Allocations Part I

In my post last week on Charts of Accounts, I mentioned that since I started serving non-profit organizations almost exclusively, I have struggled with the allocation of costs.  I noted that there are allocations required for grant reports, for tax returns, for financing compliance, for management reporting and sometimes just because a Board member wants to know a random bit of information.

Allocating costs is a function of taking the expenses of an organization and assigning them to a program or cost center.

In non-profits, the three areas that MUST be tracked and reported for the annual tax return are administrative, fundraising and program expenses.  All non-profit tax returns are considered public information and can be downloaded with ease from the Internet through a provider such as Guidestar (which is free to join).

In addition to these three areas, an organization may want to track the expenses of several individual programs to roll into that "program expenses" on the tax return.

It is the disclosure of expenses that provides the non-profit, and other interested parties, information on how much money is spent performing its exempt function.  You will commonly hear this phrased as "Eighty-two cents of every dollar goes to help..."

It is worth noting that the bigger an organization gets, the smaller their administrative costs should be.  I work with primarily small organizations who don't benefit from large organizational efficiencies.  As such, it is expected that administrative and fundraising costs together will equal between 23 and 28% of total costs.

That percentage will vary depending on the type of services the organization performs, but I would venture to say that if you see a small organization that gets these costs below 10%, they probably aren't doing their allocations properly.

I thought today I would begin going through the four most common allocation entries that we see.

DIRECT ALLOCATIONS

Direct allocations are the easiest to track.  This is when an expense is readily identifiable to a program.  If you buy supplies for an after-school camp that you put on, those supplies would be coded and entered directly to that program.

If I was using QuickBooks for a client in this case, I would have an account called Program Supplies and I would use a class code called After-School.  The invoice would be entered directly to the program and you are done.

The more direct allocations you can do, the cleaner and easier it is to track expenses by function.

SALARY ALLOCATIONS

The largest expense in most social service organizations is generally salaries.  Salaries and related costs need to be allocated based on actual time spent on a task.  This means we have to have timesheets.  There is no getting around it.  Unless you have a person who is 100% in one program and one program only, a luxury most small organizations do not have, then you will need to have an understanding of exactly where each person is working.

If you receive funding from government sources, or if you just want to do salary allocations properly, then you have no choice but to get this information.

Related costs of salary include payroll taxes, employee benefits, 403B matches and vacation or PTO accruals. All of these costs can be specifically identified to an employee and should be allocated based on that person's work.

I take timesheets periodically from the staff at my clients and I enter them into an excel spreadsheet, summarizing each person by program.  I then convert the hours to a percentage for application of the salary costs.  I apply that percentage to the employee's costs and record the allocation.

In this case, you would probably enter payroll either to administrative costs or unclassified costs and then go through and clear out the payroll entry through the allocation entry.  That way you can match the payroll payment to the payroll reports (good for audits) without having to add up all the allocations.

An example would be:

1. Pay Jane
Debit Payroll Expense    2,000.00  Unclassified
Debit Payroll Taxes           200.00  Unclassified
          Credit Cash or Salary Payable   2,000.00  Unclassified
          Credit Cash or Taxes Payable       200.00  Unclassified


2. Allocate Jane - 50% to After-School, 25% to Before-School, 25% to Administrative
Debit Payroll Expense   1,000.00  After-School
Debit Payroll Expense      500.00  Before-School
Debit Payroll Expense      500.00   Administrative
          Credit Payroll Expense    2,000.00  Unclassified

Debit Payroll Taxes          100.00   After-School
Debit Payroll Taxes            50.00   Before-School
Debit Payroll Taxes            50.00   Administrative
          Credit Payroll Taxes           200.00   Unclassified

If you draw a T-Account you will find that you still have $2,000 in Payroll Expense, but now it is in three different buckets.  The back-up for the second journal entry would be Jane's timesheet matched to the allocation workpaper.  You may also have to provide payroll records to a government auditor.

Allocating salaries is expected to take the most amount of time and effort in non-profit accounting.  It is also the most important activity; because, as the biggest cost, it is going to have the most direct impact on that percentage that I spoke about above - the amount of costs that go to providing services.

If you are hoping to be or are funded through large foundations or government sources, this allocation should always be prepared carefully, so that you can maintain credibility in the funding community.

A note about volunteers and salary costs:  Unfortunately, you can not allocate volunteer time in Salary and related cost expense.  Volunteers are often helping provide services and are rarely performing administrative functions.  This is one of the reasons that smaller organizations have higher administrative costs - they may only have two staff that do 100% of the administrative work, but they have a large volunteer pool helping with the programs.  The volunteers are not recognized in these expenses.

While that does not seem fair, it is a situation that most people face, and it is understood by grantors and other knowledgeable financial statement readers.  It is also something to keep in mind when you are writing your narrative to go along with your financial presentation.  A note describing your wonderful volunteer support (and the savings you obtain from not having to hire employees) is always a good idea.

In Part II, I will give an example of when volunteer time may be used to impact the cost allocations as we discuss the other two common allocation entries:  GENERAL EXPENSE ALLOCATIONS and OCCUPANCY ALLOCATIONS.