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# Govology Webinar: Fundamentals of Indirect Rates

Higher margins and improved profitability are a direct result of the proper calculation of indirect rates and the maximum recovery of all costs incurred. Classification of costs, the identification of correct and allowable allocation methods and accurate mathematical formulas are critical in the proper calculation of indirect rates. This session will focus on the most common cost pools utilized by government contractors and a single rate approach to indirect rates. We’ll describe the composition of each cost pool, explain the acceptable allocation bases, and walk you through a few calculation examples. Every participant receives access to an online indirect rate calculator and downloadable tool.

Higher margins and improved profitability are a direct result of the proper calculation of indirect rates and the maximum recovery of all costs incurred. Classification of costs, the identification of correct and allowable allocation methods and accurate mathematical formulas are critical in the proper calculation of indirect rates. This session will focus on the most common cost pools utilized by government contractors and a single rate approach to indirect rates. We’ll describe the composition of each cost pool, explain the acceptable allocation bases, and walk you through a few calculation examples. Every participant receives access to an online indirect rate calculator and downloadable tool.

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### Govology Webinar: Fundamentals of Indirect Rates

1. 1. Fundamentals of Indirect Rates
2. 2. We Know Government Contracts
3. 3. Who we are Left Brain Professionals is a boutique accounting firm that serves government contractors. We specialize in accounting system design & implementation, audit support, training, and cybersecurity compliance.
4. 4. Our Services
5. 5. Our Team Robert E. Jones Government Contracts & Accounting Expert CPA, CPCM, NCMA Fellow Melissa Metzger Government Accounting & Finance Advisor MAFM, CPA Candidate Steven Bressler Government Contract Associate steve@LeftBrainPro.commelissa@LeftBrainPro.comrobert@LeftBrainPro.com
6. 6. Learning Objectives • List the five basic cost pools • Describe the composition of each cost pool • Identify acceptable allocation bases and methods • Execute proper calculation of indirect rates • List tips for full cost recovery
7. 7. Cost Pools
8. 8. Five Basic Cost Pools Cont… • Direct • Fringe • Overhead • General & Administrative (G&A) • Unallowable
9. 9. Cost Pool Composition Direct (aka Costs of Goods Sold – COGS) Costs directly attributable to final cost objective (contract, job, project, product, or service). • Labor • Material • Travel • ODCs • Subcontractors Cont…
10. 10. Cost Pool Composition, Continued… Fringe Cost of maintaining W-2 employees. • Employer taxes • Health insurance • Retirement • Paid absences Cont…
11. 11. Cost Pool Composition, Continued… Overhead Cost of supporting customers, products or services. • General support • Idle time • Training • Manufacturing/service supplies • Facilities Cont…
12. 12. Cost Pool Composition, Continued… General & Administrative (G&A) Costs of operating the business and costs incurred regardless of number of customers. • Accounting • Business Development • HR • IT Cont…
13. 13. Cost Pool Composition, Continued… Unallowable Costs not allowed per terms of the contract or regulations (FAR 31). Cont…
14. 14. Cost Pool Composition, Continued… Other Cost Pools Join us next month as we explore Advanced Indirect Rates!
15. 15. Room Poll Which of the following is NOT one of the basic cost pools? A. Overhead B. Assets C. Fringe D. Unallowable
16. 16. Acceptable Allocation Methods
17. 17. Acceptable Allocation Methods Direct Note that direct costs are not allocated, but are assigned to their proper final cost objective (contract, job, project, product, and service). Cont…
18. 18. Acceptable Allocation Methods, Continued… Fringe Total Labor Dollars – Recommended; most common; most fair with least variances. Total Labor Hours – Least common; higher risk of over- or under- absorption of costs. Direct Labor Dollars – Common in some industries such as Architect/Engineer (A/E). Direct Labor Hours – Common in some industries. Cont…
19. 19. Acceptable Allocation Methods, Continued… Overhead Direct Labor Costs– Most common, especially in service or high labor industry. Direct Labor Hours – Used when total hours for the year can be easily estimated. Direct Material Costs – Useful when material costs significantly outweigh labor costs. Cont…
20. 20. Acceptable Allocation Methods, Continued… Overhead, Continued… Total Prime Costs (Direct Labor + Direct Materials) – Reflects value added to the materials such as some manufacturing environments. Units of Production – Useful in high volume production environment. Machine Hours – Useful in highly automated or heavily machined environments. Cont…
21. 21. Acceptable Allocation Methods, Continued… G&A Total Cost Input (TCI) – Most common; allocation over most other costs. Value Added – Less common; used in conjunction with the Material and Subcontract Handling (M&SH) pool we’ll discuss in Advanced Indirect Rates. Cont…
22. 22. Acceptable Allocation Methods, Continued… Unallowable Unallowable costs are not allocated, but some (Direct and Overhead) are included in the base of the G&A calculation.
23. 23. Room Poll Which of the following is NOT an acceptable allocation method for overhead? A. Units of production B. Direct labor hours C. Prime costs D. W-2 employee labor
24. 24. The Math of Indirect Rates
25. 25. The Math of Indirect Rates Pool / Base = Rate Rates are not inherently high or low. The rate is the rate. Get the correct dollars in the correct pools and bases, then divide. The rate is the rate.
26. 26. Fringe