Direct & Indirect Cost in Retail

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Indirect Cost Rate Questions and Answers

What is an indirect cost?
Indirect costs represent the expenses of doing business that are not readily identified with a particular grant, contract, project function, or activity, but are necessary for the general operation of the organization and the conduct of activities it performs. In theory, costs like heat, light, accounting, and personnel might be charged directly if little meters could record minutes in a cross-cutting manner. However, this is not practical; therefore cost allocation plans or indirect cost rates are used to distribute those indirect expenditures. Typically, salaries and expenses for auditing, budgeting, payroll, personnel, purchasing, etc. are examples of costs that are considered to be indirect costs.

What is the indirect cost rate?
The indirect cost rate is the maximum percent of dollars the district can expend from state and federal grants for administrative costs. Indirect cost rates (limits) ensure that state and federal moneys are expended for intended uses and for allowable costs, including expenditures directly traceable to the program (direct expenditures) plus a limited allowance for overhead or indirect expenditures. A “fixed with carry-forward” indirect cost rate is calculated for each district for all of its restricted federal grants and another “fixed with carry-forward” indirect cost rate is calculated for all of its unrestricted federal grants. Rates are individually computed for each district and are unique to each district.

What does fixed with carry-forward mean?
A fixed with carry-forward provision is a rate computed and fixed for a specified future period based on an estimate of that period’s level of operations. However, when the actual costs of that period become known, the difference between the estimated costs and the actual costs is carried forward as an adjustment to a subsequent period for which a rate is established. Indirect rates calculated on the 06-07 F-196 were used in 08-09 (2 year lag). Therefore, if a district’s rate on the 06-07 F-196 was 5.4%, the district could have used a maximum 5.4% indirect rate during the 08-09 school year. But, if at the end of FY 08-09, the rate calculated on the F-196 was only 4.2%, the subsequent indirect rate will be adjusted for the difference and the district will use the adjusted rate for the 2010-11 school year. The rate calculated on the 08-09 F-196 is the rate your district will use in 2010-11. This is the rate provided to iGRANTS.

How can a grantee distinguish between a direct cost and an indirect cost? There is no universal rule for classifying costs as direct or indirect. Generally speaking, a direct cost is one that is incurred specifically for one activity. Indirect costs are more general in nature and are incurred for the benefit of several activities. Once a grantee makes an election and treats a given cost as direct or indirect, it must apply that treatment consistently and may not change during the fiscal year.

What does organization-wide costs mean?
Generally, direct administration costs differ from indirect charges in that the indirect charges are considered organization-wide costs. This means costs which are related to maintaining operations as a business concern but not costs that finance the delivery of services that provide a part of its specific mission. The regulations describe accounting, payroll, and personnel management as examples of organizational disciplines that every grantee or any organization must have. When making a determination as to whether a cost is organization-wide, the question to be answered is: “Is this cost incurred for general management purposes or does the cost further functions that are the mission of the organization?”

Distorting Item Inputs:

What are distorting items?
Distorting items are activities that do not occur regularly each year, but “distort” the regular expenditures. Districts will...
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