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Allocation MethodsWhen determining an organization’s allocation strategy, limiting the number of different methods utilized can avoid overcomplication, although most organizations use at least two different allocation methods based on the type of cost. Payroll and related costs are typically a nonprofit’s most significant expense. Organizations determine employee time worked and how that information is documented and substantiated in different ways. However, the goal is ultimately the same: to report these costs in a way that reflects where employees spend their time—that is, where resources are actually being deployed. For costs other than payroll, or other than personnel service (OTPS) costs, allocation can be accomplished via various methods, including:
- Full-time equivalent (FTE): The FTE method allocates OTPS in the same proportion as employee time worked in different activities.
- Percent of salary dollars: The salary dollars method allocates OTPS in the same proportion as payroll dollars assigned to different activities.
- Square footage (SF): The SF method, typically applied to occupancy costs, allocates costs proportionate to an activity’s share of facility space.
- Per participant: The participant-based method, typically applied to OTPS across programs, allocates costs proportionate to the ratio of participants in each activity.
Allocating Grant CostsGrant agreements add a layer of complexity to nonprofit cost allocation. Commonly, grants require related costs to adhere to funder-approved, line-item budgets and conform to defined terms and conditions. That is true regardless of whether the funding is from another nonprofit, an individual or a government entity. Adopting and implementing both a consistent organizational cost allocation methodology and a consistent grant allocation methodology is critical. Special attention to grant allocations helps organizations:
- Understand progress against each grant’s budget
- Avoid the risk of double charging (charging the same cost to two different grants)
- Avoid potential consequences of violating such agreements
- The program’s share of personnel time and effort is 20%, so the program also is allocated 20% of shared supply costs.
- The program’s supply expense can be further assigned to the two grants, barring any limitations based on grant budgets and related allowability of those costs per the contracts.
At Cavanaugh & Co, we work with individuals and businesses to help them make smart financial decisions. Contact us today to schedule an appointment.Written by Dan Durst and Gina McDonald. © 2023 BDO USA, LLP. All rights reserved. www.bdo.com
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