Which of the following would not be used as the basis for allocating expenses to departments?
When non-payroll costs benefit two or more awards or projects it is required that departments understand the benefit to each award and document the allocation methodology used to charge each award. As non-compliance in documenting and applying a cost allocation methodology is an area of focus for all audits, adhering to the following best practices is recommended. Show
Why is Cost Allocation Important?Uniform Guidance Subpart E §200.405 (d), Allocable Costs, stipulates that it is necessary to substantiate the proportional benefit of costs when costs benefit two or more projects.
These costs should be simply allocated to each award to reflect the easily determined proportional benefit.
When non-payroll costs benefit two or more projects or activities in proportions that are not easily determined, an allocation is necessary. When to Use Cost AllocationCost allocation is required when non-payroll costs benefit two or more projects or activities in proportions that are not easily determined. Note that payroll costs should always be distributed based on actual effort that accurately reflects the work performed during the applicable time period, as covered in §200.430 Compensation - personal services. Allocation methodologies differ based on:
Cost allocation methodologies are as follows:
Required Components of Cost AllocationsDepartments must document the following components of an allocation:
Cost Allocation Best PracticesThe following are best practices for allocating costs and documenting the methods used.
Documenting Departmental Cost Allocation MethodologiesIt is important that departments document the methodologies that are used for all award and project costs that must be allocated. Best practices include the following:
Cost Allocation ExamplesCost allocation based on usage. The monthly cost of supplies/expendables to maintain a lab computer system is $1,000. The computer system is used solely for projects A and B. The computer operating system keeps a log of users and their time on the system. Project A assistants have 100 combined user hours a month and Project B assistants have 80 combined user hours a month. A reasonable base to allocate the expense would be computer user hours.
Cost allocation based on effort. A research assistant spends 80% effort on Project A and 20% effort on Project B. The research assistant uses supplies totaling $3,000 per month on the two projects. Usage is directly related to the amount of effort devoted to each project.
Cost allocation based on square footage. A total of $3,000 a month in rent is paid for two laboratories that are conducting similar research. In this example, the square footage of the laboratories could be used as a reasonable basis. Lab A is 1,600 square feet and Lab B is 1,200 square feet.
What is the basis of allocation of expenses?An allocation base is the basis on which Cost accounting allocates overhead costs. An allocation base can be a quantity, such as machine hours that are used, kilowatt hours (kWh) that are consumed, or square footage that is occupied.
What are the 3 allocation methods?There are three methods for allocating service department costs: direct, sequential, and reciprocal. The first step of each method is to classify each organizational unit as either an operating or service department.
What are the four cost allocation methods?When allocating costs, there are four allocation methods to choose from.. Direct labor.. Machine time used.. Square footage.. Units produced.. What are the three purposes of cost allocation?A cost allocation is a good tool to use on an annual basis to track changes in costs. Allocating costs serves three main purposes. These are to: 1) make decisions, 2) reduce waste, and 3) determine pricing.
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