In a previous blog, we discussed the importance of monitoring and encumbering indirect costs (aka IDC, Facilities and Administration, and F&A) on sponsored projects and the need for implementing a grant accounting software solution for this purpose. In today’s blog we provide the steps involved in computing direct cost encumbrances and provide examples of how calculations are performed.
Steps for Computing and Encumbering Indirect Costs on Sponsored Projects
Encumbrances must be tracked at the transaction level. The current encumbrance total for a sponsored project is not sufficient. At a minimum, each transaction must contain fields that identify the sponsored project, the type of encumbrance (salaries, fringe benefits, supplies, travel, capital equipment, etc.) and the amount of the encumbrance.
Identifying transactions that generate indirect costs (IDC)
Identifying which transactions generate indirect costs starts with defining the indirect cost rules that apply to the sponsored project. These rules are usually defined according to the type of IDC defined for the sponsored project. Examples of IDC types include:
- Total Direct,
- Modified Total Direct,
- Salary and Wages.
A list of the types of encumbrances (and eventual expenditures) is maintained for each IDC type. For example, indirect costs are usually generated for most salaries and benefits on all three examples just listed. Indirect costs are not usually generated for capital equipment purchases on projects using Modified Total Direct rules. Likewise, they are not generated for non-personnel encumbrances and expenditures on projects using Salary and Wages rules. Indirect costs are computed on transactions for a sponsored project when the type of encumbrance is included in the project’s IDC type.
Compute the indirect costs associated with each transaction
To compute the indirect costs associated with a transaction, first determine whether indirect costs should be computed for the transaction by comparing the type of the encumbrance with the list of encumbrance types associated with the project’s IDC type. If the encumbrance type of the transaction matches an encumbrance type associated with the project’s IDC type, then indirect costs are computed for the transaction. The indirect costs for the transaction are computed by multiplying the amount of the encumbrance by an indirect cost rate (a percentage) associated with the sponsored project.
Example Calculations for Encumbering Indirect Costs
Consider the following examples regarding how to compute indirect costs for two encumbrance transactions shown in Figure 1. Both examples use sponsored project 5001-22345, which has as Salary and Wages IDC type and a 50% IDC rate. In the first example, $7,850.00 is encumbered for the purchase of a Digital Microscope. Because the encumbrance type (Equipment) used in the tracking the purchase of the Digital Microscope would not be on the list for the Salary and Wages IDC type, indirect costs are not computed for this transaction. In the second example, a $4,300.00 is encumbered for a payroll transaction. In this case, encumbrance type (Salary) would be on the list for the Salary and Wages IDC type. The following calculation is performed:
Amount * IDC Rate = IDC Amount
$4,300.00 * 50% = $2,150.00
Figure 1. Sample Calculations for Encumbering Indirect Costs
Software for Encumbering Indirect Costs
In the example just presented in Figure 1, there is a single project with two transactions and the indirect cost amounts can be quickly computed with a spreadsheet. In the real world of research administration however, a grant accountant typically encounters several thousand transactions from multiple projects per month and can be quickly overwhelmed when trying to calculate indirect costs with spreadsheets. Thus the need for an accounting system designed for these calculations. As noted in our previous blog, many research intensive organizations use GL accounting systems that were not designed for this purpose and turn to products from IT Works as an alternative.
IT Works provides Grant Accounting Software Systems designed specifically for use in research intensive organizations. These systems can integrate with an institution’s GL and purchasing systems to automate the calculation of indirect cost encumbrances and provide numerous reporting functions for project review and financial analysis. For more information on these systems or other grant accounting needs, contact the IT Works team today.