CRACKING THE OVERHEAD EGG
EGG STAND: As you go through this process, it is likely that the most identifiable costs are the Direct Costs. You know what you spend on programs. You know what expenses go directly to your mission. Most importantly, you know what expenses go directly to those benefitting from your service. Most organizations have little trouble understanding this. In fact, these represent the foundation for overall cost allocation. Therefore, in our diagram we represent them as the stool on which our Overhead egg sits.
INDIRECT
INDIRECT
ADMIN INDIRECT
DIRECT
DIRECT
GRAPH: Depicts Admin Indirect Costs becoming Direct Costs
WHY is it important to establish a uniform definition of indirect and administrative cost? Indirect cost includes overhead administrative cost that are a single touch away from a program. But, for purposes of reimbursement, overhead administrative indirect cost can be defined as direct cost, which assures maximum reimbursement. All that remains in regard to organizational indirect cost reimbursement is to negotiate an indirect cost rate (NICRA). By accomplishing this, true cost of service can be fully captured.
2016 Q1 ISSUE COSTTREE CAPTURE. 07
YOLK: It gets murkier still. Indirect – Admin costs or (Overhead) as they are commonly referred, are defined as those that are not Direct, but are necessary for the immediate support of a program. Think of it like this. If the direct costs are the baseline, the Indirect-Admin costs are one touch away. The plain, old organizational indirect costs are two touches away. So, when you are working on managing a program, leading those working for a program in their work or simply accounting for program expenses and revenues, you are only one touch away and are, in effect, performing direct activities. Another way to think of it is to go back to our egg. If the Direct costs form the foundation (egg stand) and the Indirect costs are the whole egg, then the Indirect-Admin costs are a subset—in our example the yolk—of the egg. They sit at the bottom, just one touch away from the Direct costs. Therefore, these activities can be attributed to your Direct Costs for purposes of expense reimbursement.
EGG: When we move to identifying indirect costs, it gets a little more difficult, but still doable. These are things that you need to do for the sake of organizational health and operation, but don’t really tie back to a specific program. When a day is spent working with the board to set the organization’s annual plan for the following year, it’s unlikely that the time spent can be directly applied to a program. The same holds true for actual time (resources) that need to be dedicated when working with your Internet provider to fix the organization’s connection. While both are important, these just can’t simply be tied to one particular function. This cost is organizational. In our diagram, this is the actual egg that holds the egg whites and yolk.