System Procedures
Chapter 7 - General Finance Provisions
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Guideline 7.3.4.1 Cost Allocation and Implementation

While these guidelines are generally not prescriptive, the journal entry instructions must be followed.

Purpose. These guidelines provide more detail to assist colleges and universities in the allocation of costs, both direct and indirect. These guidelines may be of assistance as colleges and universities develop their individual procedures to implement the system procedure.

Cost Allocation Definitions

Direct Cost - 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 phone related charges which can be tracked to a specific phone, copying costs where the number of copies for each cost center are available and postage costs where these costs are accumulated for each cost center.

For Minnesota State Colleges and Universities purposes, costs commonly identified as specific and measurable will be treated as direct costs, regardless of campus allocation methods currently being used.

Example: School A enters postal charges for each dept into C/A module on daily basis. When the C/A module is run it will process all charges. School B accumulates postal charges for a quarter, allocates the quarter total using a method based on a predetermined calculation such as "Jobs Processed". School B then enters information into system using a JG. Even though School B is using a method of allocation the item charged is still considered a "direct Cost".

Direct Costs not charged to the appropriate program or activity on an ongoing basis could be charged to the program or activity on a monthly basis. Other suggested time frames would be daily, weekly, quarterly, end of term, or annually. Each institution should include in their written procedure the time frame for the periodic charging of the direct costs.

Examples include:

Salaries and Fringe Benefits

Equipment Telephone Charges

Direct Labor

Shipping and Freight

Printing Services

Motor Pool

Indirect Cost - 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 rationale and consistent method that approximates the activities' proportional benefit derived.

Typical costs in this category are facility costs - 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. They are to be allocated back based to the appropriate cost center by applying a pre-determined method of allocation.

For Minnesota State Colleges and Universities purposes, indirect costs will not be credited back to the object code where the expense was paid. Indirect costs will be treated with a standard journal entry to the "Allocated Indirect Cost" object code (7504).

Indirect cost transactions are to be completed, at a minimum, once per year at year-end. The allocation method could be determined by applying predetermined measurement units to specific types of expenditures. The unit of allocation would be established by the institution and applied consistently to the expense.

Examples:

Administrative expenses

Executive Staff

Payroll service

Utilities

Maintenance

Cost Allocation Guidelines. The institution must establish a procedure for allocating direct and indirect cost to business activities per System Procedure 7.3.4. These procedures should include the process for determining whether such business activities will be charged for their share of direct and indirect costs or whether another source, usually the General Fund, will either partially or in total, subsidize direct and indirect costs.

Colleges and universities must allocate costs to auxiliary and Credit/Non-Credit Instruction activities and are strongly encouraged to allocate costs to other business activities such as, but not limited to, parking, child care services and various summer camps. For example, the institution may decide to charge the bookstore for direct cost items but choose to subsidize the indirect cost items. Regardless of the determination, the bookstore accounts will display, and financial reports will include, all direct and indirect costs associated with the operation.

On the accounting procedures web site is Attachment 1, "Optional Methods for Cost Allocation" (in PDF format). Attachment 1 provides suggestions of most commonly used methods/bases for allocation but any reasonable method may be used. Also provided is a discussion of alternate cost allocation concepts. These discuss the use of the step-down method of cost allocation or the simple single step method. These are both acceptable methods.

Also on the accounting procedures web site are two additional documents, Attachment 2.1 (in PDF format) - "Required Transactions - Journal Entries - Direct and Indirect Cost Allocation" and Attachment 2.2 (in PDF format) - "Required Transactions - Cost Subsidy Option - Journal Entries Direct and Indirect Cost Allocation". These attachments represent transactions that institutions need to complete for the required cost allocation process. Institutions using the Cost Allocation (C/A) and Consumable Inventory (C/I) modules can use these modules to manage transactions except for subsidies, direct or indirect, the institution chooses to apply.

Cost Allocation Implementation, Step by Step Process

Establish campus objectives for allocation.
Identify direct and indirect costs to be allocated.
Identify cost centers where direct and indirect costs are to be posted
Identify and establish allocation methods using the following guidelines:
a. Objective and reasonable
b. Based on documented principles and procedures
c. Based on reliable financial and other information
d. Applied consistently
Identify tools and methods to complete allocations
a. Consumable Inventory (C\I) module
b. Cost Allocation (C\A) module
c. Spread sheets
Establish written procedures for allocation of direct and indirect costs, to include the method and timeline for posting cost.
Create templates for allocation of direct and indirect costs.
Create applicable journal entries for direct and indirect costs not already posted or moved.
Test allocation methods to ensure the method supplies the outcome desired to meet the campus objectives. (Item one of this list)
Implement system(s)