Instructional Resources on Cost Allocation

Cost allocation in the public transit field consisted primarily of locally developed methods until 1987 when FTA sponsored research created a specific framework for cost allocation techniques and methods. This document was directed toward providers of fixed route public transit services and introduced the concept of the three-variable model to allocate transit costs to specific services.⁸ In this manual, direct costs associated with each service are captured in the accounting system; shared costs are allocated to the respective services by three variables: vehicle hours, vehicle miles, and peak vehicles.⁹ A transit system must assign shared costs to one of these three categories, typically using a classification procedure that defines the object class as either a fixed or variable expense.

A lesser known element of this work addressed issues associated with comparative analysis of private sector and public sector cost structures — an element that must be taken into account in NEMT cost allocation, as many NEMT providers are for-profit entities. An ad-hoc group created by the Federal Transit Administration and the American Public Transit Association (APTA), known as the Competitive Services Board, developed guidance on the treatment of unique expenses associated with each type of organization (public or private).¹⁰

While groundbreaking in its comprehensive scope and development of a costing model, demand response transit operators found that the allocation of fixed expenses based on peak vehicles was not a concept that resulted in an equitable distribution of fixed costs. Cost allocation methodology in the context of public and human services transportation was introduced by the Multi- State Technical Assistance Program’s (MTAP) in a 1992 manual. This reference manual provides recommended approaches to service planning, revenue management, costing, budgeting, and cash management. A section on monitoring and analysis provides guidance on financial and performance reporting, and audits. An accounting section instructs transit managers on basic accounting procedures and performance evaluation. A chapter on cost allocation is particularly relevant to this research. A model is provided to guide agencies in distributing total system costs among funding sources and to individual routes or services, including a step-by-step example. The model uses a two-variable method, vehicle miles and vehicle hours, to allocate costs.11 Rather than use the third variable (peak vehicles), this model uses a mathematical workaround that involves the ratio of variable expenses to allocated fixed costs; this approach remedies the problem in the earlier FTA cost allocation model when applied to demand response environments. Examples of the model are provided to illustrate the allocation of costs for billing funders under
various service scenarios. The model allows transit systems to bill agencies on a per-trip basis for rides provided to an agency’s clients.¹²

This model works well in a single mode, community transit system environment. If the transit provider operates multiple modes, particularly both fixed route and demand response modes, this model abandons the three-variable approach incorporated into the FTA sponsored research and uses that mathematical work-around for this allocation, even for fixed route modes.

A 2011 Transit Cooperative Research Project (TCRP) report provided a comprehensive, unified approach to the issue of cost sharing among Federal programs. The report focuses on the need for organizations to adopt accounting practices to recognize the fully allocated cost of service delivery, provides some common principles for recognizing costs, including the depreciation of assets used in service delivery, and provides a model tool for allocating costs. This model is a variation of the previous MTAP model but solves the problem of allocating fixed costs in a multimodal transit operation. The report defines the basic data needed for managing coordinated transportation operations, methods for collecting data on transportation services and costs, and step-by-step instructions for establishing cost-sharing agreements for transportation services.¹³

The reasoning behind the report’s objective— providing cost accounting and inter-agency coordination methods to transportation agencies — is fourfold. It ensures that operators are recording all services and costs on an accurate and consistent basis; ensures that complete information is reported on transportation services and costs and is available to a wide range of decision-makers; develops a uniform service and cost-reporting methodology that can be used to track and analyze transportation services and costs; and, allows for the sharing of costs of transportation services among the users and other beneficiaries of those services, when appropriate.

The report defines data needs for measuring service: resource inputs, service inputs (service quantity inputs or qualitative statistics), and service outputs (consumption). The recommended process for determining how much a specific transportation service costs is provided in four steps:

1. Assembling data on all services provided and all expenses required to provide those services.
2. Assigning the expenses to cost categories that explain how these costs vary according to the resources required to produce these services.
3. Calculating average unit costs on a per mile, per hour, or per trip basis.
4. Allocating the costs of services among the parties receiving the services in proportion to the services that they have received.

Volume 2 of TCRP 144 provides background information related to transportation cost allocation including a summary of the Federal regulatory framework for various human service agencies’ cost accounting requirements, and descriptions of the major Federal agencies that fund transportation services. The report includes detailed descriptions of how transportation providers in a sample taken from eight states approach transportation cost accounting and in-depth case studies of coordinated transportation practices in two states.

This research also developed a Microsoft Excel tool based on the unit cost calculation model. As noted above, this cost allocation model solves the problem of fixed cost allocation when multiple modes are operated by a single provider organization.