Procedure 7.3.4 Cost Allocation

System Procedures
Chapter 7 - General Finance Provisions

Click here for a PDF copy of this procedure.

for Board Policy 7.3

Part 1. Authority. Board Policy 7.3, Financial Administration, delegates to the chancellor authority to develop procedures to implement this policy

Part 2. Guidelines. This procedure covers the allocation of both direct and indirect costs to college and university programs, activities and cost centers.

Cost information serves many purposes, both internal and external. The purpose for accumulating cost information may dictate the type and complexity of the costing methods. The costs to be allocated, both direct and indirect, will be determined by the uses of the information.

Costs may be allocated in order to price goods or services. Another purpose is to assist in the allocation of resources.


  • Direct costs are those that can be specifically identified and assigned with relative ease and with a high degree of accuracy to a program or activity. These are costs where it is practical to track actual usage by program or activity. Examples include, but are not limited to, labor and fringe benefits, telephone-related charges traced to a specific telephone account, copy costs where the number of copies are identified by cost center, and postage costs where these costs are accumulated by cost center.
  • Indirect costs, often referred to as "overhead," are costs incurred for multiple programs or activities and cannot be readily or easily identified with those programs or activities. These costs are not accumulated in units easily traceable to individual activities and therefore must be allocated using a rational and consistent method that approximates the activities' proportional benefit derived. Typical costs in this category are facility costs, such as utilities, maintenance and other related costs; costs of administrative activities such as human resources and fiscal services, and costs of executive staff, such as presidents and vice presidents.

Allocating Costs

A. All direct costs must be charged back to the related programs or activity.

B. In accordance with the auxiliary multi-year financial plan, the chancellor or a president may determine that specific programs or activities not be allocated their share of indirect costs. In such an event, the college or university must record the subsidy with a corresponding revenue and expense object code. For financial reporting purposes all costs must be recorded in the accounting system. For further assistance refer to guidelines Cost Allocation and Implementation.

Indirect Costs methods

The method used to determine an indirect cost rate to apply to activities and functions must be:

  • Reasonable;
  • Based on a documented principles and procedures;
  • Based on reliable financial and other information; and
  • Consistently applied.

Indirect costs may be applied as a single rate or in multiple rates based on the cost factors involved. These may be square footage for facilities costs, including utilities, maintenance, and depreciation where applicable. Cost for the human resources and payroll functions may be based on the number of full-time equivalent (FTE) employees, the number of staff hired during the year or some other reasonable basis. Costs for the business office function may be based on non-personnel costs incurred.

In each of these examples, the rates should be based on prior year actual data or an estimate for the current year. The rate applied normally would not change during the year unless a material event occurred to require a change.

Part 3. Costs for Contract Training/Services. Contract training/services include all instruction and related services designed and delivered to meet the needs of private and public sector companies/organizations. Such instruction includes closed enrollment and credit or non-credit provided under a contract with market pricing. For purposes of determining total program costs for customized training activities, all direct and indirect costs must be included in accordance with this procedure. The basis used must be consistent with that used for any other activities or programs where indirect costs are allocated. A multi-year financial plan approved by the president may dictate that these programs be provided a subsidy for some share of indirect costs.

Part 4. Grants. Colleges and universities receiving federal grants, other than the Carl D. Perkins Vocational and Technical Education Grant, are required to obtain a negotiated indirect cost rate from their respective cognizant federal agency.

Related Documents:

Procedure History:

Date of Implementation: 6/07/02
Date of Adoption: 6/07/02

Date & Subject of Revisions:

5/17/11 - Amended part 2, subpart B, to clarify that subsidies for auxiliary enterprises must be recorded in the accounting system. Added part 4, "Grants," specifying that for any federal grants, college or university would have to obtain a negotiated indirect cost rate from a federal agency.

07/20/09 - Technical changes; replacing the acronym MnSCU with Minnesota State Colleges and Universities.

There is no additional HISTORY for 7.03.4 at this time.