Full Cost Recovery - WYCAS

What follows is a brief step-by-step guide as to how to apply the principles of full cost recovery to your organisation.
Remember though that this is a costing exercise for you to see what your services cost, in full. Whether anyone will fund your services in full is of course another matter! Nevertheless it will give you a clear target to aim for.

We need to do the following things:
1. Decide whether or not our organisation is made up of different `cost centres'. i.e. do we deliver services for different groups of people or in different geographical areas? If so we need to work out the `full' cost of each service, i.e. the `direct costs' plus a fair share of our overheads. This will tell us how much income we need to `recover' for each.
2. Identify all the direct costs for each service or cost centre.
3. Decide how to share the overheads out for each service.
4. Add them all up.

Step 1 Identifying cost centres
For some of us, we might find that our organisation is geared towards delivering one service to one group of users. In this case the full cost of the service will be the total costs of the organisation and we don't need to do anymore calculations.
If we deliver services in different areas or to different types of users, then we need to cost up each service separately. We need to be a bit careful here - we might run 6 different activities say for local older people and 5 activities for local young people - does this mean we have to cost each one separately? - Well we could see this as being 2 `cost centres' - 1 for services for older people and 1 for services for young people, and cost these up as a starting point. We could then break each cost centre down later if we need to.
It is also likely to depend on how services are funded now - you might already have a Service Level Agreement which funds only 3 of the 6 activities for elderly people - in this case perhaps you would need to split elderly services into 2 for this exercise.
At WYCAS we treat each geographical area as a separate cost centre.

Step 2 Identifying direct costs
This part should be relatively simple, although it is up to you to keep it simple! The most likely direct cost will be someone's salary or wages; e.g. there is a full time worker, solely devoted to delivering services to older people. Alternatively, if their time is split between older people's services and younger people's services, it is easy for us to work out how much is spent on each.

Don't go too deep here, only pick things that are easy to identify and treat everything else (stationery, phone, payroll charges etc) as overheads. Don't worry; these costs will be shared across all the cost centres in the next step, so this service will get its share anyway.

Step 3 Sharing overheads
Note: Our overheads are all the other costs, not already identified as `direct' costs. If we ran 2 services, would it be fair to just divide all the overheads by 2?
Perhaps, but only if we felt that one service used as much of the overheads as the other. What about if one was a bigger drain on the overheads - how would decide by how much? We need some kind of indicator or in accounting terminology a `cost driver'. These are usually: number of people, space used or worker time e.g. when the number of staff on a project goes up, they use up more of the overheads.
Most organisations will find that simplest approach is to draw up a little table to show how many hours each worker spends delivering each service. We could then work out each service's total hours as a percentage of all worker hours. Some services will come out with a higher percentage than others and will therefore take a greater percentage of the overheads.
Is this method fair? What if one cost centre uses lots of space but has few staff compared to another? We could split the overheads into different classes and share out each class of overheads using a different cost driver e.g. premises costs by floor area and all other overheads by worker hours.
In this way perhaps you could argue that you would arrive at a fairer costing. However you only need to do this if the difference between methods would be significant.

Step 4 Final Stage
As a final stage, we can compile all of our costs into a budget for the whole organisation, say, with different columns for our different services all adding up to a total budget.

Some costs easily forgotten
Bear in mind that what we are trying to do is come up with the ongoing yearly cost of each service, whilst maintaining its quality.
Remember some simple facts of life: equipment wears out and needs replacing, staff will need covering for various reasons from time to time e.g. maternity / paternity / sickness etc, and at some point you might need to re-recruit staff altogether (perhaps involving redundancy).
We need to build allowances into our plans one way or another. We could add an extra cost as an overhead e.g. depreciation for equipment or relief cover for staff; if we don't do this, we will need to cover such costs from reserves. What reserves?
Like all organisations we need to build up and maintain sufficient reserves, surpluses or working capital, from somewhere, in order to guarantee that we can deliver quality services tomorrow as well as today.
Their level will differ from one organisation to another as they relate to the organisation's financial risks; but we should be considering some margin to add onto the cost of our services. This will give us an income target to aim for to build up reserves to the required level.
I know this is easier said than done, but if we ignore it we will definitely have problems later.

For those of you who are a whiz with Excel - visit the Big Lottery Fund website and download their FCR spreadsheet. Website: www.biglotteryfund.org.uk/fcr-spreadsheet.xls

Here are some other useful sites re Full Cost Recovery:
http://tinyurl.com/y8aoozb  (URL shortened using TinyURL)
www.fullcostrecovery.org.uk/main/index.php?content=home
http://www.caplus.org.uk/?q=node/95

This information was prepared for fit4funding by the West Yorkshire Community Accounting Service (WYCAS)

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