1. Cost Allocation for Rural Transit Agencies Presented at the 18 th National Conference on Rural Public and Intercity Bus Transportation Presented by Rich Garrity, Senior Associate RLS & Associates, Inc.

2. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 2 of 144 Session Objectives 1. Defining a Standard Approach to “Cost Allocation” 2. Adopting the Concept of Full Cost Identification 3. Identifying Issues in Cost Allocation 4. Developing of a Cost Allocation Model 5. Using/Automating of the Cost Allocation Model

3. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 3 of 144 Target Audience  This Session is Designed for: Organizations That Need an Approach to Cost Individuals Service Components Transit Organizations that Provide Service Under a Purchase of Service Arrangement to Other Users/Groups Multi-Purpose Human Service Agencies Supported by Multiple Federal Grants

4. Defining a Standardized Approach to Cost Allocation Issues Module 1

5. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 5 of 144 Issues in Cost Allocation  The Term “Cost Allocation” Has Been Used to Describe a Wide Range of Allocation Needs Among Public Transit Operators

6. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 6 of 144 Issues in Cost Allocation  In Transit, “Cost Allocation” Can Refer to a Series of Distinct Management/Accounting Practices  Each Cost Allocation Problem Requires a Separate Methodology, Typically Referred to As “Cost Allocation”

7. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 7 of 144 Types of Cost Allocation  Financial Based Cost Allocation  Service Based Cost Allocation Plans

8. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 8 of 144 Financial Based Cost Allocation  Central Service Cost Allocation Plans  Indirect Cost Allocation Plans

9. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 9 of 144 Financial Based Cost Allocation #1  Central Services Cost Allocation Plan A Publicly Sponsored Transit Program Benefits from the Services of Other Governmental Units and Desires to Claim Costs Incurred by these Units Under its Various Federal Awards The Public Entity or Governmental Unit Must Prepare a “Central Services Cost Allocation Plan”

10. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 10 of 144 Financial Based Cost Allocation #2  Indirect Cost Allocation Plan An Entity (Public or Private Nonprofit) Provides Multiple Program Services Certain Overhead and Administrative Costs Incurred by the Entity Benefit All Programs and Services, Including Transit The Agency Seeks to Recoup These Costs in Their Billings to Various Federal Agencies The Entity Requires an Approved “Indirect Cost Allocation Rate” in Order for Such Costs to be Reimbursable by the Federal Government

11. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 11 of 144 Service Based Cost Allocation  Allocate Costs to Various Types/Modes/Services  Urban/Rural Cost Allocation Required by FTA  Charter Cost Allocation  Local Match Allocation Plan

12. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 12 of 144 Service Based Cost Allocation #1  Service Based Cost Allocation A Public Transit Agency Coordinates Service With Various Human Service Agencies In The Area The Transit Provider Has A Policy That Public Transit Funds Cannot Be Used To Subsidize Human Service Agency Client Transportation The Transit Agency Needs A “Fully Allocated Cost Analysis” To Determine How To Price Contract Services

13. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 13 of 144 Service Based Cost Allocation #2  Service Based Cost Allocation A Transit Agency Receives Funding Under Both FTA Section 5307 And Section 5111 FTA Expects the Grantee to Develop a Reasonable Basis for Allocating Operating Costs Between the Two Funding Sources that is Related to the Service Provided FTA Requires a “Grant Allocation Plan” to Distribute Costs to the Two Different, But Related Programs

14. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 14 of 144 Service Based Cost Allocation #3  Service Based Cost Allocation A Transit Agency Provides Charter Service in Accordance with 49 CFR part 604 The Transit Agency Must Demonstrate That it Fully Recovers the Cost of Charter Service The Agency Requires a “Charter Service Allocation Plan”

15. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 15 of 144 Service Based Cost Allocation #4  Service Based Cost Allocation A Regional Transit Authority Provides Service Over a Multi-Jurisdictional Service Area Each Participating Local Entity Must Share Responsibility for Funding a Portion of the Local Share The Authority Must Allocate Local Funding Needs In An Equitable Manner To All Participating Jurisdictions

16. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 16 of 144 Multiple Cost Allocation Needs  Some Public Transportation Projects May Require Multiple Types of Cost Allocation

17. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 17 of 144 Multiple Cost Allocation Needs

18. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 18 of 144 Multiple Cost Allocation Needs

