Policy on Unallowable Costs

University of Massachusetts Amherst 

Policy on Unallowable Costs

Effective Date: This policy is effective July 1, 1998

Applicability: This policy applies to all federally sponsored agreements.

I. Definition

Unallowable costs, for the purpose of this policy, are costs that cannot be included in the direct costs of sponsored agreements or in the university's indirect cost rate according to OMB's Circular A-21. These costs are not necessarily what the university considers unallowable. Unallowable costs, by UMASS definition are outlined in Trustee Document T92-031 and include items such as: expenses for personal gain, political contributions, personal gifts of gratitude, and personal fines.

Circular A-21 defines allowability of costs as "(a) they must be reasonable; (b) they must be allocable to sponsored agreements under the principles and methods defined in A-21; (c) they must be given consistent treatment through application of those generally accepted accounting principles appropriate to the circumstances; and (d) 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." 

II. Guidelines

Unallowable costs and directly associated costs must be appropriately identified on all documentation to ensure these costs are in the proper accounts and are excluded from direct and indirect costs of sponsored agreements. Correct classification of unallowable costs in the accounts is also important in the computation of indirect cost rates.

Directly associated costs are expenses that would not have been incurred if the unallowable cost had not been incurred.

 Below is a list of the main unallowable costs taken from part J of Circular A-21 and a description of how these expenditures are treated at the Amherst campus. This is a quick reference. There are exceptions for some of the items listed. 

Examples of Unallowable vs. Allowable Expenses

A common area of misunderstanding, in the past, has been in the area of business function (allowable) vs. entertainment expenses (unallowable). Below you will find examples that we hope will clarify this matter for the university community. If there are any questions concerning the allowability of a cost please contact the Office of Grant and Contract Administration or The Controller's Office, Grant Accounting Section for assistance.

Unallowable Entertainment

The cost of dinner and the tickets are considered entertainment and charged to object code 4301.

(2) It is the end of the Fiscal Year and you have survived another one. You decide to have a year end party for your department to lift morale. Catering delivers a luncheon in the conference room and everyone in the department gets together to socialize and unwind.

The cost of catering is considered entertainment and charged to object code 4301.

 The above costs are for "amusement, diversion, and social activities and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities)" and therefore are examples of unallowable entertainment costs. The encumbrance documents should be coded with object code 4301 to designate them as entertainment.

Allowable Business Function

 (2) You are recruiting a new post-doc and decide to perform the interview over lunch, you pick up the tab. 

The costs of both luncheons are allowable expenses and should be classified as a business function. They are considered an extension of business.

University of Massachusetts Amherst

Policy on Unallowable Costs