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18 Sharing the Costs of Human Services Transportation an example of a value that should be recorded even though no immediate out-of-pocket expendi- ture is incurred. Transportation providers commonly count the value of volunteer labor as "in-kind revenue" as part of their local matching revenues. Of course, these recorded "revenues" need to be offset in the accounting system by equivalent labor costs. The primary reason for using full cost accounting is that all costs must be paid sooner or later by someone. Some transportation providers have experienced difficulty with this principle because they only think about out-of-pocket expenses (e.g., wages, gas, and maintenance) and not other costs (e.g., administration, rent, and depreciation). Some providers may not include infrequent expenses, including purchases of capital equipment, like vehicles. This oversight often results in failing to bill agencies for enough money to cover all costs of the transportation services they are purchasing (including administrative time, facility leasing costs, and vehicle replacement costs); this can cause a severe financial shortfall for the provider. The same kind of situation occurs when an agency wishing to purchase transportation services offers payments that are limited or capped at rates below the fully allocated costs of service. Cost Allocation Cost allocation is a financial planning technique for determining the costs of services provided to those parties receiving or otherwise benefiting from those services. The cost allocation process does not necessarily set the prices for services, but allocating costs is the first step in developing a system of charges (i.e., billing rates and procedures incorporated in fees-for-service contracts) based on the types and amounts of services provided. The cost allocation method recommended in this Toolkit is often termed proportionate cost allocation, which means that costs are allocated among parties receiving services in the same proportions as the costs of services each recipient received. (Alternative methods of cost allocation are used in some industries such as electrical utilities, telecommunications, and air traffic control, but these methods are substantially more difficult to apply and understand, so they are not recommended for coordinated community trans- portation services.) Standardized Definitions for Services and Costs Standardized definitions for services were provided earlier in this chapter. Standardized defini- tions for costs are discussed in the sections that follow. Detailed definitions for services and costs are among the items included in the Glossary of Technical Terms. Although definitions may vary somewhat from state to state or community to community, using common definitions within indi- vidual states and particularly within individual communities is highly recommended. A Common Chart of Accounts A fundamental component of cost analysis for human services transportation providers is the development of a financial chart of accounts that can track all kinds of expenses related to pro- viding community transportation services. A key element of the chart of accounts is the establish- ment of expenditure classes. There seems to be general agreement in the literature that, for human service community transportation providers, fundamental cost categories are capital, operating, and administrative costs, and that detailed expense classes should include the following: Labor. Fringe benefits. Purchased transportation. Contracted services.