19. Embracing the Concept of Full Cost Identification Module 2

20. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 20 of 144 Why Full Cost Identification?  Our Goal - To Answer the Questions: How Much Does the Transportation Service Cost? How are We Going to Pay For It?  In Order to Achieve These Goals, Agency and Program Managers Must Use Financial Planning

21. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 21 of 144 Why Full Cost Identification?  Assess Performance  Measure Progress Toward the Achievement of Goals and Objectives  Consider Actions Which May Change the Course of Future Events  Modify Policies, Procedures, and Processes

22. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 22 of 144 Why Full Cost Identification?  Make Operational Changes, Including Those Leading To: Service Expansion, Reduction, Or Cessation Increases Or Decreases In Services, Revenues, And Staff Changes Or Modifications In Procedures Or Other Activities (Such As Marketing Or Public Relations)

23. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 23 of 144 Why Full Cost Identification?  Transportation Systems Need Complete and Accurate Financial Data in Order to: Manage the System So That its Goals and Objectives are Met Efficiently

24. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 24 of 144 Why Full Cost Identification? Know the True Cost of Operating the System so that Costs May be Billed or Allocated Appropriately to the System's Users Report to the Funding Sources or Purchasing Agencies How Money was Spent, What Revenues were Realized, and the Financial Status of the Organization

25. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 25 of 144 Issues in Full Cost Accounting  Lack of Sufficient Account Detail In Organizational Accounting Systems  Failure to Capture and/or Allocate Agency Indirect or Overhead Costs  There Is A Lack Of Common Definitions For Accounts (Non-FTA Programs)

26. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 26 of 144 Issues in Full Cost Accounting  Lack of Common Definition of Service  Failure to Capture Service Unit Data  Blended Program Expenditures  Use of Capitated Payments

27. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 27 of 144 Financial Planning: Why is This Important?  Planning for Change Changes We Institute Changes Forced Upon Us

28. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 28 of 144 Financial Planning: Why is This Important?  Consider the Example: A Manufacturer Produces Two Consumer Products What are Some of the Costs That Will Be Incurred by this Company?

29. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 29 of 144 Identifying Transportation Costs  Now Consider …. Since the Ingredients Used are Basically the Same as Product 2, the Product 1 Manager Opts to Include them all In Product 2 and Does Not Include Them in Calculating His Cost Since Product 1 is Delivered on the Same Trucks as Product 2, the Product 1 Manager Does Not Include Them in Calculating His Cost

30. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 30 of 144 Identifying Transportation Costs  Product 1 Research, Development, & Testing Purchase of Ingredients Production Quality Control Distribution Marketing Profit  Product 2 Research, Development, & Testing Purchase of Ingredients Production Quality Control Distribution Marketing Profit

31. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 31 of 144 Identifying Transportation Costs  Do You Disagree with this Approach? Strongly Disagree Disagree Not Sure Agree Strongly Agree

32. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 32 of 144 Identifying Transportation Costs  What is this Product Line Manager Doing Wrong? ?

33. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 33 of 144 Identifying Transportation Costs  Let’s Talk About a Transportation Related Situation What About this Example?  A Transportation Provider Reports Their Transportation Expenses as Follows: Fuel Maintenance Insurance

34. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 34 of 144 Identifying Transportation Costs  Financial Planning Begins by Establishing (or Reaffirming) Overall Strategies and Goals Mission Statement  WHAT Will the Transit Service Do?  HOW Will the System Operate?  This Starts the Financial Planning Process

35. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 35 of 144

36. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 36 of 144 Identifying Transportation Costs  The Basic Approach Recommended and Used by Successful Business Operations and Transportation Systems is Called “Full Cost Accounting”

37. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 37 of 144 Identifying Transportation Costs  To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method

38. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 38 of 144 Identifying Transportation Costs  To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method

39. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 39 of 144 Identifying Transportation Costs  Using “Full Cost Accounting” Means that the Total Costs of Providing Transportation Services are Considered  Total Costs Include Any Commitment or Use of Time, Money, Physical Resources, and Other Assets of the Agency in the Delivery of Transportation Services

40. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 40 of 144 Identifying Transportation Costs  In Full Cost Accounting, a Value is Given to These Commitments Whether or Not They Result in Immediate Out-of-Pocket Expenditures

41. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 41 of 144 Identifying Transportation Costs  Full Cost Accounting Will: Assist the Manager in Understanding the TRUE Cost of Providing Service Determine Needed Revenues -- Immediate and Long-Term Allow Allocation of Costs to System Users Compare Costs of Service with Other Systems (Peer Analysis)

42. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 42 of 144 Identifying Transportation Costs  Full Cost Accounting Will Assist in Making Decisions to Participate in a Coordinated Services Program Recognize Value of Donations (Time, Materials, and Supplies) Permit Accurate Financial and Performance Monitoring/Evaluation

43. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 43 of 144 Identifying Transportation Costs  Analyze the Various Functions and Activities that Your Transportation Program Carries Out on a Day-to-Day Basis  Management’s Responsibility is to Identify All Activities That Your Agency Performs in the Delivery of Transportation Services

44. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 44 of 144 Identifying Transportation Costs  Analyze the Various Functions and Activities that Your Transportation Program Carries Out on a Day-to-Day Basis  Management’s Responsibility is to Identify All Activities That Your Agency Performs in the Delivery of Transportation Services

45. Issues in Cost Allocation Module 3

46. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 46 of 144 Special Issues in Cost Allocation  Direct and Indirect Costs  Operating and Capital Costs  Fixed and Variable Costs

47. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 47 of 144 Direct and Indirect Costs  Direct Costs Those Expenses Incurred by the Grantee That Are Directly Related and Strictly Benefit Only the Public Transportation Program Generic Examples:  Compensation of Employees for the Time Devoted and Identified Specifically to the Performance of the Grant

48. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 48 of 144 Direct and Indirect Costs  Direct Costs Generic Examples:  Cost of Materials Acquired, Consumed, or Expended Specifically for the Purpose of Providing Public Transit Service  Equipment and Other Approved Capital Expenditures  Travel Expenses Incurred Specifically to Carry Out the Award

49. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 49 of 144 Direct and Indirect Costs  Direct Costs Transit Examples:  501.01 – Operator's Salaries & Wages  501.03 – Dispatcher's Salaries & Wages  503.05 – Contract Vehicle Maintenance  504.01 – Fuel & Lubricants Consumed  504.02 – Tires and Tubes Consumed  508.00 – Purchased Transportation

50. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 50 of 144 Direct and Indirect Costs  Indirect Costs Generic Examples  Certain Central Service Costs  General Administration of the Organization  Accounting and Personnel Services Performed Within the Organization the Delivers Public Transit Services  Costs of Operating and Maintaining Facilities

51. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 51 of 144 Direct and Indirect Costs  Indirect Costs Transit Examples  501.04 – Administrative Salaries & Wages  512.12 – Other Administrative Facilities  505.02 – Telephone

52. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 52 of 144 Direct and Indirect Costs  Why Is the Identification of Indirect Costs Important?  Full Costs = Direct Costs + Allocable Portion of Indirect Costs – Rebates/Credits

53. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 53 of 144 Direct and Indirect Costs  Will All Transit Agencies Incur Indirect Costs? No  Independent Transit Authorities  Other Units That Do Not Rely on Central Services

54. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 54 of 144 Direct and Indirect Costs  How Can We Tell if We Need An Indirect Cost Allocation Plan? If a Transit System Incurs Costs That Are: Accumulated in the Accounts of Another Department or Division of the Organizations Incurred by Nonprofit Agency Management That Benefits Multiple Programs

55. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 55 of 144 Direct and Indirect Costs  Indirect Costs Must Be Allocated in a Manner Consistent with Procedures Set Forth in OMB Circulars A-87 or A-122

56. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 56 of 144 Direct and Indirect Costs  How are Indirect Costs Claimed Under Federal Awards? OMB Circular A-87, Attachment A, “General Principles for Determining Allowable Costs,” paragraph C3(d) states: Where an accumulation of indirect costs will ultimately result in charges to a Federal award, a cost allocation plan will be required OMB Circular A-122 contains similar language

57. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 57 of 144 Indirect Cost Allocation  You MUST Have An Indirect Cost Allocation Plan or Indirect Cost Rate in Order to Claim Reimbursement Under Federal Awards

58. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 58 of 144 Indirect Cost Allocation  Indirect Cost Rate Proposals or Cost Allocation Plans Must Either: Be Submitted to a Federal Cognizant Agency; or Be Maintained on File by the Governmental Unit  Similar Rules Apply to Nonprofits

59. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 59 of 144 Indirect Cost Allocation  "Cognizant Agency" Means the Federal Agency Responsible for Reviewing, Negotiating, and Approving Cost Allocation Plans or Indirect Cost Proposals Developed on Behalf of All Federal Agencies  OMB Publishes a Listing of Cognizant Agencies

60. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 60 of 144 Indirect Cost Allocation  Negotiation and Approval of Rates Generally, the Federal Agency with the Largest Dollar Value of Awards to the Nonprofit Organization Will be Designated as the Cognizant Agency for the Negotiation and Approval of the Indirect Cost Rates The Designation Is Not Changed Unless There is a Major Long-Term Shift in the Dollar Volume of Federal Awards

61. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 61 of 144 Indirect Cost Allocation  In No Case Shall an Indirect Cost Allocation Plan or Indirect Cost Rate Proposal Be Acceptable Unless it Has Been Certified by the Governmental Unit Using the Certificate of Cost Allocation Plan or Certificate of Indirect Costs

62. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 62 of 144 Indirect Cost Allocation  The Certification Must be Signed on Behalf of the Governmental Unit by an Individual at a Level No Lower than Chief Financial Officer of the Governmental Unit that Submits the Proposal or Component Covered by the Proposal

63. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 63 of 144 Indirect Cost Allocation  Where a Local Government Only Receives Funds as a Subrecipient, the Primary Recipient Negotiates the Indirect Cost Rates and/or Monitors the Subrecipient's Plan  Section 5311 Primary Recipient: State DOT Subrecipient: Grantee

64. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 64 of 144 Indirect Cost Allocation  Indirect Cost Rates and Cost Allocation Plans Have Specific Documentation Requirements: Organization Chart Comprehensive Annual Financial Report Certification

65. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 65 of 144 Indirect Cost Allocation  Indirect Cost Rates and Cost Allocation Plans Where an Organization’s “Central Services” are Included Must: Identify the Unit Rendering the Service and the Operating Agencies Receiving the Service Detail the Items of Expense Included in the Cost of the Service

66. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 66 of 144 Indirect Cost Allocation  Indirect Cost Allocation Plans Must: Describe the Method Used to Distribute the Cost of the Service to Benefitted Agencies Contain a Summary Schedule Showing the Allocation of Each Service to the Specific Benefitted Agencies

67. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 67 of 144 Indirect Cost Allocation  Guidelines for Nonprofits are Similar to Those for Government Agencies  Procedures for Nonprofits Are Prescribed in OMB Circular A-122, Attachment A, Paragraph C  Procedures for Educational Institutions Different – Consult A-21

68. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 68 of 144 Indirect Cost Allocation  Prescribed Methodologies Simplified Allocation Method Multiple Allocation Base Method Direct Allocation Method (Nonprofits Only) Special

69. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 69 of 144 Indirect Cost Allocation  A-122 States that Indirect Costs be Classified within Two Broad Categories: Facilities Administration  A-21 Provides Similar Classification

70. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 70 of 144 Indirect Cost Allocation  A Nonprofit Organization Which Has Not Previously Established an Indirect Cost Rate with a Federal Agency Shall Submit its Initial Indirect Cost Proposal Immediately After the Organization is Advised that an Award will be Made and, in No Event, Later Than Three Months After the Effective Date of the Award

71. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 71 of 144 Indirect Cost Allocation  Use of a Standardized Chart of Accounts Is Essential to Indirect Cost Allocation Modify or Expand the Chart of Accounts to Meet Needs

72. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 72 of 144 Indirect Cost Allocation Plan Preparation Guide

73. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 73 of 144 Indirect Cost Allocation Plan Preparation Guide  HHS Guide Can be Downloaded at: http://rates.psc.gov/fms/dca/asmb%20c-10.pdf

74. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 74 of 144 Capital vs. Operating Costs  Operating Costs are Consumed in Less Than One Year (e.g., Wages, Fuel) and Generally Have a Unit Acquisition Cost of Less Than $300.00  Capital Costs are Expenses for Long- Term Assets (e.g., Vehicles, Garages)  Definitions May be Set by the Grantor Agency

75. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 75 of 144 Capital vs. Operating Costs  Under the Section 5311 Program, Capital Expenses are Defined in FTA Circular 9040.1F, Chapter III, Paragraph 2e(2)  This Document Can Be Obtained at http://www.fta.dot.gov/documents/FTA_C _9040.1F.pdf

76. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 76 of 144 Capital vs. Operating Costs  Defining Capital Costs is Important, as OMB Circular A-87 States that Depreciation Will Exclude : Any Portion of the Cost of Buildings and Equipment Borne by or Donated by the Federal Government Irrespective of Where Title was Originally Vested or Where it Presently Resides

77. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 77 of 144 Capital vs. Operating Costs  What Does this Mean? If the Cost of the Vehicle (Asset) Was Paid for by a Federal Program, You May NOT Include Depreciation of that Asset in Your Charges to Other Federal Programs in the Cost of Service Provision  Source: OMB Circular A-87, Attachment B, Paragraph 15c(2); and OMB Circular A-122, Attachment B, Paragraph 11c(2).

78. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 78 of 144 Fixed vs. Variable Expenses  Variable Costs Change Relative to the Amount of Service Provided (e.g., Drivers' Wages)  Fixed Costs Do Not Vary with the Amount of Service Provided (e.g., Administrative Salaries) Fixed Variable Total Output Cost

79. Developing a Cost Allocation Model Module 4

80. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 80 of 144 Capital vs. Operating Costs  Fad or Management Necessity? An Understanding of Fully Allocated Costs Provides Management with:  The Ability to Accurately Price Services Provided Under Contract  An Assessment Tool to Evaluate Changes in Service For Example, the Cost of Adding or Losing a Contract Service Could Be Estimated

81. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 81 of 144 Why Cost Allocation? General Public Ridership More Grant Funds From FTA??

82. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 82 of 144 Why Cost Allocation?  To Determine How Much It Costs to Provide A Specific Transit Service $6.80 Per Trip

83. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 83 of 144 The Cost Allocation Process  Why Do We Need a Model to Determine Cost? Why Can’t We Simply Divide Total System Cost by Total System Miles? Or Total System Cost by Total System Hours? Consider the Following:

84. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 84 of 144 The Cost Allocation Process  Do These Trips Cost the Same?

85. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 85 of 144 The Cost Allocation Process  Do These Trips Cost the Same?

86. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 86 of 144 The Cost Allocation Process  Transportation Costs are Driven by Two Critical Factors: Time AND Distance  Our Model Must Take Both Factors Into Account When Costing Transportation Services

87. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 87 of 144 Developing a Cost Allocation Model  How Do We Allocate Costs? Don’t Worry, This Process is Not Complicated! Another Program Mandate???? Aaaaaagh!!!

88. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 88 of 144 Capital vs. Operating Costs  Cost Allocation Assumes: Total System Costs Can be Allocated to Service Based on the Level of Service Provided System Average Unit Costs Can Be Used to Estimate Service Costs

89. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 89 of 144 Overview of Cost Allocation Process Assemble Data Assign Expense Line Items Calculate Unit Costs

90. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 90 of 144 Issues in Assembling Data  Where Do We Get Cost Data?  What Time Period Should be Used?  Projected vs. Actual?

91. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 91 of 144 Required Data  Twelve (12) Months Actual or Projected Transit Expense Data Expense Data Will be Classified as Either:  Fixed Expense  Variable Expense  Service Data Vehicle-Miles Vehicle-Hours Passenger Trips

92. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 92 of 144 Assigning Cost to Categories  Cost Allocation Involves Taking Each Expense Line Item and Assigning It to Either the Fixed or Variable Category  Variable Expenses are Further Broken Down as Varying Either by: Hour Mile

93. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 93 of 144 Assigning Cost to Categories  Fixed Costs are Those Costs that Will Not Change As a Result of an Increase or Decrease in Service Levels  Variable Expenses are Those Costs that Will Change if There is a Change in Service Levels

94. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 94 of 144 Assigning Cost to Categories  There are No Hard and Fast Rules…..But: Project Administration Costs are Almost Always Fixed Understand the Basis of Each Cost Item and Assign Accordingly Be Logical BE CONSISTENT

95. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 95 of 144 Exercise No. 1, Part A  Using the Provided Budget, Classify Each Line Item Expense as Either : Fixed Variable (by Hours) Variable (by Miles)

96. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 96 of 144 Exercise No. 1, Part B  Now that We Have Classified Each Expense Line Item, We Want to Total All Fixed Expenses, All Variable - Hours Expenses, and All Variable - Miles Expenses

97. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 97 of 144 Calculation of Unit Costs  We Now Have a Total of Fixed and Variable Costs  We Need to Calculate Our Unit Costs. There are Three (3) Calculations: Allocated Hours Cost Allocated Miles Cost Allocated Fixed Expense  Demand Response: Ratio  Fixed Route: Fixed Cost Per Vehicle

98. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 98 of 144 Calculation of Unit Costs  Allocated Hours Cost: Total Allocated Hours Cost ÷ Annual Projected Vehicle Hours

99. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 99 of 144 Calculation of Unit Costs  Allocated Miles Cost: Total Allocated Miles Cost ÷ Annual Projected Vehicle Miles

100. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 100 of 144 Calculation of Unit Costs  What Do We Do With Fixed Expenses?  There Are Different Approaches - For Most Demand Response Systems in Rural Areas, Fixed Expenses are Expressed as a Percentage or Ratio of Allocated Variable Expenses (Hours Cost + Miles Cost)

101. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 101 of 144 Calculation of Unit Costs  In Rural Systems, Fixed Expenses are Expressed as a Percent of Variable Expenses: Fixed Cost Factor = Total Fixed Expenses ÷ (Total Allocated Hours Expenses + Total Allocated Miles Expenses)

102. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 102 of 144 Calculation of Unit Costs  In Urban Systems, Fixed Expenses are Expressed as Follows: (Total Fixed Expenses ÷ Total Vehicles In Maximum Revenue Service)

103. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 103 of 144 Exercise No. 2  Calculate the Unit Rates Allocated Hours Cost Allocated Miles Cost Fixed Costs  Cost Per Peak Period Bus  Fixed Cost Ratio

104. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 104 of 144 Completing the Computations  The Fully Allocated Cost of Service is Equal to: {(Total Annual Projected Hours x Allocated Hours Cost) + (Total Annual Projected Miles x Allocated Miles Cost)} + {Fixed Cost Factor x [(Total Annual Projected Hours x Total Allocated Hours Cost) + (Total Annual Projected Miles x Allocated Miles Cost)]}

105. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 105 of 144 Completing the Computations  To Test our Unit Average Costs, Plug in Total Annual Projected Hours and Total Annual Projected Miles into the Above Equation to Ensure the Result = Total Annual Expenses

106. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 106 of 144 Completing the Computations  Congratulations … You Have Just Developed a Cost Allocation Model

107. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 107 of 144 Applying the Model  Now that We Have Our Model, We Will Put it to Work We'll Sort Through The X's and O's By Looking At Allocating the Costs of Various System Users

108. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 108 of 144 Review  We Built a Cost Allocation Model that Uses Generally Accepted Accounting Principles to Allocate Transportation Costs Among Various Agency Users  We Learned How to Use the Model to Determine or Project the Costs for Individual Agency Users

109. Use and Automation of the Cost Allocation Model Module 5

110. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 110 of 144 Using the Model  We Will Examine the Ways in Which A Transit System Can Use Fully Allocated Costs to Develop Unit Pricing for Contracted Services Various Types of “Unit” Costs Pro’s and Con’s of Each Unit Cost Type  We Will Calculate Various Units Costs for Our Transit System

111. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 111 of 144 Using the Model  Are Our Contract Rates Fully Recovering Our Costs of Providing Service?  What Does Route 1 Cost Our Agency to Operate?  What Rate Should We Use in Providing Service Under Contract Next Year?

112. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 112 of 144 Exercise No. 3  Using the Parameters Given, and Our Cost Model Unit Costs, Calculate Answers to the Three Problems Facing Management

113. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 113 of 144 Automation of the Process  As You Can See from the Cost Allocation Model Built Earlier in this Workshop Cost Allocation Can be Repeated on an Annual Basis The Process Lends Itself to Spreadsheet Application

114. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 114 of 144 Generic Cost Allocation Model  The Course CD-ROM Contains a Generic Cost Allocation Model  Let’s Take A Look at the Model

115. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 115 of 144 Generic Cost Allocation Model  Copy the File “Cost Allocation Model.xls” to a Folder on Your Computers Local or Network Drive  Start MS Excel  Navigate to Folder and Open the Model

116. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 116 of 144 Generic Cost Allocation Model  Cautions Excel Will Generate One of Two Messages, Depending on Your Security Level  Excel Will Not Permit You to Open the File Action:  Reset Security Level to Medium  From the Menu, Click on Tools, Options, Security Tab, Click on the Macro Security Button and Select Medium

117. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 117 of 144 Generic Cost Allocation Model  Cautions Once Set to Medium, Excel Will Permit You to Open the File, But Will Generate a Warning Message You Must Click on “Enable Macros” in Order for the Cost Allocation Model to Work You are Not Jeopardizing Your Computer or Network Security

118. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 118 of 144 Adjourn  Good Luck in Using this Information at Your Own Transit Programs

119. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 119 of 144 Presenter Richard Garrity, Senior Associate RLS & Associates, Inc. 3131 S. Dixie Highway, Suite 545 Dayton, OH 45439 (937) 299-5007 Direct Line: (910) 328-5770 richg@cris.com