Internal Audit Report 

Limited Operational Audit 
Port of Seattle Corporate Cost Allocations 


January 1, 2011  December 31, 2011 




Issue Date: June 12, 2012 
Report No. 2012-09

Internal Audit Report 
Corporate Cost Allocations 
January 1, 2011  December 31, 2011 

Table of Contents 
Transmittal Letter.................................................................................................................................... 3 
Executive Summary ............................................................................................................................... 4 
Background .............................................................................................................................................. 6 
Highlights and Accomplishments ...................................................................................................... 8 
Audit Scope and Methodology ............................................................................................................ 8 
Conclusion ................................................................................................................................................ 9 












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Internal Audit Report 
Corporate Cost Allocations 
January 1, 2011  December 31, 2011 

Transmittal Letter 

Audit Committee 
Port of Seattle 
Seattle, Washington 

We have completed a limited operational audit of the Corporate cost allocations. 
We examined information related to a twelve-month period from January 1, 2011 through December 
31, 2011.
We conducted this performance audit in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit to obtain sufficient,
appropriate evidence to provide a reasonable basis for our findings and conclusions based on our
audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings
and conclusions based on our audit objectives. 
We extend our appreciation to the management and staff of the Finance and Budget department for
their assistance and cooperation during the audit. 


Joyce Kirangi, CPA 
Director, Internal Audit 







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Internal Audit Report 
Corporate Cost Allocations 
January 1, 2011  December 31, 2011 
Executive Summary 
Audit Scope and Objective  We examined the Port Corporate Cost allocations for a twelve-month
period from January 1, 2011 to December 31, 2011. We also evaluated the 2012 budget allocations. 
The purpose of the audit was to determine whether: 
1.  The Port Corporate costs are allocated to the operating divisions based on a reasonable and cost
effective basis. 
Specifically, we determined whether: 
The current default allocation formula is reasonable. 
The selection of the default formula by corporate departments is reasonable and in
accordance with the Operating Cost Allocation Policy. 
The special allocation formula by corporate departments is reasonable, supportable, and
in accordance with the Operating Cost Allocation Policy. 
Direct Charges by corporate departments are in accordance with the Direct Charge
Policy. 

Background  The Port of Seattle is organized into five divisions/groups; three are operating divisions
that generate revenues and two provide support services to the three operating divisions. 
The Port has implemented policies for costs allocation. Per the Operating Cost Allocation Policy, the
Port distributes the costs of the two service support groups (Corporate and Capital Development) to
the three operating divisions (Aviation, Seaport, and Real Estate). This is done in order to properly
reflect the full costs associated with the operating divisions and to match revenues with the related
expenses. For the 2011 budget, the total Corporate expenses allocated to the operating divisions
were budgeted at $73.3 million. 
Corporate costs are allocated to the operating divisions through any combination of the following Port
approved methodologies: 
1.   Direct charges 
Per the Port Direct Charge Policy, support service groups/departments direct charge their costs
to the operating divisions if the cost of the service can be accurately and effectively tracked and
the service clearly benefits a particular operating division. Direct charges may include salaries,
employee benefits, and other costs directly attributable to performing the services. The direct
charge is the most accurate way to assign costs and as such, the Policy encourages its usage. 
2.   Special allocations 
Costs that are not direct charged are allocated to the operating divisions in accordance with a
special allocation formula or a standard/default allocation. Special allocations are encouraged
when there is a clear cause and effect relationship to the operating divisions. Corporate support
service groups work closely with the operating divisions to evaluate and determine whether it's
practical to use a special allocation formula. 
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Internal Audit Report 
Corporate Cost Allocations 
January 1, 2011  December 31, 2011 
3.   Default allocations 
When a corporate support service group provides services that are notspecifically attributable 
to a particular operating division, the operating costs are allocated to the operating divisions
using a default allocation formula. The current default cost allocation formula is 64% to the
Aviation Division, 27% to the Seaport Division, and 9% to the Real Estate Division. 

Audit Result Summary  The Port Corporate costs are allocated to the operating divisions based on
a reasonable and cost effective basis. 















