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Establishing Reimbursement Rates

Establishing Reimbursement Rates. Salary and Related Expense (SRE) and General and Administrative (Overhead) Rates Presented by Leonard E. Bell, Jr. (LEBELL@lambert-stl.org) Comptroller’s Office Internal Audit Section. The Cost Object.

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Establishing Reimbursement Rates

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  1. Establishing Reimbursement Rates Salary and Related Expense (SRE) and General and Administrative (Overhead) Rates Presented by Leonard E. Bell, Jr. (LEBELL@lambert-stl.org) Comptroller’s Office Internal Audit Section

  2. The Cost Object • Cost object: A cost object is anything that we want to know the cost of • We might want to know the cost of making one unit of product, or a batch of product, or all of Tuesday’s production, in which case the cost objects are one unit of product, a batch of product, or Tuesday’s production, respectively • We might want to know the cost of operating a department or a factory, in which case the cost object is the department or factory.

  3. The Cost Object Continued • A cost mitigating contractual provision to encourage adequate reporting of contractual reimbursable items is a standard for all contracts entered into with the City of St. Louis whether it is for construction services or professional service agreements

  4. Direct Costs/Indirect Costs: • Management accounting classifies product costs as either direct costs or overhead costs (indirect costs). Following are three definitions of direct costs from different accounting textbooks: • Direct costs of a cost object are costs that are related to the cost object and can be traced to it in an economically feasible way. • Direct costs are costs that can be directly attached to the unit under consideration. • Direct costs are costs that can be traced easily to specific products.

  5. Overhead Cost and Cost Allocation Bases • Overhead costs are costs related to the cost object, but cannot be traced to the cost object in an economically feasible way. • Overhead costs are not directly traceable to specific units of production. • The allocation base is the “link” that is used to attach overhead costs to the cost object • Whatever cost allocation base is chosen, it must be a “common denominator” across all cost objects.

  6. Overhead Rates • The overhead rate is the ratio of cost pool overhead dollars in the numerator, and the total quantity of the allocation base in the denominator:

  7. How Do I Determine The Rate ? • Overhead rate: • =

  8. Computation Example ? • Materials and Supplies per Direct Labor Hour: • =

  9. Computation Example ? • Percent of Direct Labor Hours • =

  10. What can be/are my reimbursable rates? • Salary and Related Expenses (SRE) • General and Administrative Rates (G&A) • Fixed fee (Profit Rate)

  11. What Can I Include to Compute the General and Administrative Rate? • Accounting Costs • Auto and Travel not project related • Business Taxes • Computer Administration • Depreciation • Employee Insurance/employee recruiting • Fees, Dues, and Meetings • Office Space

  12. What Can I Include to Compute the General and Administrative Rate Continued? • Repairs and Maintenance • Telephone costs not charged to direct projects • Warranty

  13. What Can I Include to Compute the Salary and Related Expense Rate (SRE)? • Salaries/ Wages • Benefits/Health Insurance • Payroll Taxes • Commissions/Bonuses • Accrued Leave Costs • Pension Costs

  14. What About the Fixed Fee? • This is determined in one of two ways 1) A profit percentage can be applied to direct labor rate. This is a negotiated rate between the firm and the negotiating officer 2) Negotiate a fixed dollar amount for profit. A percentage of the profit is billed each month to equal the percentage of the job completed

  15. How Do I Best Negotiate These Rates? • Present rates which have been certified by an Independent CPA firm • Ensure that computations of non-certified rates can properly supported by documentation and subject to a review

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