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Transaction Sampling: Circular A-21 Excerpt

Refer to this excerpt from OMB Circular A-21 to help determine if a sampled transaction is allowable and allocable.

Factors affecting allowability of costs

The tests of allowability of costs under these principles are:

  • They must be reasonable.
  • They must be allocable to sponsored agreements under the principles and methods provided herein.
  • They must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances.
  • They must conform to any limitations or exclusions set forth in these principles or in the sponsored agreement as to types or amounts of cost items.

Reasonable costs

A cost may be considered reasonable if the nature of the goods or services acquired or applied, and the amount involved therefore, reflect the action that a prudent person would have taken under the circumstances prevailing at the time the decision to incur the cost was made. Major considerations involved in the determination of the reasonableness of a cost are:

  • Whether or not the cost is of a type generally recognized as necessary for the operation of the institution or the performance of the sponsored agreement
  • The restraints or requirements imposed by such factors as arm's-length bargaining, Federal and State laws and regulations, and sponsored agreement terms and conditions
  • Whether or not the individuals concerned acted with due prudence in the circumstances, considering their responsibilities to the institution, its employees, its students, the Federal Government, and the public at large
  • The extent to which the actions taken with respect to the incurrence of the cost are consistent with established institutional policies and practices applicable to the work of the institution generally, including sponsored agreements

Allocable costs

A cost is allocable to a particular cost objective (i.e., a specific function, project, sponsored agreement, department, or the like) if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a sponsored agreement if it meets one of the following criteria:

  • It is incurred solely to advance the work under the sponsored agreement.
  • It benefits both the sponsored agreement and other work of the institution, in proportions that can be approximated through use of reasonable methods.
  • It is necessary to the overall operation of the institution and, in light of the principles provided in this Circular, is deemed to be assignable in part to sponsored projects.

See the entire policy.