cost recovery Essay example

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This document and others about Full Cost Recovery are available from www.philanthropycapital.org/html/full_cost_recovery.php

What is full cost recovery?
Full Cost Recovery means securing funding for, or ‘recovering’, all your costs, including the direct costs of projects and all your overheads. Every organisation, whether voluntary, public or private, needs to recover all its costs, and ideally generate a surplus, or it cannot pay its employees, rent office space, offer its products and services, or plan for the future and the continued development and delivery of its services.
Funding to cover your costs can come from a variety of sources including: fees, charges, grants, contracts, donations, trading activities or payments in exchange for a particular product or service. In an organisation there are two types of costs. Direct costs that are incurred as a direct result of running a project or service, and overhead costs that are incurred by an organisation in order to support the projects that it runs. The full cost of your organisation includes both the direct costs of all your projects and services and all your overheads. Therefore, the full cost of each of your projects includes both the direct costs and a portion of overheads as shown below.

Direct costs

Overhead costs

Full cost of your organisation

Full cost of one project or service

It is important to note that although the diagram shows the overhead costs as proportional to the direct costs this will not always be the case. Since different projects make different demands on the organisation.

If you are not recovering the full costs of a project you are creating a deficit for your organisation. This deficit has to be met through additional fundraising or through subsidy from your unrestricted funds. Your unrestricted funds are not limitless. If you are not achieving full cost recovery you are jeopardising the longevity of your organisation and hence the services you provide.

Full Cost Recovery: A guide and toolkit on cost allocation was developed with support from:

This document and others about Full Cost Recovery are available from www.philanthropycapital.org/html/full_cost_recovery.php

Full Cost Recovery: A guide and toolkit on cost allocation
This guide contains a template to help organisations calculate the full cost of a particular project or service, including an appropriate share of all relevant support services and other overheads.

Full costs of Project A
A

B

C

D

E

Premises and office costs Central Functions e.g. finance, HR, IT
Governance and strategic development

The full cost of an activity or output or project =
The direct costs of the activity +
The appropriate portion of all other costs in the organisation

General Fundraising
(if needed)

Principles behind the template
The cost allocation template adheres to the principles behind The Chartered Institute of Public
Finance and Accounting (CIPFA) guidance on best value accounting for local authorities Best value accounting: code of practice, CIPFA, 2000.

Average versus marginal cost
Projects costs can be calculated using either marginal costs or average costs. Average cost is the total cost of all services split by some determinant e.g. number of services delivered. The marginal cost is only the additional cost incurred in starting a new service, and does not include an appropriate share of overheads. For this reason, the template uses average cost.

Cost allocation
To calculate an appropriate portion of overhead costs to allocate to a project or service or output, the template uses a number of cost drivers for the different types of overheads. A cost driver is the factor that affects whether costs increase or decrease. The template uses:
Headcount to allocate Premises and Office costs
Time to allocate Central Function costs
Expenditure to allocate Governance and Strategic Development costs

Full…