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Indirect Costs Allocation

Directive Statement

This Directive establishes the proper methods of allocating indirect costs. Cost Accounting Standard (CAS) 9905.501 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) 9905.502 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) 9905.505 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) 9905.506 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).

Reason for Directive

The University of Florida must comply with the requirements of Uniform Guidance 2 CFR 200 and Cost Accounting Standards (CAS) 48 CFR 9905.501, 9905.502, 9905.505, and 9905.506.

Who must comply?

Responsibility for following these guidelines lies primarily with Finance and Accounting Cost Analysis.  Cost Analysis staff are responsible for:

  1. Developing the Indirect Cost Proposal and,
  2. Negotiating with the cognizant agency, the Department of Health and Human Services (DHHS) Division of Cost Allocation (DCA)

The University of Florida produces the indirect cost proposal in accordance with Uniform Guidance 2 CFR 200 Appendix III and the related Cost Accounting Standards 9905.501, 9905.502, 9905.505 and 9905.506.

The University of Florida administration is responsible for guidance and training and for ensuring compliance through periodic internal and external audits.

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).

  1. This requires that costs are correctly recorded in the accounting system (recorded to the correct expense account code and program) and then carefully assigned to the appropriate cost pool

Per 2 CFR 200: 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.

  1. 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
  2. The distribution method(s) used to allocate a cost pool should be based on actual conditions at the University

2 CFR 200 Appendix III 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 base is that it be the one best suited for assigning the pool of costs to cost objectives in accordance with benefits derived; with a traceable cause-and-effect relationship; or with logic and reason, where neither benefit nor a cause-and-effect relationship is determinable” (Appendix III –A.2.d.1).

  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 in a cost grouping 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
  3. If the expenses in a cost grouping are more general in nature, the distribution may be based on a cost analysis study which results in an equitable distribution of costs. Such cost analysis studies may take into consideration weighting factors, population, or space occupied if appropriate. Cost analysis studies, however, must:
    • Be appropriately documented in sufficient detail for subsequent review by the cognizant agency for indirect costs
    • Distribute the costs to the related cost objectives in accordance with the relative benefits derived
    • Be statistically sound
    • Be performed specifically at the institution at which the results are to be used
    • Be reviewed periodically, but not less frequently than rate negotiations, updated if necessary, and used consistently

Although much of these guidelines have already been implemented, an effective date of December 26, 2014 is set to allow for university wide training at the department level so as to ensure compliance and consistency.

Definitions

Direct Costs (200.413)

Direct costs are those costs that can be identified specifically with a particular final cost objective, such as a Federal award, or other internally or externally funded activity, or that can be directly assigned to such activities relatively easily with a high degree of accuracy. Costs incurred for the same purpose in like circumstances must be treated consistently as either direct or indirect (F&A) costs. [Back to Top]

Indirect (Facilities & Administrative (F&A)) Costs (200.56)

Indirect (F&A) costs means those costs incurred for the common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. [Back to Top]

Program Income (200.80)

Program income means the gross income earned by the non-Federal entity that is directly generated by a supported activity or earned as a result of the Federal award during the period of performance. Program income includes but is not limited to income from fees for services performed, the use of rental or real or personal property acquired under Federal awards, the sale of commodities or items fabricated under a Federal award, license fees and royalties on patents and copyrights, and principal and interest on loans made with Federal award funds. Interest earned on advances of Federal funds is not program income. Expect as otherwise provided in Federal statues, regulations, or the terms and conditions of the Federal award, program income does not include rebates, credits, discounts, and interest earned on any of them. [Back to Top]

Major Functions of an Institution (Appendix III to Part 200.A.1.)

Refers to instruction, organized research, other sponsored activities and other institutional activities as defined. [Back to Top]

Last Reviewed

05/01/2020: reviewed content

Resources

2 CFR 200 Quick Reference Guide

Uniform Guidance 2 CFR 200

48 CFR 9905 – Cost Accounting Standards (CAS) for Education Institutions

Toolkits

UF HR Toolkit – CAS Exemption Process

Training

RSH260: Cost Principles

RSH206: Cost Principles Advanced Topics

RSH212: Post Award Overview

Contacts

Cost Analysis: (352) 392-5778

Contracts and Grants Accounting: (352) 392-1235