1. Cost Allocation Techniques presented by Richard Garrity, Senior Associate RLS & Associates, Inc. Presented at: 17 th National Rural Public and Intercity Bus Transportation Conference October 22 - 25, 2006 Stevenson, WA

2. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 2 of 72 Session Objectives 1. Identify Range of “Cost Allocation” Issues in Transit 2. Understand Concept of Full Cost Identification 3. Define Methods for Computing Fully Allocated Costs 4. Review Methods to Convert FAC to “Price”

3. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 3 of 72 Target Audience This Workshop is Designed for: This Workshop is Designed for: Transit Organizations that Provide Service Under a Purchase of Service Arrangement to Other Users/Groups 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 Multi-Purpose Human Service Agencies Supported by Multiple Federal Grants

4. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 4 of 72 What is Cost Allocation? In Transit, “Cost Allocation” Can Refer to a Series of Distinct Management/Accounting Practices In Transit, “Cost Allocation” Can Refer to a Series of Distinct Management/Accounting Practices Each Requires a Separate Methodology, Yet all are Technically Cost Allocation Each Requires a Separate Methodology, Yet all are Technically Cost Allocation

5. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 5 of 72 Types of Cost Allocation Financial Based Cost Allocation Financial Based Cost Allocation Service Based Cost Allocation Plans Service Based Cost Allocation Plans

6. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 6 of 72 Types of Cost Allocation Financial Based Cost Allocation Financial Based Cost Allocation Central Service Cost Allocation Plans Central Service Cost Allocation Plans Indirect Cost Allocation Plans Indirect Cost Allocation Plans

7. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 7 of 72 Types of Cost Allocation Central Services Cost Allocation Plan 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 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” The Public Entity or Governmental Unit Must Prepare a “Central Services Cost Allocation Plan”

8. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 8 of 72 Types of Cost Allocation Indirect Cost Allocation Plan Indirect Cost Allocation Plan An Entity (Public or Private Nonprofit) Provides Multiple Program Services An Entity (Public or Private Nonprofit) Provides Multiple Program Services Certain Overheard and Administrative Costs Incurred by the Entity Benefit All Programs and Services, Including Transit Certain Overheard 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 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 The Entity Requires an Approved “Indirect Cost Allocation Rate” in Order for Such Costs to be Reimbursable by the Federal Government

9. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 9 of 72 Types of Cost Allocation Service Based Cost Allocation Service Based Cost Allocation Allocate Costs to Various Types/Modes/Services Allocate Costs to Various Types/Modes/Services Urban/Rural Cost Allocation Urban/Rural Cost Allocation Required by FTA Required by FTA Charter Cost Allocation Charter Cost Allocation Local Match Allocation Plan Local Match Allocation Plan

10. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 10 of 72 Types of Cost Allocation Service Based Cost Allocation Service Based Cost Allocation A Public Transit Agency Coordinates Service With Various Human Service Agencies In The Area 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 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 The Transit Agency Needs A “Fully Allocated Cost Analysis” To Determine How To Price Contract Services

11. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 11 of 72 Types of Cost Allocation Service Based Cost Allocation Service Based Cost Allocation A Transit Agency Receives Funding Under Both FTA Section 5307 And Section 5111 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 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 FTA Requires a “Grant Allocation Plan” to Distribute Costs to the Two Different, But Related Programs

12. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 12 of 72 Types of Cost Allocation Service Based Cost Allocation Service Based Cost Allocation A Transit Agency Provides Charter Service in Accordance with 49 CFR part 604 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 Transit Agency Must Demonstrate That it Fully Recovers the Cost of Charter Service The Agency Requires a “Charter Service Allocation Plan” The Agency Requires a “Charter Service Allocation Plan”

13. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 13 of 72 Types of Cost Allocation Service Based Cost Allocation Service Based Cost Allocation A Regional Transit Authority Provides Service Over a Multi-Jurisdictional Service Area 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 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 The Authority Must Allocate Local Funding Needs In An Equitable Manner To All Participating Jurisdictions

14. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 14 of 72 Multiple Cost Allocation Needs Some Public Transportation Projects May Require Multiple Types of Cost Allocation Some Public Transportation Projects May Require Multiple Types of Cost Allocation

15. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 15 of 72 Example of Public Agency With Need for Multiple Allocation Strategies

16. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 16 of 72 Example of Nonprofit Agency With Need for Multiple Allocation Strategies

17. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 17 of 72 Identifying Transportation Costs Our Goal - To Answer the Questions: Our Goal - To Answer the Questions: How Much Does the Transportation Service Cost? How Much Does the Transportation Service Cost? When We Sell Transportation Services, What Should We Charge? When We Sell Transportation Services, What Should We Charge? In Order to Achieve These Goals, Agency and Program Managers Must Use Financial Planning In Order to Achieve These Goals, Agency and Program Managers Must Use Financial Planning

18. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 18 of 72 Financial Planning: Why is This Important? Transportation Systems Need Complete and Accurate Financial Data in Order to: Transportation Systems Need Complete and Accurate Financial Data in Order to: Manage the System So That its Goals and Objectives are Met Efficiently Manage the System So That its Goals and Objectives are Met Efficiently To Accurately Evaluate Alternative Service Delivery Proposals To Accurately Evaluate Alternative Service Delivery Proposals

19. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 19 of 72 Financial Planning: Why is This Important? Know the True Cost of Operating the System so that Costs May be Billed or Allocated Appropriately to the System's Users 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 Report to the Funding Sources or Purchasing Agencies How Money was Spent, What Revenues were Realized, and the Financial Status of the Organization

20. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 20 of 72 Financial Planning: Why is This Important? Planning for Change Planning for Change Changes We Institute Changes We Institute Changes Forced Upon Us Changes Forced Upon Us

21. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 21 of 72 Framework for Financial Planning Financial Planning Begins by Establishing (or Reaffirming) Overall Strategies and Goals Financial Planning Begins by Establishing (or Reaffirming) Overall Strategies and Goals Mission Statement Mission Statement WHAT Will the Transit Service Do? WHAT Will the Transit Service Do? HOW Will the System Operate? HOW Will the System Operate? This Starts the Financial Planning Process This Starts the Financial Planning Process

22. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 22 of 72 Framework for Financial Planning Four (4) Fundamental Financial Management Processes Four (4) Fundamental Financial Management Processes Performance Evaluation Process Performance Evaluation Process Budget Process Budget Process Accounting System Accounting System Financial Reporting Financial Reporting All are Inter-Related All are Inter-Related

23. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 23 of 72 Framework for Financial Planning

24. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 24 of 72 Framework for Financial Planning Cost Analysis is a Key Element of Financial Planning 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 Knowing the Costs of Individual Routes or Services is Useful for Your Management Purposes and for Billing Your Client Agencies

25. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 25 of 72 Framework for Financial Planning The Basic Approach Recommended and Used by Successful Business Operations and Transportation Systems is Called “Full Cost Accounting” The Basic Approach Recommended and Used by Successful Business Operations and Transportation Systems is Called “Full Cost Accounting”

26. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 26 of 72 Framework for Financial Planning To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method (Model) To Use this Approach Requires an Understanding of Basic Cost Concepts and the Use of a Consistent Costing Method (Model)

27. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 27 of 72 Full Cost Accounting Using “Full Cost Accounting” Means that the Total Costs of Providing Transportation Services are Considered 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 Total Costs Include Any Commitment or Use of Time, Money, Physical Resources, and Other Assets of the Agency in the Delivery of Transportation Services

28. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 28 of 72 Full Cost Accounting In Full Cost Accounting, a Value is Given to These Commitments Whether or Not They Result in Immediate Out- of-Pocket Expenditures In Full Cost Accounting, a Value is Given to These Commitments Whether or Not They Result in Immediate Out- of-Pocket Expenditures

29. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 29 of 72 Tools to Assist in Full Cost Accounting 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 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

30. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 30 of 72 Special Issues in Full Cost Accounting Operating and Capital Costs Operating and Capital Costs Fixed and Variable Costs Fixed and Variable Costs Direct and Shared Costs Direct and Shared Costs

31. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 31 of 72 Special Issues in Full Cost Accounting Cost Principles Cost Principles State and Local Governments State and Local Governments OMB Circular A-87 OMB Circular A-87 http://www.whitehouse.gov/OMB/circu lars/a087/a087-all.html http://www.whitehouse.gov/OMB/circu lars/a087/a087-all.html Nonprofits Nonprofits OMB Circular A-122 OMB Circular A-122 http://www.whitehouse.gov/OMB/circu lars/122/a122.html http://www.whitehouse.gov/OMB/circu lars/122/a122.html

32. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 32 of 72 Operating and Capital Cost 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 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) Capital Costs are Expenses for Long- Term Assets (e.g., Vehicles, Garages) Definitions May be Set by the Grantor Agency Definitions May be Set by the Grantor Agency

33. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 33 of 72 Operating and Capital Cost Under FTA Programs, Capital Expenses are Defined in FTA Circulars Under FTA Programs, Capital Expenses are Defined in FTA Circulars These Documents Can Be Obtained at: These Documents Can Be Obtained at: http://www.fta.dot.gov/legal/guidance/circulars/9000 /

34. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 34 of 72 Operating and Capital Cost Defining Capital Costs is Important, as OMB Circular A-87 States that Depreciation Will Exclude: 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 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

35. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 35 of 72 Operating and Capital Cost What Does this Mean? 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 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).

36. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 36 of 72 Variable and Fixed Expenses Variable Costs Change Relative to the Amount of Service Provided (e.g., Drivers' Wages) 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 Costs Do Not Vary with the Amount of Service Provided (e.g., Administrative Salaries) Fixed Variable Total Output Cost

37. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 37 of 72 Direct and Indirect Costs Direct Costs are Those Expenses Incurred by the Transit System that are Directly Related and Strictly Benefit Only the Transportation Program Direct Costs are Those Expenses Incurred by the Transit System that are Directly Related and Strictly Benefit Only the Transportation Program

38. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 38 of 72 Direct and Indirect Costs Indirect Costs are Those Costs That Have Been Incurred for Common or Joint Purposes Indirect Costs are Those Costs That Have Been Incurred for Common or Joint Purposes These Costs Benefit More than One Cost Objective/Program and Cannot be Readily Identified with a Particular Final Cost Objective Without Effort Disproportionate to the Results Achieved These Costs Benefit More than One Cost Objective/Program and Cannot be Readily Identified with a Particular Final Cost Objective Without Effort Disproportionate to the Results Achieved

39. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 39 of 72 Direct and Indirect Costs The Essential Difference is the Degree of Ease with Which a Cost Can be Readily Assigned to a Particular Cost Objective with a High Degree of Accuracy The Essential Difference is the Degree of Ease with Which a Cost Can be Readily Assigned to a Particular Cost Objective with a High Degree of Accuracy

40. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 40 of 72 Direct and Indirect Costs There are No Universal Rules for Classifying Costs as Direct or Indirect Under Every Accounting System There are No Universal Rules for Classifying Costs as Direct or Indirect Under Every Accounting System But You Must be Consistent But You Must be Consistent

41. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 41 of 72 Recommendations for Preparing Indirect Cost Plans

42. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 42 of 72 HHS Guide Can be Downloaded at: HHS Guide Can be Downloaded at: http://www.hhs.gov/grantsnet/state/ http://www.hhs.gov/grantsnet/state/ Recommendations for Preparing Indirect Cost Plans

43. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 43 of 72 Cost Allocation Fad or Management Necessity? Fad or Management Necessity? An Understanding of Fully Allocated Costs Provides Management with: An Understanding of Fully Allocated Costs Provides Management with: The Ability to Accurately Price Services Provided Under Contract The Ability to Accurately Price Services Provided Under Contract An Assessment Tool to Evaluate Changes in Service An Assessment Tool to Evaluate Changes in Service For Example, the Cost of Adding or Losing a Contract Service Could Be Estimated For Example, the Cost of Adding or Losing a Contract Service Could Be Estimated

44. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 44 of 72 Why Cost Allocation? Transit Ridership More Transit Funds From FTA???

45. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 45 of 72 Why Cost Allocation? To Determine How Much It Costs to Provide A Specific Transit Service To Determine How Much It Costs to Provide A Specific Transit Service $6.80 Per Trip

46. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 46 of 72 The Cost Allocation Process Why Do We Need a Model to Determine Cost? Why Do We Need a Model to Determine Cost? Why Can’t We Simply Divide Total System Cost by Total System Miles? Why Can’t We Simply Divide Total System Cost by Total System Miles? Or Total System Cost by Total System Hours? Or Total System Cost by Total System Hours? Consider the Following: Consider the Following:

47. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 47 of 72 The Cost Allocation Process Do These Trips Cost the Same? Do These Trips Cost the Same?

48. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 48 of 72 The Cost Allocation Process Do These Trips Cost the Same? Do These Trips Cost the Same?

49. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 49 of 72 The Cost Allocation Process Transportation Costs are Driven by Two Critical Factors: Transportation Costs are Driven by Two Critical Factors: Time AND Distance Time AND Distance Our Model Must Take Both Factors Into Account When Costing Transportation Services Our Model Must Take Both Factors Into Account When Costing Transportation Services

50. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 50 of 72 Developing a Cost Allocation Model How Do We Allocate Costs? Don’t Worry, This Process is Not Complicated! This is Not a Mandate, But a Useful Management Tool How Do We Allocate Costs? Don’t Worry, This Process is Not Complicated! This is Not a Mandate, But a Useful Management Tool Another Program Mandate???? Aaaaaagh!!!

51. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 51 of 72 The Cost Allocation Process Cost Allocation Assumes: Cost Allocation Assumes: Total System Costs Can be Allocated to Service Based on the Level of Service Provided 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 System Average Unit Costs Can Be Used to Estimate Service Costs

52. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 52 of 72 Overview of the Cost Allocation Process Assemble Data Assign Expense Line Items Calculate Unit Costs

53. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 53 of 72 Issues in Assembling Data Where Do We Get Cost Data? Where Do We Get Cost Data? What Time Period Should be Used? What Time Period Should be Used? Projected vs. Actual? Projected vs. Actual?

54. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 54 of 72 Data Required Twelve (12) Months Actual or Projected Transit Expense Data Twelve (12) Months Actual or Projected Transit Expense Data Expense Data Will be Classified as Either: Expense Data Will be Classified as Either: Fixed Expense Fixed Expense Variable Expense Variable Expense Service Data Service Data Vehicle-Miles Vehicle-Miles Vehicle-Hours Vehicle-Hours Passenger Trips Passenger Trips

55. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 55 of 72 Assigning Expenses to Categories Cost Allocation Involves Taking Each Expense Line Item and Assigning It to Either the Fixed or Variable Category 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 : Variable Expenses are Further Broken Down as Varying Either by : Hour Hour Mile Mile

56. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 56 of 72 What Are the Rules for Assigning Costs? Fixed Costs are Those Costs that Will Not Change As a Result of an Increase or Decrease in Service Levels 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 Variable Expenses are Those Costs that Will Change if There is a Change in Service Levels

57. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 57 of 72 Tips for Assigning Costs There are No Hard and Fast Rules…..But: There are No Hard and Fast Rules…..But: Project Administration Costs are Almost Always Fixed Project Administration Costs are Almost Always Fixed Understand the Basis of Each Cost Item and Assign Accordingly Understand the Basis of Each Cost Item and Assign Accordingly Be Logical Be Logical BE CONSISTENT BE CONSISTENT

58. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 58 of 72 Calculate Unit Costs We Now Have a Total of Fixed and Variable Costs We Now Have a Total of Fixed and Variable Costs We Need to Calculate Our Unit Costs. There are Three (3) Calculations: We Need to Calculate Our Unit Costs. There are Three (3) Calculations: Allocated Hours Cost Allocated Hours Cost Allocated Miles Cost Allocated Miles Cost Allocated Fixed Expense Ratio Allocated Fixed Expense Ratio

59. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 59 of 72 Computation - Allocated Hours Cost Allocated Hours Cost: Allocated Hours Cost: Total Allocated Hours Cost Total Allocated Hours Cost Annual Projected Vehicle Hours

60. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 60 of 72 Computation - Allocated Miles Cost Allocated Miles Cost: Allocated Miles Cost: Total Allocated Miles Cost Total Allocated Miles Cost Annual Projected Vehicle Miles

61. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 61 of 72 Computations What Do We Do With Fixed Expenses? 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) 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)

62. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 62 of 72 Computation of Fixed Expenses In Rural Systems, Fixed Expenses are Expressed as a Percent of Variable Expenses: In Rural Systems, Fixed Expenses are Expressed as a Percent of Variable Expenses: Fixed Cost Factor = Fixed Cost Factor = Total Fixed Expenses Total Allocated Hours Expenses + Total Allocated Miles Expenses

63. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 63 of 72 Computation of Fixed Expenses Fixed Expenses are Expressed as Follows: Fixed Expenses are Expressed as Follows: Total Fixed Expenses Total Fixed Expenses Total Peak Period Vehicles Total Peak Period Vehicles

64. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 64 of 72 Completing Our Calculations The Fully Allocated Cost of Service is Equal to: 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 *[(Total Annual/Projected Hours x Total Allocated Hours Cost)+(Total Annual Projected Miles x Allocated Miles Cost)]} {Fixed Cost Factor *[(Total Annual/Projected Hours x Total Allocated Hours Cost)+(Total Annual Projected Miles x Allocated Miles Cost)]}

65. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 65 of 72 Putting It All Together Congratulations … You Have Just Developed a Cost Allocation Model! Congratulations … You Have Just Developed a Cost Allocation Model!

66. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 66 of 72 Putting Our Model to Work Now that We Have Our Model, We Will Put it to Work 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

67. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 67 of 72 Developing Unit Rates Our Objectives in the Process: Our Objectives in the Process: Simple Simple Equitable Equitable Reflect Actual Cost of Service Provision Reflect Actual Cost of Service Provision Appropriate Use of Public Subsidies Appropriate Use of Public Subsidies

68. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 68 of 72 Alternative Rate Structures Price Per Passenger Trip Price Per Passenger Trip Price Per Mile Price Per Mile Price Per Hour Price Per Hour Price Per Zone Price Per Zone

69. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 69 of 72 Issues with Cost Allocation This Procedure Has Not Been Reviewed or Certified by Federal Grantor Agencies This Procedure Has Not Been Reviewed or Certified by Federal Grantor Agencies Complexities Arise When a Transportation Provider Uses Ridesharing (Mixing Clients of Two or More Programs) When Using a Mileage or Time Based Unit Rate of Service Complexities Arise When a Transportation Provider Uses Ridesharing (Mixing Clients of Two or More Programs) When Using a Mileage or Time Based Unit Rate of Service Treatment of Capital Paid for, in Whole or In Part, By the Federal Government Treatment of Capital Paid for, in Whole or In Part, By the Federal Government

70. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 70 of 72 Automating the Cost Allocation and Rate Setting Process The Procedures Employed in Cost Allocation Can be Replicated Each Fiscal Year The Procedures Employed in Cost Allocation Can be Replicated Each Fiscal Year Process Lends Itself to the Development of a Spreadsheet- Based Cost Allocation Model Process Lends Itself to the Development of a Spreadsheet- Based Cost Allocation Model

71. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 71 of 72 Automating the Cost Allocation and Rate Setting Process Several States Have Developed Such Models for Their Section 5311 Grantees Several States Have Developed Such Models for Their Section 5311 Grantees

72. Cost Allocation Techniques – Rich Garrity, RLS & Associates, Inc. Page 72 of 72 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