Administrative Policies and Procedures Manual - Policy 2410: Accounting for Federally-Defined Allowable and Unallowable Costs

Date Originally Issued: 04-01-1993
Revised: 07-01-2004
Subject to Change Without Notice

1. General

The U. S. Government funds the direct costs of numerous University activities, including research, public service, instructional, and training projects. The government also provides funds to the University to support the indirect costs of the University associated with sponsored projects. Although the University has established policies relating to allowable expenditures, the Federal government has additional requirements and limitations. This policy outlines those Federal laws and regulations which govern accounting for both direct and indirect costs associated with federally sponsored programs and describes policies and procedures designed to ensure compliance with these regulations. Described herein are procedures for reviewing direct and indirect costs to determine if the costs are properly allocated and that federally defined unallowable costs are correctly accounted for. In some instances federal rules for allowable costs exceed the University's criteria for allowable expenditures. Since these regulations apply to both direct and indirect costs, compliance affects all University departments, not just those accountable for sponsored programs.

For projects sponsored by non-federal sources, University policies on allowable expenditures shall apply unless the sponsoring agency or organization has additional requirements or limitations. Refer to specific agreements for definitions of allowable and unallowable costs for such sponsored projects.

2. Federal Regulations

Regulations issued by the U. S. Government and its agencies define cost principles to be applied and set limits on the costs which may be charged to the Government under federally-sponsored agreements. Listed below are the federal regulations which govern the administration of these costs.

2.1. Office of Management and Budget (OMB) Circular A-21

OMB Circular A-21 defines cost principles for educational institutions which receive federal funds, in the form of contracts, grants, and cooperative agreements. These cost principles:

• explain the factors that determine allowability of costs,
• describe types of direct and indirect costs, and
• provide guidance on the allocation of indirect costs for the purpose of preparing an indirect cost proposal.

2.2. Federal Acquisition Regulations (FAR)

The Federal Acquisition Regulations (FAR) contain the procurement regulations and purchasing procedures pertaining to federal government contracts. FAR, Part 31.3, which references Circular A-21, determines the allowability of costs.

2.3. Office of Management and Budget (OMB) Circular A-110

OMB Circular A-110 defines administrative requirements for grants and cooperative agreements for educational institutions and non profit organizations.

2.4. Supplemental Regulations

Additional policies and regulations vary among sponsoring federal agencies and individual programs.

Copies of federal regulations are located in the University office of Research Development, Information and Logistical Services, Main Campus and Health Sciences Center (HSC) Contract and Grant Accounting Departments, and the Purchasing Department.

3. Allocation of Costs

The allocation of costs is the process of assigning individual costs to the appropriate cost center, in reasonable and realistic proportion to the benefit provided to that cost center. A cost may be assigned to a cost center either directly, or indirectly through indirect cost pools. The total cost charged to a sponsored project is made up of allowable direct costs required for its performance, and allowable indirect costs.

3.1. Cost Centers

A cost center is a specific University function or activity for which costs are accumulated in the University's Banner Finance System (FRS) . Examples of cost centers include University units with a specific budget, particular services and programs, and specific sponsored projects.

3.2. Direct and Indirect Costs

3.2.1. Direct Costs

Direct costs are costs that can be identified specifically with a particular sponsored project or other University activity, and that are charged directly to the account assigned to that project or activity. The University treats the following types of expenditures incurred in the performance of sponsored work, as direct costs charged to sponsored projects:

• Salaries, wages, and proportional fringe benefits of personnel directly engaged in the sponsored project. Cost of equipment, materials, and services.
• Travel and transportation expenses.
• Consultant fees.
• Subcontracts.
• Telephone charges.
• Postal charges.
• Space Rental.
• Other allowable costs per the terms of the agreement. 

3.2.2. Indirect Costs

Indirect costs consist of costs incurred for more than one (1) cost center, and costs that cannot be easily identified with a specific sponsored project or other University activity. Indirect costs include the following types of costs:

• An allowance for the use of University buildings.
• An allowance for the use of University equipment.
• The cost of operating and maintaining University facilities.
• The cost of maintaining University libraries.
• General administrative expenses.
• Expenses associated with the administration of student services.
• Departmental administrative expenses.
• Expenses associated with the administration of sponsored programs.

4. Allowability of Costs

All costs must first comply with University policies on allowable expenditures. Costs must then be evaluated according to the federal definition of allowable and unallowable expenditures. These standards apply to both direct and indirect costs supported by either institutional funds (unrestricted) or sponsored funds (restricted).

