Elegant Nonprofit Allocations: System Design

• October 30, 2019
• Kathy Jastrzebski

Our last post in the Elegant Financial Systems series explained the purpose and methodology of nonprofit allocations. Our purpose being to arrive at a program’s true cost. To arrive there, we identified that we must aggregate each program’s direct costs along with their fair share of the following:

1. Shared direct costs – This cost pool consists of resources each program uses to accomplish its mission work. Examples include expenses like rent, office supplies, technology, and equipment. We code each of these costs into a “To Be Allocated” category. Then, at the end of each month, we allocate these costs by line item to programs, management & general, and fundraising. We use a measure which closely reflects usage, for instance, staff time, as the method for our allocation distribution. 
2. Management and general costs – These are resources used for the overall management of the entire organization. Examples include board governance, financial accounting, and human resources. These costs benefit both programs and fundraising, therefore they are allocated against each program and against fundraising. A common driver of this expense is FTEs. We apply this allocation method to the aggregated costs of management and general rather than allocated by line item.
3. Fundraising costs – Our final allocation pool includes fundraising’s direct costs, its allocated portion of shared direct costs, and its share of allocated management and general costs. Fundraising costs are also allocated in the aggregate. Because fundraising expenses are often closely tied with contributed income by program area, using the percentage of contributed revenue as an allocation method seems justifiable.

We now know what needs to be allocated, the order of allocations, and methodology to apply. Let’s see how to automate these month-end allocations in Sage Intacct.

Shared Direct Cost: Allocation Pool Setup

For the allocation of direct costs, we first need a “To Be Allocated” bucket. This will serve as our method for aggregating shared direct costs, making it easy to later identify the amount to allocate. Since this cost pool crosses many expense types, it’s best to set up as a dimension value rather than add an account in order to avoid account proliferation and keep our chart of accounts simple, yet sophisticated. It makes sense to add to the Program list as a new value because these costs, at the time of entry, don’t apply to any specific program. Therefore, our new Program dimension list may look something like this:

Example AP Bill Entry:

When we enter an AP Bill, rather than choosing a program, we’ll choose the To Be Allocated cost center.

 

Direct Shared Cost: Allocation Methodology Setup

We identified our method for allocating our direct shared costs as staff time. Luckily, in Intacct we have the ability to record this data using Statistical accounts. Then, on a monthly basis, we can record our staff time by program, M&G, and Fundraising in our statistical journal as seen below.

Based on this entry of time for September by Program, M&G, and Fundraising, the system will automatically calculate the percent of shared direct costs to apply to each program either in a report or using a month-end allocation tool: 10% to program 1, 25% to program 2, 35% to program 3, 5% to Management & General, and 25% to Fundraising.

Direct Shared Cost: Final Allocations

Now that we have our costs pooling in our To Be Allocated bucket and we have our allocation methodology set up, we can combine the two components in our allocation. To perform our allocation, we’ll query the balance in this pool for each account and apply the methodology to post the final journal entries.

Statement of Activities by Program prior to allocating the To Be Allocated – Direct Shared costs:

The above report gives us the total by account that we need to allocate across programs. We aim to allocate all costs in the To Be Allocated column across our programs.

Our Allocation Percentages Report computes our percentages for this allocation:

Applying the allocation percentages, results in the below final journal entry:

After posting our allocation entry and re-running the Statement of Activities by Program:

Notes on Direct Shared Allocations

Methods of Performing Allocations:

• Using a combination of reports, excel, and journal entry imports you can manually perform this direct shared allocation.
• If you’d like to reduce time spent on allocations, month-end allocation tools are available to fully automate the process such as CLA’s Allocation Management tool for Sage Intacct.

Posting of Allocations:

It may be the case that you’d like to be able to report both with allocations and without them. If that is true, User Defined Books in Intacct (kept separate from Accrual books but just as easy to report on financially) are an option.

Allocation Methodology:

While FTEs is the most common allocation method for shared direct costs, you could have a different method for each line item. It all depends on what kind of activity drives that expense up or down. But we advise against getting too complicated with your allocation methods, because each different method would require a different allocation set up in Intacct.

Management and General Cost: Allocation Pool Setup

We pool our management and general costs very similarly to the Direct Shared Costs. However, we already have a management and general cost center in our program list. There are no additional cost centers to add for this allocation. We’ll simply take all expenses coded to our management and general cost center as our pool. The key will be making sure to run this balance query after the direct shared allocation has been posted. This is because, included in this pool are both the direct management & general expenses and management & general’s fair share of direct shared costs.

Management and General Cost: Allocation Methodology Setup

Our allocation methodology for Management and General costs will be staff hours. Although our methodology is the same in this case, we could have chosen a new methodology. When choosing a new methodology, we would set up a new statistical account and record the relevant journal entry. Our new percentages, will still use the same statistical information, but exclude Management and General staff time.

Management and General Cost: Final Allocations

Looking at where we left off our Statement of Activities after our direct shared allocation, we can see our management and general cost pool:

We can apply our allocation percentages from above to the cost pool to create our allocation journal entry. Unlike our Direct Shared Allocation, which posts by line item to the original expense accounts from which we pulled our costs, our Management and General allocation posts the aggregate expenses to a single allocation account. If you recall from the Chart of Account design blog, we recommended saving room in your chart of accounts for allocation accounts. Your patience is about to be rewarded as we’ll finally get to use these accounts.

Below is the allocation journal entry:

Now re-running the Statement of Activities by Cost Center:

Fundraising Cost: Allocation Pool Setup

Our final allocation, Fundraising, uses the exact same pooling method as the other two allocations, however in this case we’re looking at the Fundraising cost center. This allocation must be performed last because it consists of the following three cost types:

• Direct Costs – these are expenses coded to fundraising at the time of transaction entry.
• Shared Direct Cost – these were costs allocated to fundraising as a result of our first allocation
• Share of Management and General Costs – costs allocated to fundraising from our M&G allocation.

In this allocation we’ll query all expense accounts plus our admin allocation account for the fundraising cost center to derive the entire cost pool.

Fundraising Cost: Allocation Methodology Setup

Our methodology for allocating fundraising costs is different from the previous two allocations. Rather than basing this allocation on statistical data like FTEs or Staff Time, we’ve determine to use income by program as our driver. Therefore, we are querying our income accounts and computing percentage by program. The only difference is the type of accounts we’re querying. Therefore, we’ll still use the third set of allocation percentages in the report below.

Fundraising Cost: Final Allocations

Based on our last Statement of Activities, we know the amount of the fundraising cost pool:

We also have our allocation percentages we plan to use: 13% to Program 1, 25% to Program 2, and 63% to Program 3.

Applying these percentages against our fundraising cost pool results in the journal entry below. Notice, just like in the Management and General allocation, we are using an allocation account to allocate the aggregate of all Fundraising expenses.

Finally, the fully allocated statement of activities which gives us a much better picture of the true cost of running each of our programs:

Elegance Principles in Action

Please subscribe to receive the next blog in our series where we’ll cover the powerful use of Elegant Financial Systems in creating sophisticated reports, dashboards, and budgets. We’ll provide a high-level look at an example of each of these good uses of the elegance principles we’ve covered in the past several months.

Tags: allocation methods, cost allocations, nonprofit accounting software, nonprofit accounting system, true program costs, Nonprofit general, Technology | 1 Comment »