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Purpose of Cost Allocation in US Corps of Engineers
Even though US Corps of Engineers is a branch of US federal government, there is the need for cost allocation for deriving an equitable distribution of the project costs among several projects authorized to be executed. In addition, there are legal regulations requiring reimbursement or cost-sharing which generally specify the cost recovery norms for specific service or function. This also necessitates a proper cost allocation among the different projects for purposes of reimbursement. Cost allocation provides information required for determination of the quantum and share of estimated projects costs that need to get reimbursed. This information is vitally important for testing the financial feasibility and plan acceptability of the authorized projects. The information arrived based on the allocated costs form the basis for subsequent planning and construction. Cost allocation also ensures that the cost accounts are maintained in accordance with the formulated plans and principles of allocation (USArmyCorpsofEngineers, n.d.).
Cost allocation Factors
Usually a cost allocation plan is developed by federal and state agencies like City of Seattle to share the operation costs accumulated in cost pools to all the benefiting partners. Cost allocation plan follows the steps of classifying costs and pooling them. Pooling costs implies the process of accumulating costs into pools pending allocation to benefiting programs and/or partners. The cost allocation plan may allocate individual cost items or the total of all cost items in the pool. The cost pools take the form of facility cost pools, categorical cost pools or organization cost pools. The allocation bases are determined based on the principles of minimal distortion, general acceptability, actual costs or effort expended and materiality of costs involved (Kentucky WIA Implementaion Team, 2000). In my opinion the selection of so many cost drivers is made to facilitate the identification of the cost of individual service or facility accurately. However I am not in favour of such a detailed analysis of cost drivers as after all such a detailed cost allocation base does not benefit the taxpayer in any respect. Therefore it is advisable to follow more uniform cost allocation based on the extent of utilization of the service or facility. In the government settings cost allocation is found meaningful to assess the financial feasibility and control of expenses within the budget. Even though in general cost allocation is associated with manufacturing companies, of late the efficiency of the federal and state agencies could be assessed by following an effective cost allocation method.
US Department of Human Services Division for Cost Allocation
The Division of Cost Allocation (DCA) is located within the Department of Health and Human Services. Office of Management and Budget (OMB) has designated the Health and Human services as the cognizant federal agency to look after specific functions like allocation of cost and to review and negotiate facility and administrative cost rates which are the indirect costs (USDepartmentofHealth&HumanServices, 2005). The agency is formed to take up the exclusive functions of determining fringe benefit rates, special rates as determined to be appropriate and to conduct research on patient care rates. Since the functions like state wide cost allocation plans and public assistance cost allocation plans are specialized and exclusive functions the government has decided to entrust these functions to a specialized agency like DCA. In addition to these functions, DCA is expected to conduct resolving audits involving indirect costs and cost allocation methodologies. The agency also provides technical assistance and guides the Federal departments. DCA also provides technical assistance to other government agencies and the grantees.
Colleges, hospitals and other non-profit organizations can follow a simplified allocation method, multiple allocation method, direct allocation method or based on special indirect cost rates. The simplified allocation method and multiple allocation method depend on the benefits extended by the indirect costs to a single major function or several major functions in varying degrees. Direct allocation method is adopted where the non-profit organization treats all costs as direct costs. In some cases based on the factors substantially affecting the indirect costs, a special rate may be worked out for applying to the several major functions (OMB CircularA-122, 1980).
Relevance of Cost Allocation
It cannot be stated that the cost allocation is relevant only to the government agencies. Since indirect costs in any business or non-profit organizations, are costs related to a particular cost object which cannot be traced to it in an economically feasible way, there is the need for allocating costs arise in all forms of organizations. Since the indirect costs are a sizeable percentage of the overall costs assigned to the cost objects like products, customers and distribution channels the need to allocate costs enhances. In general cost allocation serves the purpose of providing information for economic decisions, motivating the managers and other employees of the organization, justifying costs or computing reimbursement and measuring income and assets for reporting to external parties. Since cost allocation has varied purposes it cannot be generalized that the cost allocation is applicable only in the context of government agencies. For instance if the salary of a aerospace scientist in the centralized research and development department of Boeing Corporation need to be allocated to different functions or departments to arrive at the performance of the divisions accurately. This salary may be allocated as a part of the central R&D costs, to satisfy the purpose of making an economic decision like pricing. However it may or may not be allocated for meeting the other purposes of motivation or cost reimbursement purposes. Nevertheless, cost allocation assumes an important role in arriving at the income and asset measurement in most of the cases of business and non-profit organization and for managerial decision making purposes.
References
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KentuckyWIAImplementaionTeam. (2000). Cost Allocation Guidelines for Kentuckys One-Stop Service Delivery Centers.
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OMBCircularA-122. (1980). Cost Principles for Non-Profit Organizations.
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USArmyCorpsofEngineers. (n.d.). Cost Allcoation.
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USDepartmentofHealth&HumanServices. (2005). Division of Cost Allocation.
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