1. Cost Allocation Sponsored by: California Association for Coordinated Transportation Presented by Rich Garrity, Senior Associate RLS & Associates, Inc. September 23-24, 2008 Sacramento, CA

2. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 2 of 175 Session Objectives 1. Develop a Standard Approach to “Cost Allocation” 2. Identify Special Issues in Cost Allocation 3. Build a Cost Allocation Model 4. Understand the Difference Between Cost and Price 5. Automating the Cost Allocation Process

3. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 3 of 175 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 175 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 175 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 175 Types of Cost Allocation  Financial Based Cost Allocation  Service Based Cost Allocation Plans

8. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 8 of 175 Financial Based Cost Allocation  Central Service Cost Allocation Plans  Indirect Cost Allocation Plans

9. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 9 of 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 Multiple Cost Allocation Needs

18. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 18 of 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 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 175 Exercise No. 1  Exercise No. 1 - Take a Minute or Two to Jot Your Ideas Down on Paper

30. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 30 of 175 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

31. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 31 of 175 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

32. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 32 of 175 Identifying Transportation Costs  Do You Disagree with this Approach? Strongly Disagree Disagree Not Sure Agree Strongly Agree

33. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 33 of 175 Identifying Transportation Costs  What is this Product Line Manager Doing Wrong? ?

34. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 34 of 175 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

35. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 35 of 175 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

36. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 36 of 175

37. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 37 of 175 Identifying Transportation Costs  Cost Analysis is a Key Element of Financial Planning  Knowing the Costs of Individual Routes or Services is Useful for Your Management Purposes and for Billing Your Client Agencies

38. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 38 of 175 Identifying Transportation Costs  The Basic Approach Recommended and Used by Successful Business Operations and Transportation Systems is Called “Full Cost Accounting”

39. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 39 of 175 Identifying Transportation Costs  To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method

40. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 40 of 175 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

41. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 41 of 175 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

42. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 42 of 175 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)

43. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 43 of 175 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

44. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 44 of 175 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. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 45 of 175 Identifying Transportation Costs  Understand HOW the Activity Creates Costs for the Transportation Program Your Transit Program DOES Something Your Transit Program BUYS Something  Use a Functional Approach to Cost Recognition

46. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 46 of 175 Identifying Transportation Costs  Functional Areas of Transportation: Operations Maintenance Non-Vehicle Maintenance General Administration

47. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 47 of 175 Identifying Transportation Costs  The Agency’s Chart of Accounts is the Basic Tool Used to Ensure that All Transportation Costs are Reflected in the Agency’s Accounting System

48. Issues in Cost Allocation Module 3

49. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 49 of 175 Special Issues in Cost Allocation  Direct and Indirect Costs  Operating and Capital Costs  Fixed and Variable Costs

50. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 50 of 175 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

51. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 51 of 175 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

52. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 52 of 175 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

53. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 53 of 175 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

54. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 54 of 175 Direct and Indirect Costs  Indirect Costs Transit Examples  501.04 – Administrative Salaries & Wages  512.12 – Other Administrative Facilities  505.02 – Telephone

55. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 55 of 175 Direct and Indirect Costs  Why Is the Identification of Indirect Costs Important?  Full Costs = Direct Costs + Allocable Portion of Indirect Costs – Rebates/Credits

56. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 56 of 175 Direct and Indirect Costs  Will All Transit Agencies Incur Indirect Costs? No  Independent Transit Authorities  Other Units That Do Not Rely on Central Services

57. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 57 of 175 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

58. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 58 of 175 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

59. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 59 of 175 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

60. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 60 of 175 Indirect Cost Allocation  You MUST Have An Indirect Cost Allocation Plan or Indirect Cost Rate in Order to Claim Reimbursement Under Federal Awards

61. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 61 of 175 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

62. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 62 of 175 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

63. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 63 of 175 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

64. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 64 of 175 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

65. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 65 of 175 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

66. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 66 of 175 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: Caltrans Subrecipient: Grantee

67. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 67 of 175 Indirect Cost Allocation  Indirect Cost Rates and Cost Allocation Plans Have Specific Documentation Requirements: Organization Chart Comprehensive Annual Financial Report Certification

68. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 68 of 175 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

69. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 69 of 175 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

70. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 70 of 175 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

71. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 71 of 175 Indirect Cost Allocation  Prescribed Methodologies Simplified Allocation Method Multiple Allocation Base Method Direct Allocation Method (Nonprofits Only) Special

72. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 72 of 175 Indirect Cost Allocation  A-122 States that Indirect Costs be Classified within Two Broad Categories: Facilities Administration  A-21 Provides Similar Classification

73. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 73 of 175 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

74. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 74 of 175 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

75. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 75 of 175 Indirect Cost Allocation Plan Preparation Guide

76. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 76 of 175 Indirect Cost Allocation Plan Preparation Guide  HHS Guide Can be Downloaded at: http://rates.psc.gov/fms/dca/asmb%20c-10.pdf

77. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 77 of 175 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

78. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 78 of 175 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

79. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 79 of 175 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

80. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 80 of 175 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).

81. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 81 of 175 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

82. Developing a Cost Allocation Model Module 4

83. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 83 of 175 Why Cost Allocation?  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

84. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 84 of 175 Why Cost Allocation? General Public Ridership More Grant Funds From Caltrans??

85. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 85 of 175 Why Cost Allocation?  To Determine How Much It Costs to Provide A Specific Transit Service $6.80 Per Trip

86. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 86 of 175 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:

87. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 87 of 175 The Cost Allocation Process  Do These Trips Cost the Same?

88. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 88 of 175 The Cost Allocation Process  Do These Trips Cost the Same?

89. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 89 of 175 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

90. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 90 of 175 Developing a Cost Allocation Model  How Do We Allocate Costs? Don’t Worry, This Process is Not Complicated! Another Program Mandate???? Aaaaaagh!!!

91. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 91 of 175 Cost Allocation Model  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

92. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 92 of 175 Overview of Cost Allocation Process Assemble Data Assign Expense Line Items Calculate Unit Costs

93. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 93 of 175 Issues in Assembling Data  Where Do We Get Cost Data?  What Time Period Should be Used?  Projected vs. Actual?

94. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 94 of 175 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

95. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 95 of 175 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

96. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 96 of 175 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

97. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 97 of 175 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

98. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 98 of 175 Exercise No. 2, Part A  Using the Provided Budget, Classify Each Line Item Expense as Either : Fixed Variable (by Hours) Variable (by Miles)

99. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 99 of 175 Exercise No. 2, 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

100. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 100 of 175 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

101. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 101 of 175 Calculation of Unit Costs  Allocated Hours Cost: Total Allocated Hours Cost ÷ Annual Projected Vehicle Hours

102. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 102 of 175 Calculation of Unit Costs  Allocated Miles Cost: Total Allocated Miles Cost ÷ Annual Projected Vehicle Miles

103. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 103 of 175 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)

104. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 104 of 175 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)

105. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 105 of 175 Calculation of Unit Costs  In Urban Systems, Fixed Expenses are Expressed as Follows: (Total Fixed Expenses ÷ Total Vehicles In Maximum Revenue Service)

106. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 106 of 175 Exercise No. 3  Calculate the Unit Rates Allocated Hours Cost Allocated Miles Cost Fixed Cost Ratio

107. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 107 of 175 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)]}

108. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 108 of 175 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

109. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 109 of 175 Completing the Computations  Congratulations … You Have Just Developed a Cost Allocation Model

110. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 110 of 175 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

111. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 111 of 175 Exercise No. 4  Using the Parameters Given, and Our Cost Model Unit Costs, We Will Calculate How Much it Costs to Provide Service to the Five Different Users of Our Transit System

112. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 112 of 175 Exercise No. 4  This Exercise is Comparable to the Process a Transit Manager Would Use to Determine What Each Agency Should Pay to Purchase Service from the Provider of Services

113. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 113 of 175 Exercise No. 4  In this Exercise, Management Has Made an Estimate of the Resources (Hours & Miles) of Service that Each User Will Consume  The Allocated Hours Cost and the Allocated Miles Cost is Applied to Each User  Fixed Costs are Then Added, Then the Three (3) Costs are Summed to Arrive at the Provider’s Fully Allocated Cost of Service  Let’s Walk Through the Computation for the First Agency User

114. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 114 of 175 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

115. Pricing Fully Allocated Services Module 5

116. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 116 of 175 Using the Model to Price Contract Services  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

117. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 117 of 175 Objectives in Our Rate Structure  Our Objectives in the Process: Simple Equitable Reflect Actual Cost of Service Provision Appropriate Use of Public Subsidies

118. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 118 of 175 Alternative Rate Structures  Per Trip  Per Mile  Per Hour  Per Passenger Mile  Per Zone

119. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 119 of 175 Price Per Trip  Price Per Trip  Computed as Follows: Fully Allocated Costs of the Service ÷ No. Projected Passenger Trips

120. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 120 of 175 Characteristics of Per Trip Pricing  Simple  Shared Ride Equity  Assumes That Are Trips Have Similar Characteristics  Works Best in Small Service Areas  Greater Risk for Service Provider  Short Trips Subsidize Long Trips

121. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 121 of 175 Price Per Mile  Price Per Mile  Computed as Follows: Fully Allocated Costs of the Service ÷ No. Projected Miles of Service

122. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 122 of 175 Characteristics of Per Mile Pricing  Customers Understand Miles  Requires Recordkeeping by Drivers  Cost Per Mile Varies Based on Route Path Driven on a Given Trip  Does Not Address Travel and Wait Time  Dead Head Mileage  Shared Ride Equity Issues

123. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 123 of 175 Price Per Hour  Price Per Hour  Computed as Follows: Fully Allocated Costs of the Service ÷ No. Projected Vehicle Hours

124. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 124 of 175 Characteristics of Per Hour Pricing  Requires Recordkeeping by Drivers  Cost Per Hour Varies Based on Route Path Driven on a Given Trip  Addresses Travel and Wait Time  Shared Ride Equity Issues

125. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 125 of 175 Price Per Passenger Mile  Price Per Passenger Mile  Computed as Follows: Fully Allocated Costs of the Service ÷ No. Projected Passenger Miles

126. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 126 of 175 Characteristics of Per Passenger Mile Pricing  Equitable  Addresses Shared Ride  Some Shared Ride Equity Issues  Generally Requires Automation to Assist in Billing Computations

127. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 127 of 175 Price Per Zone  Price Per Zone  Zones are Artificial Grids Overlaid on a Map of the Service Area

128. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 128 of 175 Price Per Zone

129. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 129 of 175 Price Per Zone  Computed as Follows: Fully Allocated Costs of the Service ÷ No. Projected Zones of Travel

130. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 130 of 175 Price Per Zone  Counting Zones  Zones are Counted on a Straight-Line Basis, Up and Down, Left or Right (No Diagonal Movement)

131. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 131 of 175 Characteristics of Zone Pricing  Sometimes Difficult to Explain  Relatively Simple to Administer  Easy to Predict Trip Cost if User is Familiar with Zone Map  Requires Initial Estimate of Zones Traveled in Order to Set Rate  Short Trips Will Generate Problems in Cost Recovery  Sensitive to Zone Size

132. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 132 of 175 Rate Setting Complexities  Ridesharing  Wait Time  Out-of-County Trips  Mixed Fleet (e.g., Different Sized Vehicles)  Brokerage: Trips Assigned to Other Providers  Contracted Services  Subsidies

133. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 133 of 175 Ridesharing  Occurs When the Clients of Two or More Agencies that Contract for Service Ride the Same Vehicle  Some Rate Structures Will Require Sub- Allocation of Costs Per Hour and Per Mile Pricing Methods

134. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 134 of 175 Ridesharing  Suggested Approaches Pro-Rate Trip Costs Based on:  Percent of Agency “A” Passengers as Percent of All Passengers (Percent x Overall Route Cost)  Calculate Trip Cost Based on Total Number of Passengers ((Overall Trip Cost ÷ No. of Passengers) x Passengers Agency “A”) Problems  Assumes Uniform Trip Characteristics  Gives Appearance of Uniform Rate

135. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 135 of 175 Wait Time  Labor Costs Associated with Wait Time is a Problem  Suggested Approach Adopt Time-Based Pricing  Cost Per Hour  Added Wait Time Charges on Top of Existing Pricing Strategy (e.g., $10.00 per Hour)

136. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 136 of 175 Out-of-Service Area Trips  Use The Cost Allocation Model as the Pricing Structure

137. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 137 of 175 Mixed Fleets  Different Operating Cost Structure of Large Buses over Minivans/Standard Vans  Options: Adopt Tiered Pricing Structure Use Uniform Structure

138. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 138 of 175 Brokered Trips  Adopt Uniform Rate Structure Despite Differential Costs/Charges Among Multiple Providers

139. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 139 of 175 Contracted Services  Fully Allocated Cost Pricing Means System Administration Costs Plus Contractor’s Rate are Incorporated Into the Pricing Structure

140. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 140 of 175 Subsidies  Deduct Subsidy Amount Prior To Calculating Average Unit Rates in Your Cost Allocation Model  Run Cost Model With and Without Subsidy so Users Understand True Cost of Service

141. Automating the Cost Allocation Process Module 5

142. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 142 of 175 Overview  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

143. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 143 of 175 Cost Allocation Model  The Course CD-ROM Contains a Generic Cost Allocation Model  Let’s Take A Look at the Model

144. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 144 of 175 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

145. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 145 of 175 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

146. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 146 of 175 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

147. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 147 of 175 Cost Allocation Model: Macro Warning

148. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 148 of 175 Cost Allocation Model: Opening Screen

149. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 149 of 175 Cost Allocation Model: Opening Screen  Opening Screen The Cost Allocation Model Will Always Open to This Screen (Rather Than Last Place) To Continue, Click the “Begin” Button This Will Advance You to the “Table of Contents” Worksheet

150. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 150 of 175 Cost Allocation Model: Table of Contents

151. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 151 of 175 Cost Allocation Model: Opening Screen  First Step – Enter System Service Data Vehicle Hours Vehicle Miles Vehicles Used in Peak Revenue Service  Click On “Step 1 – Enter ……”

152. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 152 of 175 Cost Allocation Model: Opening Screen

153. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 153 of 175 Cost Allocation Model: Enter Service Data  What Time Period For Data? Analysis of Past Performance  Historical Data Projected Costs for a Future Period  Budgeted or Projected Data Enter System Hours and Miles For Fixed Route Systems, Enter Peak Vehicles In Revenue Service

154. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 154 of 175 Cost Allocation Model: Enter Service Data:

155. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 155 of 175 Cost Allocation Model: Next Step  Once You Have Entered System Service Data, Click on “Back to Table of Contents”

156. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 156 of 175 Cost Allocation Model: Next Step

157. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 157 of 175 Cost Allocation Model: Enter Budget Data  From the Table of Contents, Click on Step 2 – Enter Budget Data for Your Transportation System  This Will Take You To a Worksheet Where You Will Enter Budget Data

158. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 158 of 175 Cost Allocation Model: Enter Budget Data

159. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 159 of 175 Cost Allocation Model: Enter Budget Data  The Chart of Accounts is Generic, Based on the FTA Uniform System of Accounts (USOA)  The Chart Requires You To Enter Data in Accordance With Four Basic Function Codes

160. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 160 of 175 Cost Allocation Model: Enter Budget Data  Four Basic Function Codes Operations Vehicle Maintenance Non-Vehicle Maintenance General Administration

161. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 161 of 175 Cost Allocation Model: Enter Budget Data  Enter Budget Data Each Function Code Has Its Own Column Columns Automatically Total for  Each Function  Each Line Item Where the Cells are Shaded, It Means That, By Definition, the System Cannot Have Expenses in That Line Item

162. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 162 of 175 Cost Allocation Model: Enter Budget Data  If You are Unfamiliar With the USOA Chart of Accounts, Help is Available  By Moving Your Mouse Cursor Over the Tiny Red Triangle on the Ride Side of the Account Column

163. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 163 of 175 Cost Allocation Model: Enter Budget Data

164. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 164 of 175 Cost Allocation Model: Compute Fully Allocated Costs  Once You Have Enter Budget Data, Click the Button on the Top of the Worksheet and Go Back to the Table of Contents  Click on “Step 3: Calculate the Fully Allocated Cost of Any Service Component”

165. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 165 of 175 Cost Allocation Model: Compute Fully Allocated Costs  A Final Data Entry Sheet Will Appear  You Will Need to Specify The Mode of Service Fixed Route Demand Response  Fixed Expenses Are Allocated Differently in Each Mode

166. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 166 of 175 Cost Allocation Model: Compute Fully Allocated Costs  You Then Enter the Estimated or Actual Vehicle Hours or Vehicle Miles  If Costing a Fixed Route Service, Also Enter the Number of Peak Vehicles Used for the Proposed Service

167. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 167 of 175 Cost Allocation Model: Compute Fully Allocated Costs

168. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 168 of 175 Cost Allocation Model: Compute Fully Allocated Costs  Once You Enter the Required Service Data, The Fully Allocated Cost Will Automatically be Computed and Shown in the Bottom Box!

169. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 169 of 175 Cost Allocation Model: Other Elements  The Model Works Because Once the Budget Information, Standardized Assignment of Each Line Item Has Already Been Established  You DO NOT Have to Assign Each Line Item to the Fixed, Variable-Hours, or Variable Miles Category

170. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 170 of 175 Cost Allocation Model: Other Elements  You Can View the Assignment of Costs  From the Table of Contents, Click on “View the Assignment of Cost Categories” Your Total Budget Information Appears An “X” Indicated How the Model Classifies Each Line Item, By Function Code

171. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 171 of 175 Cost Allocation Model: Other Elements  You Can Also View the Total Computations of Fixed and Variable Expenses  From the Table of Contents Click on “View the View the Cost Computations”

172. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 172 of 175 Cost Allocation Model: Other Elements  Finally, Some Additional Explanation, Help, or Tips are Available from All Screens  Click on the “Get Help on This Section to Get Context Sensitive Help”

173. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 173 of 175 Cost Allocation Model: Other Elements

174. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 174 of 175 Adjourn  Good Luck in Using this Information at Your Own Transit Programs  Please Complete the Course Evaluation!!

175. Cost Allocation – Rich Garrity, RLS & Associates, Inc. Page 175 of 175 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