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A comprehensive cost accounting system for community transportation services should do the following: â¢ Describe in detail all costs that have been incurred and all services rendered. â¢ Describe in detail how the funds of all participating agencies have been spent. (This descrip- tion should be designed to satisfy the audit and regulatory requirements of each participating agency.) â¢ Provide the opportunity to distribute the costs of transportation services among those customers (agencies or individuals) receiving services based on the actual costs of the services each has received. It is important to recognize that some agencies have arbitrarily limited their reimburse- ment rates to amounts that are less than their share of the costs of the services that they are receiv- ing. Transportation providers should determine for themselves if working with such agencies constitutes good business practices. Even if rules prevent full cost recovery in some cases, it is still useful to determine the actual cost for each participating agency for purposes of planning and fundraising. To achieve these objectives, the following steps are necessary: 1. Agree on an overall approach and accounting structure. 2. Create standardized and commonly agreed upon definitions and data collection procedures for costs and services rendered. 3. Apply a standardized chart of accounts to record and analyze financial data. 4. Develop acceptable procedures for recording, reporting, and analyzing non-financial data. Although the merits of all of these components seem obvious, reviews of actual practices showed little consistency or standardization among different transportation providers. This report describes how to achieve higher levels of consistency and standardization. Overall Approach and Accounting Structure Full Cost Accounting The accounting approach recommended and used by successful business operations and trans- portation systems is called full cost accounting. Using full cost accounting means that all costs of providing transportation services are considered, and that all the different kinds of expenses incurred are recorded. The total costs include any commitment of or use of time, money, phys- ical resources, and other assets of the system used in the accomplishment of program objectives. In full cost accounting, a value is given to these commitments whether or not they result in immediate out-of-pocket expenditures. The value of the time provided by volunteer drivers is 17 C H A P T E R 6 Transportation Accounting Fundamentals
an example of a value that should be recorded even though no immediate out-of-pocket expendi- ture is incurred. Transportation providers commonly count the value of volunteer labor as âin-kind revenueâ as part of their local matching revenues. Of course, these recorded ârevenuesâ need to be offset in the accounting system by equivalent labor costs. The primary reason for using full cost accounting is that all costs must be paid sooner or later by someone. Some transportation providers have experienced difficulty with this principle because they only think about out-of-pocket expenses (e.g., wages, gas, and maintenance) and not other costs (e.g., administration, rent, and depreciation). Some providers may not include infrequent expenses, including purchases of capital equipment, like vehicles. This oversight often results in failing to bill agencies for enough money to cover all costs of the transportation services they are purchasing (including administrative time, facility leasing costs, and vehicle replacement costs); this can cause a severe financial shortfall for the provider. The same kind of situation occurs when an agency wishing to purchase transportation services offers payments that are limited or capped at rates below the fully allocated costs of service. Cost Allocation Cost allocation is a financial planning technique for determining the costs of services provided to those parties receiving or otherwise benefiting from those services. The cost allocation process does not necessarily set the prices for services, but allocating costs is the first step in developing a system of charges (i.e., billing rates and procedures incorporated in fees-for-service contracts) based on the types and amounts of services provided. The cost allocation method recommended in this Toolkit is often termed proportionate cost allocation, which means that costs are allocated among parties receiving services in the same proportions as the costs of services each recipient received. (Alternative methods of cost allocation are used in some industries such as electrical utilities, telecommunications, and air traffic control, but these methods are substantially more difficult to apply and understand, so they are not recommended for coordinated community trans- portation services.) Standardized Definitions for Services and Costs Standardized definitions for services were provided earlier in this chapter. Standardized defini- tions for costs are discussed in the sections that follow. Detailed definitions for services and costs are among the items included in the Glossary of Technical Terms. Although definitions may vary somewhat from state to state or community to community, using common definitions within indi- vidual states and particularly within individual communities is highly recommended. A Common Chart of Accounts A fundamental component of cost analysis for human services transportation providers is the development of a financial chart of accounts that can track all kinds of expenses related to pro- viding community transportation services. A key element of the chart of accounts is the establish- ment of expenditure classes. There seems to be general agreement in the literature that, for human service community transportation providers, fundamental cost categories are capital, operating, and administrative costs, and that detailed expense classes should include the following: â¢ Labor. â¢ Fringe benefits. â¢ Purchased transportation. â¢ Contracted services. 18 Sharing the Costs of Human Services Transportation
