apply and with Subpart E-Cost Principles of Part 200.
(3) This proposal does not include any costs which are unallowable under Subpart E – Cost Principles of Part 200 such as (without limitation); contributions and donations, entertainment costs, fines and penalties, lobbying costs and defense of fraud proceedings; and<br>
Certificate of Indirect (F&A) Costs
This is to certify that to the best of my knowledge and belief;
(1) I have reviewed the indirect cost proposal submitted herewith;
(2) All costs included in this proposal [date] to establish indirect cost rates for [date of period covered] are allowable in accordance with the requirement of the Federal awards to which they apply and with Subpart E-Cost Principles of Part 200.
(3) This proposal does not include any costs which are unallowable under Subpart E – Cost Principles of Part 200 such as (without limitation); contributions and donations, entertainment costs, fines and penalties, lobbying costs and defense of fraud proceedings; and<br>
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Certificate Continued…. (4) All costs included in this proposal are properly allocable to Federal awards on the basis of ta beneficial or causal relationship between the expenses incurred and the Federal awards to which they are allocated in accordance with applicable requirements.
I declare that the foregoing is true and correct.
Nonprofit Organization : _____________________________________
Signature: ___________________________________________________
Name of Official: ____________________________________________
Title: _________________________________________________________
Date of Execution: ___________________________________________<br>
I declare that the foregoing is true and correct.
Nonprofit Organization : _____________________________________
Signature: ___________________________________________________
Name of Official: ____________________________________________
Title: _________________________________________________________
Date of Execution: ___________________________________________<br>
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Final Steps Submit the indirect Cost Proposal to the Grantor
Grantor submits the proposal to the DHHS Office of the Controller (OoC)
The OoC performs the review and contacts the nonprofit, if needed, to resolve questions or ask for additional information
Once approved, the OoC sends an approval letter to the Grantor<br>
Grantor submits the proposal to the DHHS Office of the Controller (OoC)
The OoC performs the review and contacts the nonprofit, if needed, to resolve questions or ask for additional information
Once approved, the OoC sends an approval letter to the Grantor<br>
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Questions? Helpful Link
OMB Super Circular: http://www.ecfr.gov/cgi-bin/text-idx?tpl=/ecfrbrowse/Title02/2cfr200_main_02.tpl<br>
OMB Super Circular: http://www.ecfr.gov/cgi-bin/text-idx?tpl=/ecfrbrowse/Title02/2cfr200_main_02.tpl<br>