Cost Allocation For Multi-Service Micro-Finance Institutions (Occassional Paper No. 02)
Helms, B.
Publication Date: Apr 1998
Published by: Consultative Group to Assist the Poor (CGAP)
Document Type: Paper
What is the purpose of cost allocation?
Cost allocation contributes to the understanding of the basic financial health of microfinance institutions (MFIs) financial services, with the exception of non-financial programmes
Four steps of cost allocation are presented: - defining separate cost centres
- identifing costs to be allocated
- establishing decision rules for allocating costs
- defining separate cost allocation
Shows how to apply decision rules to financial statements and how to undertake ratio analysis after allocation
Explains common decision rules in detail: - Direct Expense Ratio (DER)
- Direct Administrative Expense Ratio (DAER)
- Simple Personnel Ratio (SPR)
- Personnel Time Ratio (PTR)
- Personnel Cost Ratio (PCR)
- Executive Director's Time Ratio (EDTR)
Presents an illustrative case study of the Bangladesh Rural Advancement Committee (BRAC)
The need for cost allocation depends on: - how important financial viability of micro-finance services is to the MFI
- the extent to which the MFI considers its non-financial services as integral to the success of the micro-finance program
- whether non-financial services are compulsory or voluntary for clients who want financial services
- if the MFI funds its financial services from different sources than its non-financial services
- what proportion of the MFI's business is attributable to non-financial services
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