Updated: Sep 15, 2020
In last month’s article I wrote about what happens when you write a Program Budget and no one cares. In other words, you have identified the full costs of providing various services to the community but it does not affect funding decisions. So depending on your resources you will want to ask yourself, What do I hope to achieve by allocating administrative costs? So let’s explore a couple of different scenarios:
I only want to recover administrative costs from the Enterprise Funds.
If this is your only motivation, then a Cost Allocation Plan (CAP) is your best bet because it does not create the on-going accounting work that an Internal Service Fund does. But if you are already allocating administrative positions to the Enterprise Funds in the budget, then those positions cannot be included in the CAP. Unfortunately, as you are preparing your budget it is easier to allocate all or parts of positions to Enterprise Funds than to use an administrative charge supported by a CAP. You could also do an abbreviated CAP that only allocates to the Enterprise Funds. Although, it is not that much extra work to allocate to all funds once you set up the CAP process for the Enterprise Funds.
I want to identify administrative costs for fee recovery.
Since most agencies do not calculate costs for fee recovery on an annual basis, you do not need a process that allocates costs on an annual basis. Therefore a CAP fits those needs perfectly. Of course you now need to make sure that you are allocating to all funds and departments as you will most likely want to look at every fund or department for possible fee recovery.
I want to prepare a Program Budget to identify full costs for all services provided to the public.
While a CAP can certainly allocate all administrative costs to all funds and departments on an annual basis, you may want to look at Internal Service Funds (ISFs) if you are creating a program budget. This is because ISFs are typically an institutionalized part of the budget and accounting process, whereas a CAP is typically not. Therefore, it is usually easier to determine what exactly is being charged to each fund or department if ISF charges show up as line items in each departmental budget. But for a program budget to have credibility, you should spend the time to review with each department how and why they are being charged for various administrative costs.
Traditionally, ISFs have not included general administrative departments, such as Finance and Human Resources. But to create a complete program budget you would need to add all administrative and support departments into various ISFs. Otherwise, the ISF approach covers only part of the costs of a CAP.
So depending on your goals for cost allocation there are certain methods that are more efficient than others. But even when trying to determine how to best use limited resources, it is important to keep in mind the following thoughts from an articulate Finance Director, which came in response to last month’s article:
You are right that [elected officials] may still choose to [ignore the costs] if given that option, but they sure can’t claim ignorance if they are given the information and ignore it. Change can be difficult and it can mean more work initially, but the information can also be a powerful tool that will allow the Council to make decisions and use the information to support the decisions rather than just succumbing to the influence/pressure of public safety.