4.1. Allowable Costs According to University Policy

University policies regarding allowable costs are intended to ensure compliance with state and federal laws where applicable, and to ensure fiscal accountability. The University's policies regarding allowable costs are defined in the following sections of the University Business Policies and Procedures Manual:

• Section 3000--Personnel policies address allowable costs for salaries and wages.
• Section 4000--Procurement and travel policies address allowable costs for reimbursements and for the purchase of goods and services.
• Section 7000--Property Management policies address allowable costs for the acquisition of capital equipment.

4.2. Allowable Costs According to Federal Regulations

Allowable costs according to federal regulations are defined in OMB Circular A-21 and the Federal Acquisition Regulations (FAR), Part 31.3.

According to Circular A-21, a cost may be charged to a sponsored program only if it meets all of the following criteria:

(a) It must be a reasonable cost. 
(b) It must be allocable to the sponsored program. 
(c) It must be treated consistently, through the application of generally accepted accounting principles. 
(d) It must be within the limitations specifically defined in Circular A-21 and the particular contract or agreement, in terms of the type of cost item and dollar amount charged.

4.2.1. Reasonable Costs

Costs are considered to be reasonable if the goods or services acquired and the dollar amount of the cost:

• reflect a prudent and responsible action,
• are necessary,
• are in accordance with all applicable external regulations and terms, and
• are consistent with University policies governing the action.

4.2.2. Allowability/Unallowability of Selected Cost Items

Circular A-21 defines principles to be applied in determining the allowability/unallowability of certain types of costs. Section J of Circular A-21 describes fifty (50) selected types of cost items. In case of a conflict between A-21 provisions and the provisions of a specific agreement, the terms of the agreement apply.

The following cost items are unallowable according to Section J of Circular A-21, although these expenditures may be allowable under University policy. Section 5., herein, describes accounting procedures for expenditures which are allowable by University policy but are unallowable per federal regulations.

Alcoholic beverages 
Alumni Activities
Bad debts 
Color advertising for employee recruitment purposes
Commencement and convocation costs
Contingency reserves 
Donations and contributions 
Entertainment costs 
Fund raising costs 
Goods and services for personal use 
Lobbying costs 
Losses on other sponsored agreements 
Membership in civil/community/social organizations 
Personal living expenses 
Selling and marketing costs
Student activity costs 
Travel by trustees (Regents)

Other costs items may be unallowable depending on the circumstances, refer to Section J of Circular A-21 for full detailed information on the allowability or unallowability of cost items.

4.2.3. IDC Excludable

The University is required to identify charges which are unallowable according to federal regulations. Such costs must be excluded from cost pools used to calculate indirect cost rates. The University refers to these costs as "IDC excludable."

5. Review Process

Each expenditure document submitted by a University department is reviewed for cost allowability and includability by the appropriate accounting office (Main Campus or HSC Unrestricted Accounting, Main or HSC Contract and Grant Accounting, and office of Inventory Control) to determine:

• if the costs are allowable,
• if the charge is correctly accounted for, and
• if the cost is IDC excludable.

An expenditure document will not be approved until the review process has been completed. The steps in the review process are as follows:

(1) All expenditures are reviewed for compliance with University policies as defined in Section 4.1. herein.

(a) If the expenditure complies with University policies, the accountant proceeds to Step (2) for restricted funds and Step (3) for unrestricted funds.
(b) If the expenditure does not comply with University policies, the accountant returns the document to the submitting department, with an explanation.

(2) Costs charged to sponsored projects are reviewed for allowability according to Circular A-21 and/or the terms of the specific contract or grant.

(a) If the expenditure is allowable, the accountant approves it and proceeds to Step (3). 
(b) If the expenditure is not allowable, the accountant returns the document to the submitting department, with an explanation.

(3) The University is required to identify and segregate costs excludable according to OMB Circular A-21 to ensure that they are not included in indirect costs charged to sponsored programs. Costs are reviewed for excludability, regardless of whether they are charged to federal or other funds.

(a) If the expenditure is allowable according to Circular A-21, it is approved as it stands.
(b) If the expenditure is not allowable according to Circular A-21, the accountant changes the last digit of the subcode to "9," and approves the expenditure as revised. The use of this subcode classifies the expenditure as IDC excludable. The basis for making a subcode change is determined by the nature and purpose of the specific expenditure.

5.1. Department Responsibilities

University departments must provide sufficient detailed information describing the item purchased and the purpose or function of the expenditure on every disbursement document, to facilitate the review process. Departments which, for budgeting and bookkeeping purposes, rely on expenditure categories using the fourth digit of the subcode are not permitted to use "9" in that position. Departments should also be aware that any expenditure reporting which relies on the use of "1" through "8" in the fourth digit of the subcode may be affected by some individual transactions being changed to "9."

5.2. Audit Process

The University Controller receives a monthly report of activity in expenditure subcodes ending in "9." These reports are used to monitor the process of segregating unallowable costs. The level and distribution of activity is reviewed for reasonableness.