â¢ Materials and supplies. â¢ General administrative expenses (including indirect organizational costs, if applicable). â¢ Utilities. â¢ Casualty and liability costs. â¢ Taxes. â¢ Miscellaneous expenses. â¢ Leases and rentals. â¢ Capital expenses. â¢ Depreciation and amortization. Each expense category should have detailed subcategories. For example, the category âlaborâ could have separate entries for drivers, administrators, dispatchers, and mechanics. Some trans- portation operators have separate expense categories for salaries paying for training or overtime. Other expense categories that may be useful in certain conditions include Indirect Expenses (for multi-service agencies providing transportation and other services), Expense Transfers, and Interest Expense. (The major components for a uniform chart of accounts are identical to those in components listed in FTAâs National Transit Database category titled âExpenditures.â) Used together, the 13 categories of expenses fully describe all costs of transportation services. It is important to recognize that not all federal funding programs recognize all of these categories as allowable expenses under their specific funding legislation or regulations. Different Kinds of Costs When using a full cost accounting approach, transportation providers should understand that costs may be expressed in a number of different ways. The costs of transportation services may be considered as â¢ Fixed versus variable costs. â¢ Capital versus operating costs. â¢ Direct versus shared costs. Each of these paired concepts (e.g., fixed versus variable costs) is an expression of 100 percent costs of providing transportation services. Each of these paired concepts has its own value in under- standing how costs are incurred and, therefore, how to better manage transportation services. In addition, the distinction between capital and operating costs has a significant effect on funds avail- able and on reporting requirements. Local transportation providers have some flexibility in assigning expenses. Because there are no hard and steadfast rules for assigning expenses, good judgment and an understanding of how expenses are incurred are needed. A good expenses assignment should be â¢ Logical and understood by all. â¢ Defensible and able to pass scrutiny from an outside observer. â¢ Clearly expressed in writing. â¢ Consistent so that it is useful for watching cost trends over time. Various methods for assigning expenses can be used, provided that they meet these objectives. Fixed versus Variable Costs Variable costs are those that CHANGE with the amount of service provided. These expenses typically include driver wages, fuel costs, and maintenance costs. The more miles and hours of service provided by the transportation service, the greater the costs of that service. Transportation Accounting Fundamentals 19
Fixed costs are those that DO NOT CHANGE according to the amount of service provided. In most systems, this means that modest changes in the numbers of hours or miles of service will not result in corresponding changes to the fixed costs. Fixed costs typically include such items as administrative salaries and facility depreciation. Thus, variable costs are highly dependent on the amount of service provided, while the fixed costs should remain relatively constant from year to year. The distinction between fixed and variable costs is extremely useful in understanding the costs of transportation services, as well as being highly useful for budgeting, managing, and billing pur- poses. The primary assumption of our Cost Sharing Model is that each line item expense is either a variable cost or a fixed cost. This is sometimes called a two-variable, fully allocated cost model. More information on the Cost Sharing Model is presented in Chapter 8. Variable costs can be logically linked to either one of two service variables: hours or miles. For example, the number of vehicle hours is directly related to most of the operator labor costs because driver expense is a function of the amount of time that vehicles are in operation. The number of miles accounts for most maintenance labor and materials costs as well as the cost of fuel consumed and vehicle depreciation. Fixed costs are the expense items that do not vary with the number of miles or hours of oper- ation but, instead, reflect the scale or size of the agency. Examples include administration and building rents. The total cost of providing transportation service equals the sum of all fixed and variable costs. Capital versus Operating Costs Capital costs refer to the expenses associated with long-term acquisitions and leases of phys- ical assets, such as vans, buses, garages, and maintenance facilities. These assets often are quite expensive and have a physical or functional life that extends several years. Each year, these assets lose value. This loss in value is known as depreciation, which sometimes also is called the annual cost of capital. From a grant program perspective, allowable depreciation costs may include only the cost actu- ally incurred by the transportation operator for the purchase of the asset; federal or state grant funds may not be depreciated. If no grant funds were used, the total cost of the asset is used to calculate the depreciation cost. It is important for transportation providers to consider depreciation costs when determining the correct price