Indirect cost calculation and process

Calculating indirect cost

The following is the formula for calculating indirect cost rate, also known as composite rate, per the operating agreement.

Allocated cost centers

Allocated costs centers are used in determining ALA’s total indirect costs and include both direct and indirect costs that are generated in a given area ie operating supplies, telephone, audit/bank fees do not incur indirect costs – direct costs only.

They are units or activities used to determine indirect costs and include the following (*Denotes units or areas that incur both direct and indirect costs):

1. Distribution Center*
2. Building Operations*
3. Human Resources
4. Library/ORS*
5. Production Services (net chargebacks)*
6. Reprographics (net chargebacks)*
7. Membership Services*
8. Operating Supplies (net chargebacks)
9. Equipment Repairs and Maintenance/Lease
10. Telephone Expense (net chargebacks)
11. Public Information Office*
12. Information Technology & Telecommunication Services*
13. Financial Services*
14. Audit and Bank Fees
15. Member Programs and Services*
16. General and Administrative (Council/Administration, Executive Board, Executive Office, Communications AED,
17. Office Services/Purchasing, and Business Expense).

The following table lists the departments directly assessed for direct and indirect costs from cost centers.

Four-step calculation process

Calculating indirect cost is a four-step process:

1. Allocate total ALA expenses to each unit as incurred.
2. Update allocation methodologies and apply to indirect cost centers (See Allocation Methodology Information Request below).
3. Determine direct/indirect cost incurred by indirect cost centers (16) after the methodology has been applied. See the  Human Resources Expense Allocation worksheet example (Opens an Excel spreadsheet).
4. Allocate indirect costs and revenue generated by indirect cost formula components as required by Operating Agreement (See Cost Caluclation Formula above).

This sample flow chart illustrates this process using the Human Resources spreadsheet example from a previous fiscal year.

For additional assistance and comments about the information contained in this page, please contact, Keith Brown, Senior Financial Analyst, ALA Finance and Accounting at kbrown@ala.org.