The cost allocation plan was developed for the city to identify total costs of providing municipal services to the citizens of Hermiston.

In this study, costs are categorized as either Direct or Indirect costs.

Direct costs are those that can be specifically identified with a particular service, such as street maintenance, water treatment, wastewater treatment or providing electric service to citizens of Hermiston.  

Indirect costs are not readily identifiable with a particular department or program, but rather are incurred for a joint purpose, which benefits more than one cost objective. Examples of indirect costs would be purchasing, accounting, payroll, personnel/human resources, building maintenance, and utilities.

The city’s cost allocation plan has been prepared in accordance with GAAP guidelines and closely adheres to federal guidelines for the development of cost allocation plans. The guidelines were designed to ensure a uniform approach is used in the preparation of the cost allocation plan.

There are four steps in the development of a cost allocation plan:

1.    Identify departments that provide support. These departments are referred to as allocating departments and they provide indirect services as described above.

2.    Identify departments that receive support. These departments are referred to as receiving departments and they provide direct services.

3.    Accumulate the allowable expenditures of the central service departments that provide support to the operating departments.

4.    Allocate the allowable expenditures of the central service departments that provide support to the operating departments based on available, meaningful, measurable and auditable allocation statistics that match the service provided to the service received.

The cost allocation plan is used to identify the indirect costs incurred by the city in administering and providing support services to the various enterprise funds.

In summary, the cost allocation plan establishes a fair, equitable and defensible methodology for identifying and allocating indirect costs to direct cost programs.

No recommendation needed. 

This presentation is meant to acquaint the city council with the purpose for and development of an overhead cost allocation plan to more accurately determine proper cost allocations to enterprise funds in the city.