for their services (see Chapter 7 for more information). Including depreciation costs is a consistent and equitable way to recover the costs of replacing capital assets and save toward future replacements. It avoids the common problem of making special requests to funding agen- cies every time capital purchases are needed. Operating costs refer to those expenses that are consumed in a single calendar or fiscal year to make the transit system operate. These expenses include labor, fringe benefits, materials and sup- plies (e.g., fuel), maintenance, office space, and equipmentâall of which are essential to operating transportation services. Administrative costs are a kind of operating cost. They always must be considered; they may be most difficult to quantify in the case of a multi-purpose human service agency that provides trans- portation services as one of the agencyâs many functions. Administrative expenses are those used to support an agency or program so that it can per- form its basic functions (like providing transportation services). Administrative costs cover func- 20 Sharing the Costs of Human Services Transportation
tions such as planning, preprogram start-up activities, accounting and legal services, fringe ben- efits, and rent. Typical administrative expenses include the following: â¢ Salaries for administrative personnel. â¢ Fringe benefit costs for administrative personnel. â¢ Rent and utilities for general office and administrative space. â¢ General office supplies and materials. â¢ Casualty and liability costs not related to vehicle operations. â¢ Most miscellaneous expenses. â¢ Professional fees (e.g., legal and accounting services). â¢ Property taxes. â¢ Office insurance. â¢ Equipment rental. These expenses are generally NOT directly related to the level of service provided; they tend not to change unless the level of service changes significantly. The total cost of providing transportation service equals the sum of all capital and operating costs. Direct versus Shared Costs Direct costs are expenses that can be associated on a one-to-one basis with a given service. Examples of these costs include operator labor, fuel costs, and maintenance costs. Generally, most of the direct costs of transportation service are variable costs and are the types most people think about when they consider costs, such as driver wages and gasoline. Shared costs (sometimes called indirect costs) are those that CANNOT be associated on a one- to-one basis with a given transportation service. These costs are representative of functions that often support more than one service. The majority of shared costs are administrative and facility costs. These costs also commonly called overhead costs or indirect costs. These costs cover items such as planning, preprogram start- up activities, client screening and eligibility determinations, accounting, and legal services. These expenses may be overlooked when providers calculate the cost of a specific service. Shared costs are generally fixed costs. For agencies that operate more than one service (e.g., an Area Agency on Aging that provides home delivered meals, transportation, and other services), shared costs must be allocated on a reasonable basis to each individual service so that sufficient revenues can be collected to cover all of the shared costs. The total cost of providing transportation service equals the sum of all direct and shared costs. (OMBâs cost principles state this as total cost equals direct cost plus the allocable portion of indi- rect costs, minus rebates.) Understanding How Costs Are Incurred The process of determining how much a specific transportation service costs has the following steps: 1. Assembling cost and service data. 2. Assigning the cost figures to categories that explain how these costs vary. 3. Calculating average unit costs. These unit costs then can be used to determine costs of specific routes or services to particu- lar agencies or to particular funding sources. Transportation Accounting Fundamentals 21
There is some flexibility in assigning expenses to specific expense accounts. Because there are no hard and steadfast rules for assigning expenses, good judgment and an understanding of how expenses are incurred are needed. A good expenses assignment should be â¢ Logical and understood by all. â¢ Defensible and able to pass scrutiny from an outside observer. â¢ Clearly expressed in writing. â¢ Consistent so that it is useful for watching cost trends over time. Various methods for assigning expenses can be used provided that they meet these objectives. See Chapter 7 for a recommended method. Summary A comprehensive cost accounting system for transportation services should describe in detail all costs that have been incurred and all services rendered, describe in detail how the funds of all par- ticipating agencies have been spent, and equitably distribute the costs of transportation among the participating agencies by allocating the costs according to services received. To do this, a financial chart of accounts that can track all kinds of expenses related to community transportation ser- vices must be developed. A key element of the chart of accounts is the establishment of expendi- ture classes, each of which should have detailed subcategories. When using a full cost accounting approach, transportation providers should understand that costs may be expressed in a number of different ways. The costs of transportation services may be considered as fixed versus variable costs, capital versus operating costs, or direct versus shared costs. Each paired concept has its own value in understanding how costs are incurred and, therefore, how to better manage transportation services. 22 Sharing the Costs of Human Services Transportation