Cost Allocation

Cost Allocation

The full-day "Enabling Resilience: How to Restructure and Revitalize Your Non-Profit Organization" workshop produced by ReStructure Non-Profit Consulting includes an in-depth practical section on understanding how to allocate true costs, understanding direct / indirect costs, as well as a section on financial analysis and reporting.

This excerpt is taken from the NFPAccounting Blog regarding the importance of strategic cost allocation for Non-Profit Organizaitons.

Cost allocation is a method for apportioning shared expenses or shared costs (also called common costs, or directly allocable costs) across functional areas.

Cost allocation is important because, done accurately and consistently, it can provide a realistic picture of what different programs and other activities cost.

There are a number of cost allocation methods out there, and several of the most common are:

- Payroll. Allocations are based on a percentage of the total actual time worked or the total payroll dollars charged by all employees in each functional area. For example, four employees’ time sheet data shows that they spent 15 percent of their aggregated time during the last payroll period on Program A, 35 percent of their aggregated time on Program B, 25 percent on program C, 15 percent on Administration and 10 percent on Fundraising.

- Cost-to-cost or direct cost. Allocations are based on the previous year’s percentage breakdowns for each functional area.

- Square footage. Allocations are based on the proportionate space occupied by each functional area in your office or worksite. For example, Program A occupies 10 percent of your office space, Program B occupies 20 percent, Program C 50 percent, Administration 5 percent and Fundraising 15 percent. This method is useful for allocating rent, utilities and other occupancy-related costs.