Updated: Sep 15, 2020
Being someone who allocates costs for a living, it has become an axiom that if you can allocate costs then you do it. But is more information always a good idea? Or in other words, has the allocation of central costs merely become an academic exercise?
The reason that I generally think that it is a good idea to allocate central services costs is the same reason that the person who invented the Program Budget (wasn’t it Benjamin Franklin) thought it was a good idea. That idea being, If you identify the full costs of a program being provided to the public, that program will have to survive with the knowledge of the full costs of the program, for better or worse.
But what if that full information has no or very little impact on the decision makers? Is it still worth the effort to identify the full costs of the program if it does not affect funding decisions?
There are still management benefits to allocating central services. It can help to identify which internal service providers are inefficient. How many times has the Police Chief said that he could get patrol cars serviced quicker and at less cost if he used the local auto dealership? Well he may be right. You don’t hear about that until the customer complains.
It can also help to identify which users of internal services are wasteful. If you have out-of-control copier costs, by charging departments for copier usage, the usage, and therefore the costs, should decrease.
Another less cumbersome option to allocating costs is a Cost Allocation Plan (CAP). A CAP allocates central service costs just like an ISF without all of the reporting and accounting requirements of a separate fund. But a CAP may not be an institutionalized part of the budget process like an ISF may be.
In short, before you allocate anything you should ask yourself why you are doing it. Do you want to recover administrative costs from Enterprise or Grant funds? Do you want to identify administrative costs for fee recovery? Do you want to prepare a program budget to identify full costs for all services provided to the public? Each of those questions has a different answer. But you can’t get there in the straightest line without knowing where you are going first.
In future articles we will explore each use and what approach is the most efficient for which use.