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projects or activities, and may be used where the level of Federal awards to that department or <br />agency is relatively small. <br />b. Both the direct costs and the indirect costs shall exclude capital expenditures and unallowable <br />costs. However, unallowable costs must be included in the direct costs if they represent activities <br />to which indirect costs are properly allocable. <br />c. The distribution base may be (1) total direct costs (excluding capital expenditures and other <br />distorting items, such as pass-through funds, major subcontracts, etc.), (2) direct salaries and <br />wages, or (3) another base which results in an equitable distribution. <br />3. Multiple allocation base method. <br />a. Where a grantee agency's indirect costs benefit its major functions in varying degrees, such <br />costs shall be accumulated into separate cost groupings. Each grouping shall then be allocated <br />individually to benefitted functions by means of a base which best measures the relative benefits. <br />b. The cost groupings should be established so as to permit the allocation of each grouping on <br />the basis of benefits provided to the major functions. Each grouping should constitute a pool of <br />expenses that are of like character in terms of the functions they benefit and in terms of the <br />allocation base which best measures the relative benefits provided to each function. The number <br />of separate groupings should be held within practical limits, taking into consideration the <br />materiality of the amounts involved and the degree of precision needed. <br />c. Actual conditions must be taken into account in selecting the base to be used in allocating the <br />expenses in each grouping to benefitted functions. When an allocation can be made by <br />assignment of a cost grouping directly to the function benefitted, the allocation shall be made in <br />that manner. When the expenses in a grouping are more general in nature, the allocation should <br />be made through the use of a selected base which produces results that are equitable to both the <br />Federal Government and the governmental unit. In general, any cost element or related factor <br />associated with the governmental unit's activities is potentially adaptable for use as an allocation <br />base provided that: (1) it can readily be expressed in terms of dollars or other quantitative <br />measures (total direct costs, direct salaries and wages, staff hours applied, square feet used, hours <br />of usage, number of documents processed, population served, and the like), and (2) it is common <br />to the benefitted functions during the base period. <br />d. Except where a special indirect cost rate(s) is required in accordance with subsection 4, the <br />separate groupings of indirect costs allocated to each major function shall be aggregated and <br />treated as a common pool for that function. The costs in the common pool shall then be <br />distributed to individual Federal awards included in that function by use of a single indirect cost <br />rate. <br />e. The distribution base used in computing the indirect cost rate for each function may be (1) <br />total direct costs (excluding capital expenditures and other distorting items such as pass-through <br />funds, major subcontracts, etc.), (2) direct salaries and wages, or (3) another base which results <br />in an equitable distribution. An indirect cost rate should be developed for each separate indirect <br />53 <br /> <br />