Allocations Part II

Last week, I began the unenviable task of explaining expense allocation reporting in non-profit organizations.  I mentioned that there are four common entries and I described DIRECT ALLOCATIONS and SALARY ALLOCATIONS.  Today, I would like to wrap up this topic by writing a bit about the other two types of allocation entries.  If you have a chance to look at Part I, it is helpful to understanding this discussion.

GENERAL EXPENSE ALLOCATIONS

General expense allocations refer to expenses that are not easily identifiable to a program.  Examples include copier leases, office supplies and insurance costs.

Note that worker's compensation insurance would fall in this area even though it is an employee expense - it is not an expense that can normally be broken out by individual and so it would not be considered under the salary allocation entry.

These expenses are typically accumulated on a monthly basis and recorded as either an unclassified or an administrative cost.  As part of closing out the month's reporting, these costs would then be allocated out to the various programs.

The preferred method used for allocating these costs is generally effort reporting.  Effort reporting takes into account the amount of time that employees spend on a program and applies that effort to the general expenses.

The theory behind this method contemplates that an employee is spending 50% of their time doing the After-School work and so they must be using 50% of the copier costs on After-School work.  This method, applied consistently, will survive an audit of cost allocation.

Effort reporting is NOT the same as salary allocations, but you do start in the same place - with the timesheets.  If you remember, we used the hours on the timesheets to generate the percentages for each individual's payroll costs.  The total percentage used for payroll can NOT be used for general expense allocation because it is skewed based on different salary levels.  The total hours in a program can be used.  Here is an example to explain what I am talking about:

S is the Executive Director and makes $4,000 per month.  She spends 80 hours (50%) in Programs and 80 hours (50%) in Fundraising.
T is the Program Manager and makes $2,000 per month.  She spends 128 hours (80%) in Programs and 32 hours in Fundraising (20%).

For Salary Allocations, you would do this:
Payroll Expenses would be allocated 60% to Programs and 40% to Fundraising.

The program expense is S's salary of $2,000 (50%) plus T's salary of $1,600 (80%) to equal $3,600 (or 60% of $6,000 in Payroll Expense).

This fundraising expense is S's salary of $2,000 (50%) plus T's salary of $400 (20%) to
equal $2,400 (or 40% of $6,000 in Payroll Expense).

The Salary Allocation is 60/40 because the Executive Director makes more than the Program Manager and skews the salaries.  You have no choice but to take actual payroll costs on the Salary Allocations, but you do not want to apply this skewing to other costs.  The copier does not cost more to use when the Executive Director is doing it.

For General Expense Allocations, you would do this:
General Expenses would be allocated 65% to Programs and 35% to Fundraising.
This is comprised of the total of S and T's Hours = 320.  Of those hours, the total Program Hours are 208 and the total Fundraising Hours are 112.

While a 5% difference does not seem like much - keep in mind this is a very limited example.  When you pull it out to the population, the difference can be larger.

Volunteers
I have used Volunteer hours when calculating general expense allocations, if it makes sense.  If your volunteers are on-site doing program related work that use up general expenses, then why not include them in the effort reporting?  You can't put them in salaries, but you do want to be reasonable about just how much that copier is getting used for your program.

Let's look at the above example and add in the hours for the Volunteer that runs the After-School program.  If their hours are 20 per month, you now have 340 total hours - 228 to Programs and 112 to Fundraising.  Or a general expense allocation split of 67% Program and 33% Fundraising.

Volunteer time makes sense for some organizations, but not all.  If you decide to use it, you should be prepared to explain why it makes sense and to demonstrate that you used a complete tally of volunteer time (not just the program hours).  Again, timesheets are useful for providing the substantive back-up.

OCCUPANCY ALLOCATIONS

The fourth most common allocation entry is occupancy.  Occupancy costs include rent, interest on a mortgage, utilities, depreciation and sometimes maintenance expenses.

The preferred method for allocating occupancy costs is based on the square footage that a function literally takes up within the office.  If a program is off-site completely, then the allocation might be the costs of the off site location or it might have to come from an application of the general expenses allocation method to occupancy.

Getting a layout of your office is the first step to figuring out how you want to allocate.  Sit down with that layout and calculate the square footage of each area to each function.  Apply that percentage to the occupancy costs on a consistent basis and you're done.

This allocation should be re-visited at a minimum on an annual basis, but may require a more periodic review.  Especially if there is a major shift in office layout or new programming is added.

BONUS ALLOCATION DISCUSSION - ADMINISTRATIVE COST ALLOCATION

After all other allocations are completed, you may want to perform an allocation of administrative costs to the various programs.  Note that this would be for funders that allow it and for internal management reporting purposes.  A full allocation method like this would present a program's contribution to the overhead of the non-profit.  On tax returns for non-profits, general and administrative expenses must remain separate.

This is very easy to do - again, after everything else is allocated, just take your general and administrative expense total and apply it using the formulas that you used to do the general expense allocations.  With one tweak.

If your General Expense Allocation was 10% Administrative, 10% Fundraising and 80% Programs; then you would want to allocate all Administrative between Fundraising and Programs.  Your allocation would be based on Fundraising being 10 of 90 or 11%.  The allocation to Programs would be 88% or 80 of 90.

General Expense allocation is normally shown as a separate income statement line item - it is a lump adjustment at the bottom of reporting and it should add up to zero for top-level and tax reporting.

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I know all of this is a lot to think through objectively while staring at a computer screen, but it is the way we do it.  And once you get these allocations set up and start running through them a few times, it becomes very systematic and can easily be done by a solid general ledger accountant.

Knowing that your allocations are correct and supportable will give you credibility within your organization and within the various funding communities that you operate.  It will also give you a lot of information for when you are building budgets.  Allocations are worth understanding, setting up properly and vigorously maintaining.