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Internal Audit Report 
Corporate Cost Allocations 
January 1, 2011  December 31, 2011 
Background 
The Port of Seattle is organized into five divisions/groups as follows: Three are operating divisions
that generate revenue and two provide support services to the operating divisions. 
Support Services Group            Operating Division 
Corporate                           Aviation 
Capital Development Division            Seaport 
Real Estate 
Business groups within the operating divisions generate revenues whereas the service support
groups within Corporate support revenue-generating activities. 
The service support costs are allocated to the operating divisions to appropriately reflect fullcosts 
associated with generating operating revenues. Support services by Corporate and Capital
Development Division are necessary in revenue-generating activities. Thus, a true cost of operating
revenue should include service support costs.
The Port distributes all of the net operating costs of the service support groups in accordance with the
Cost Allocation Policy through any combination of the following allocation methodologies: 
1.  Direct charges (14% of 2011 budget) 
Per the Port Direct Charge Policy, support service groups/departments direct charge their costs
to the operating divisions if the cost of the service can be accurately and effectively tracked and
the service clearly benefits a particular operating division. Direct charges may include employee
salaries, benefits, vendor invoice, and other costs directly attributable to performing services for
a business unit in the operating division. The direct charge is the most accurate way to assign
costs and as such, the Policy encourages its usage. 
2.   Special allocation (54% of 2011 budget) 
Costs that are not direct charged are allocated to the operating divisions in accordance with a
special allocation formula or a standard/default allocation. Special allocations are encouraged
when there is a clear cause and effect relationship to the operating divisions. Corporate support
service groups work closely with the operating divisions to evaluate and determine whether it's
practical to use a special allocation formula. 
An example is the personal computer support costs which are allocated based on the number of
PCs per business unit. 
3.   Default allocation (32% of 2011 budget) 
The operating costs of the service support groups are allocated using a default allocation
formula under the following conditions: 
The services are not specifically attributable to a particular operating division. 
There are cost relationships, but the administration cost of allocation exceeds benefits. 
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Internal Audit Report 
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The most recent budget guideline states that the default formula is based on the number of
FTEs and direct operating & maintenance expenses. In accordance with the guideline, the 2011 
calculated default formula is as follows: 
Aviation     Seaport    Real Estate 
Based on FTE              77%       6%       17% 
Based on Operating Exp.        71%       12%       17% 
However, the default formula  in use for 2011  was  different than the calculated ratios.
Specifically, 2011 ratios were 64%, 27%, and 9% to the Aviation, Seaport and Real Estate
Division, respectively. The difference is due to the budget guideline requiring a cap on the
default formula at 64% Aviation, 27% Seaport, and 9% Real Estate if the ratio to Aviation is
greater than 65%. 
A cap has been imposed since 2003, and the current cap has been in place since 2008. 
Cost allocations and direct charges are budgeted annually as part of the budget process. Service unit 
allocations are approved by the Finance & Budget in each operating division. 
The following describes the sequential application of the existing cost allocations methodologies: 
Corporate Operating Expenses 
Direct Charges, if available 
Special Allocations, if available 
Default Allocations 

Financial Highlights 
Total Corporate operating expenses were allocated as indicated in the charts below. 
2011 Budget  Primary Allocation
2011 Budget $73.3 Allocation &
Method Used by Organization    Actual Allocations to Operating Divisions 
Direct Charges 
Units (Orgs) 
9%           9%           9% 
20% 
6%                21%              23% 
14%                         32% 
32%         54% 
62%                  70%       71%       68% 

2009     2010     2011
Special  Default  Direct Charge         Special  Default  Direct Charge
Aviation     Seaport     Real Estate
Source: Budget vs. Actual Comparison, F&B 
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Internal Audit Report 
Corporate Cost Allocations 
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Highlights and Accomplishments 
During the course of the audit, we observed the following effective and efficient management
practices: 
The Operating Division finance staff review and approve during the budget season the allocation
methodology of each service organization unit to ensure complete and reasonable cost
assignments. 
The majority of the cost allocation process is automated (via PeopleSoft) thereby minimizing
processing errors. 

Audit Scope and Methodology 
We reviewed information for the twelve-month period from January 1, 2011 to December 31, 2011,
which included the 2012 budget. We utilized a risk-based audit approach from planning to testing. We
gathered information through research, interviews, observations and analytical reviews, in order to
obtain a complete understanding of the allocation process. We identified and tested management
controls to determine the areas of audit focus with the highest likelihood of significant negative impact. 
We applied additional detailed audit procedures as follows: 
1.  To determine if the default allocation formula is reasonable and current: 
We reviewed the Operating Cost Allocation Policy, the Direct Charge policy, the Allocation
formula, and budget guidelines. 
We analyzed FTEs and operating expenses budgeted for 2011 and 2012, and recalculated
the formula based on those factors. 
We discussed at length with management in the various budget groups the assumptions
related to the default allocation formula and the historical context. 
We calculated the impact of imposing a cap on the allocation formula. 
2.  To determine if the selections of default formula was reasonable and in accordance with the
Operating Cost Allocation Policy, we selected and tested a judgmental sample of 6 Corporate 
departments which represented 53% of 2011 budgeted expenses through the default formula: 
We reviewed the department budgets and activities. 
We reviewed the allocation forms for consistency and proper approval by the operation
divisions. 
We analyzed actual allocations for 2011. 
We discussed with management the rationale for the default selection, and any alternatives,
and assessed the reasonableness of the default selection. 
3.  To determine if the selection of a special allocation formula was reasonable, supportable and in
accordance with the Operating Cost Allocation Policy, we selected and tested a  judgmental
sample of 6 Corporate departments which represented 94% of 2011 budgeted expenses through
the special allocation: 
We reviewed their department budgets and activities. 
We reviewed their allocation forms for consistency, approval, and the supporting
documentation. 
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Internal Audit Report 
Corporate Cost Allocations 
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We analyzed actual allocations for 2011. 
We discussed with management the rationale for the special allocation. 
4.  To determine if the direct charges by Corporate departments were in accordance with the Direct
Charge Policy, we selected a judgmental sample of 6 Corporate departments that represented
88% of actual direct charges: 
We reviewed their department budgets and activities 
We reviewed their allocation forms for consistency and approval 
We analyzed actual allocations for 2011 
We tested a sample of vouchers of $3.1 million, 78% of the vendor payments in 2011 by
these departments, to determine if the underlying information supports and is directly linked
to the business group being charged. 

Conclusion 
The Port Corporate costs are allocated to the operating divisions based on a reasonable and cost
effective basis. 












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