RSM Resources

Keep your cost allocation methodology up-to-date

As yournot-for-profit organization grows, adds or eliminates new programs oractivities, do you review your expense methodology? It’s essential that youreview and update your allocation process on a regular basis.

To helpfinancial statement users assess your organization’s service efforts, NFPsreport expenses by functional classification, such as major classes of programservices (i.e., the central purposes and output of the organization) andsupporting services (which include all other activities and are generallydivided into three categories):

• Management and general — oversight, administration and financial management
• Fundraising — all activities related to soliciting contributions and raising funds for the organization
• Membership development — all activities related to soliciting new members and maintaining records on new members

Costsdirectly related to a particular program service or supporting service shouldbe charged completely to that service. If the costs don’t precisely connect toa specific service, they should be allocated between the various applicablefunctional classifications.

Theallocation method ought to be rational and systematic, result in a reasonabledistribution of costs and be applied consistently. Review each expense line todetermine the appropriate distribution process. Different types of expenses mayuse different systems. Salaries and fringe benefits may be allocated based ontime sheets. Office rent and building expenses may be billed based on a squarefootage calculation. Office supplies may be dispensed based on consumptionrecords.

If yourorganization has “joint activities” in which it incurs program, management andgeneral costs in activities that also include fundraising expenses, follow theguidance in Statement of Position (SOP) 98-2, Accounting for Costs ofActivities of Not-for-Profit Organizations and State and Local GovernmentalEntities that Include Fund Raising. If any of the criteria of purpose, audienceand content – as defined in the SOP – aren’t met, all spending of the jointactivity should be reported as fundraising expenditures. However, goods orservices costs provided in exchange transactions — that are part of jointactivities, such as expenses of direct donor benefits of a special event (e.g.,a meal) — shouldn’t be reported as fundraising.

Whatevermethod your organization chooses, it’s important to review the allocationmethods at least once per year. And this process should be documented and madeavailable to your auditors to review as part of the audit.

Colleen Williams is a managingdirector with RSM McGladrey. For more information, contact her at colleen.williams@rsmi.com.