![]() The burden of tracking usage to that level of detail is prohibitive. The nature of the equipment makes it difficult to measure specifically what pieces of equipment are being used by which program when. Each program of the organization uses this technology in support of mission-based programmatic work, as well as to support fundraising and administrative activity. To be most useful to us in our decision-making, we tie our allocation methods to drivers that influence how much a particular program or cost center uses a particular resource.įor example, many nonprofits have office equipment costs for computers, monitors, and network servers. The method we choose may need to be different from line item to line item. Instead, we apply the allocations to the total amount captured in the “To be allocated” cost center.Ĭhoosing an allocation method for nonprofit expensesĪny allocation method we choose for our shared direct costs must be reasonable, justifiable, and consistently applied. We avoid having to apply allocation percentages to every transaction. Having a “To be allocated” coding option makes entering accounts payable invoices into the accounting system simpler. This step organizes all of our shared direct costs into one easily identifiable category. When incurring expenses and coding them into our accounting system, we choose this cost code. This allocation cost center sits parallel to the other functional cost centers (programs, administration, and fundraising) in our structure. To organize shared direct expenses best, we create a “To be allocated” or “Allocable expenses” cost center. ![]() Prior to taking either step, we use our elegant cost centers and elegant chart of accounts structure to capture these expenses accurately. The second step is to allocate the expenses aggregated in the administrative and fundraising categories. The first step is to allocate shared direct costs. To allocate costs properly, we take a two-step approach. The resources deployed to these purposes are benefitting each program and each functional area.Ī two-step approach to allocating nonprofit expenses These are often expenses like office supplies, occupancy, technology, and equipment. It is generally not possible (or would be prohibitively expensive and time-consuming) to track the exact amount used by each program or function. Nonprofits most often acquire these resources centrally and make them available to each program as well as the administrative and fundraising functions. Shared direct costs (aka, shared program costs aka, allocable direct costs) are resources that each program uses to accomplish its mission work. The resources deployed to these purposes are benefitting the organization as a whole. ![]() These are often expenses related to board governance, financial accounting, human resources, and organization-wide staff meetings. Just because a resource is used by more than one program or functional area (administration or fundraising) does not define it as an administrative cost.Ī high-level definition of administrative costs (aka, management and general aka, indirect) is that they are resources used for the overall management of the entire organization. Nonprofits sometimes misunderstand the difference between shared direct costs and administrative costs. The difference between shared direct costs and administrative costs For a complete view of the financial state of any one program, we need to see the full range of resources required to support it. For nonprofits, we strengthen our decision making when we can see the whole truth about our programs and their finances. ![]() The point of taking the time to design an elegant accounting system is not only simplicity, it is power – decision-making power. Now it is time to use those blocks to build better financial reports. In our previous blogs in this series, we have outlined the building blocks of an elegant financial system: elegant cost centers and elegant charts of accounts. ![]()
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