Cost Allocation Definition
The process of charging a cost, or a group of costs, to the funding sources that receive the benefit of the goods or services purchased. For purposes of this discussion, funding sources are defined as either Sponsored Awards or other, non-award budgets.
Allocation Methods
If a cost solely benefits one funding source, it should be charged entirely to that funding source. If a cost benefits more than one funding source, the cost should be charged to each funding source in the same proportion as it provides benefit.
There are two methods for allocating a cost to multiple funding sources:
- The Proportional Benefit Rule: when it is possible to determine the exact benefit of the cost to each funding source, the cost is allocated according to the proportion of benefit provided.
- Example: A lab purchases 12 gallons of solution. 3 gallons of solution are used on Award A and 9 gallons on Award B. 25% (3/12) is charged to Award A and 75% (9/12) is charged to Award B.
- The Interrelationship Rule: when it is not possible or cost effective to determine the exact allocation or use for each funding source, the cost is distributed on a reasonable and rational basis.
- Example: A lab purchases syringes for use in experiments on two Awards. It is impossible to tell in advance exactly how many syringes will be used for each Award, and it would not be cost effective to track the use of each syringe. Instead, the lab allocates the cost of the syringes based on the amount of effort the lab personnel who uses the syringes expends on each Award. If the effort allocation is 70/30 on Awards A and B, the cost of the syringes would also be 70/30.
Costs may not be allocated based on:
- Amount of available funds on an Award;
- Budgetary convenience, e.g., accommodating an Award that is either over or under budget;
- Avoidance of restrictions on an Award; and/or
- Offset where costs are charged to Award A one time and Award B the next time.
Allocation Best Practices
- Document the allocation methodology. Documentation should explain how the allocation methodology is reasonably related to the costs being allocated. Document how measures such as headcount, square footage, or hours directly relate to the benefit received. Documentation should be retained along with the purchase receipt and made available for review.
- The allocation methodology must be used consistently in like circumstances.
- Routinely review the methodology to ensure it continues to represent a reasonable basis for distributing costs. The methodology should be updated if it is determined that it no longer represents a reasonable distribution of costs.
- Review estimated allocations on a routine basis. If a cost has been allocated based on an estimate, that cost can be reallocated - if needed - using a cost transfer. Ensure that reallocations are completed promptly so that accurate costs are recorded on the appropriate funding source within 90 days, per GIM 15, of the original expense posting date.
- Update allocations when a funding source is no longer available or a new source has been added. The methodology should not change unless it no longer provides a reasonable representation of the benefit provided.
- The end dates of all Awards should be taken into consideration. The benefit received on each Award may be impacted if, for example, two Awards have significantly different end dates.
Allocation Examples
Allocation based on usage:
The cost of lab supplies allocated based on the quantity used on each Award.
A Principal Investigator uses 5 gallons of solution per month on Award A and 7 gallons of the same solution per month on Award B. The department orders 12 gallons of solution per month at $10 per gallon including tax and shipping for a total cost of $120. Award A should be charged $50 ($10/gallon x 5 gallons) and Award B should be charged $70 ($10/gallon x 7 gallons).
Allocation based on number of experiments:
The cost of syringes allocated based on the number of experiments on each Award.
A Principal Investigator uses syringes to conduct experiments on two of his research Awards. The PI keeps a log of how many experiments are performed on each Award each week. Syringes are ordered every two weeks at $1 per syringe. The log indicates the following:
Award A:
- Week 1: 25 Experiments
- Week 2: 39 Experiments
Award B:
- Week 1: 19 Experiments
- Week 2: 16 Experiments
The total cost of the syringes is $99 (99 experiments x $1/syringe). Award A should be charged $64 (64 experiments x $1/syringe) and Award B should be charged $35 (35 experiments x $1/syringe).
Allocation based on number of hours:
The cost of a computer program allocated based on hours used for each Award.
A researcher uses the same computer program for two Awards. Because the Awards require significantly different usage of the program and the tasks are long, the researcher keeps a log of how much time they use the program for each Award, rounded to the hour. The department is billed quarterly for use of the program. At the end of the quarter, the amount billed is $500 for 50 hours ($10/hour) of work on the two Awards. The researcher’s log shows that 40 hours were used on Award A for a cost of $400 and 10 hours were used on Award B for $100.
Allocation based on percentage effort:
The cost of lab supplies allocated based on the PI's percentage of effort charged to each Award.
A PI spends 70% effort on Award A and 30% effort on Award B. The PI uses lab supplies totaling $6,000/month on the two Awards. Award A is charged $4,200 (70% of $6,000) and Award B is charged $1,800 (30% of $6,000).
Allocation based on square footage:
Student assistant salary allocated based on the square footage of two laboratories.
A student is paid a salary of $1,200 a month to clean two laboratories conducting similar research. The only research performed in Lab A is on Award A and the only research performed in Lab B is on Award B. In this example, the square footage of the laboratories could be used as a reasonable basis to allocate the student's salary. Lab A is 1,400 square feet and Lab B is 1,000 square feet. Award A should be charged $700 (1,400 sq. ft./2,400 sq. ft. x $1,200) and Award B should be charged $500 (1,000 sq. ft./2,400 sq. ft. x $1,200).
Allocation based on FTEs:
The cost of renting space allocated based on the number of FTEs on each Award.
The Center for Penguin Research is located in Alaska and pays $10,000 in monthly rent. There are three FTEs employed on Award A, six FTEs employed on Award B, and one FTE paid from another non-award funding source. These are all the FTEs at this site and the only two Awards with work performed and managed at this site. Award A should be charged $3,000 monthly rent (3/10 FTEs x $10,000 monthly rent) and Award B should be charged $6,000 (6/10 FTEs x $10,000 monthly rent). The remaining $1,000 monthly rent cannot be charged to either Award.