Purpose of Guidelines

Background

Cost Accounting Standard (CAS) 501 requires consistency estimating, accumulating and reporting costs. Accumulation has already occurred at the object code level. See University of Florida Policy on Charging Costs Directly to Sponsored Projects.

Cost Accounting Standard (CAS) 502 requires consistency in allocating costs incurred for the same purpose. Proper care must be taken in allocating costs that are usually considered indirect. See University of Florida Policy on Charging Costs Directly to Sponsored Projects.

Cost Accounting Standard (CAS) 505 requires identification and correct treatment of unallowable costs. Unallowable costs must be identified and excluded. Unallowable activities must be identified and allocated to Other Institutional activities. See University Policy on Unallowable costs.

Cost Accounting Standard (CAS) 506 requires consistency in the cost accounting period. This is necessary in order for accuracy in rate development and rate application. It requires that the same time period be used for the development of the indirect cost pools and direct cost pools (bases).

Definitions

A-21 Office of Management and Budget (OMB) circular of Cost Principles for Educational Institutions.

Direct Costs

Costs which are specifically associated and identified to a particular project, program or activity.

Indirect Costs

Costs incurred for a common or joint purpose benefiting more than one cost objective and which cannot be readily assigned to a particular project, program or activity.

PI

Principal Investigator on a grant, contract or cooperative agreement. This person bears the main responsibility for costs that are charged to that agreement.

Program Income

The gross income earned as a result of an award or as a supported activity.

Program Objective (per A-21)

May be a major function of the institution (i.e. Instruction, Research, Other Institutional Activities), a particular service or project (i.e., Animal Resources), a sponsored agreement, or an indirect cost activity (i.e., Operations and Maintenance, General Administration, Department Administration).

Guideline Issues

In order to correctly and fairly allocate indirect costs for the purposes of the indirect cost proposal, it is necessary to first identify and segregate costs as either direct or indirect in nature. (We call these segregated costs, cost pools.) This requires that costs are correctly recorded in the accounting system (recorded to the correct object code and account) and then carefully assigned to the appropriate cost pool.

Per A-21: The overall objective of the indirect cost allocation process is to distribute the indirect costs to the major functions of the university in proportions reasonably consistent with the nature and extent of their use of the university's resources.

Once indirect costs have been grouped together in cost pools that are like in nature and in terms of their relative contribution to the particular cost objectives, the next step is to appropriately distribute these costs using an acceptable method. The distribution method(s) used to allocate a cost pool should be based on actual conditions at the university. A-21 lists the order of distribution required in the proposal as well as certain default methods for each cost pool category. It further states, "The essential consideration in selecting a (method of distribution) is that it be the one best suited for assigning the pool of costs to cost objectives, in accordance with benefits derived; a traceable cause and effect relationship; or logic and reason, where neither benefit nor cause and effect relationship is determinable."

1. When a cost grouping can be identified directly with the cost objective benefited, it should be assigned to that cost objective.
   
2. If expenses are more general in nature, they can be assigned based on a cost analysis study if this results in an equitable distribution of the costs. Such cost analysis must be:
   
   1. sufficiently documented for later review/audit,
   2. distribute costs to the related cost objectives in relation to relative benefits derived,
   3. be statistically sound, and
   4. be performed at the university, and
   5. be reviewed periodically, at least every two years.
   
   
3. If neither the single allocation to one cost objective nor the cost analysis methods are used, then the default methods specified in A-21 must be used.
   

The effective date of these guidelines is July 1, 1996.

Although much of these guidelines have already been implemented, an effective date of July 1, 1996 is set to allow for university wide training at the department level so as to insure compliance and consistency.

Responsibility for compliance

Responsibility for following these guidelines lies primarily with Contracts and Grants which is responsible for development of the annual indirect cost proposal. The University of Florida administration is responsible for guidance and training and for insuring compliance through periodic internal and external audits.

Contracts and Grants Responsibilities

Contracts and Grants staff are responsible for developing the annual indirect cost proposal and negotiating with the cognizant agency, The Department of Health and Human Services (DHHS). The University of Florida produces the indirect cost proposal in accordance with A-21 and the related Cost Accounting Standards 501, 502, 505 and 506.