Steps for Simplifying the Allocation of Costs Within a Not-for-Profit

Steps for Simplifying the Allocation of Costs Within a Not-for-Profit

This includes identifying which expenses are attributable to more than one program or function and the basis used for allocating each of the expenditures. Examples of possible bases used for allocation of costs include square footage, costs of specific amounts utilized by a department, units of service, FTEs or estimates of time and effort. Certain expenses are typically charged to activities on a direct costing basis when those expenses represent direct conduct or direct supervision, while others indirectly benefit more than one functional activity and need to be allocated among programs and supporting services.

Simplifying the Allocation of Costs within a Not-for-Profit Organization

The steps below outline a simplified allocation plan:

1. From your trial balance, identify which expenses are direct costs of one functional category and which need to be allocated because the expense relates to several functions.
   • Allocation of Costs Tip: You may want to use subcodes to differentiate between the direct items and the ones subject to allocation to simplify the process. This could be very important if you operate grants or contracts on a reimbursement basis.
2. For those expenses subject to allocation, determine which allocation base is the best to use. If a non-financial base is not appropriate, you can use a percentage base to perform the allocation, for example, salaries and fringes or direct costs of a program to total salaries and fringes or total costs of the organization.
3. If a time reporting system is used as the allocation base, be sure that it is well documented based on timesheets or another written approximation of the effort utilized. The related personal expenses – taxes and fringe benefits – should also follow the allocation of salaries.
4. Prepare the formal written allocation plan that will be consistently used and monitor the allocated results and any changes to the plan based on changes in activities on a periodic basis.

Keep in mind that the IRS Form 990 will not necessarily reflect the same expense classifications/requirements as in the financial statements. So, if the financial statements are used to prepare the 990, a mapping from one document to the other will need to be prepared.

As this ASU standard is effective for fiscal years beginning after December 15, 2017, not-for-profits should consider whether their current allocation of costs methods are appropriate. Donors, bankers, creditors and other institutions will most likely compare functional expense statements of similar not-for-profit entities to assess their service efforts and accomplishments on a programmatic basis.