Allocating Direct or Indirect Costs for Nonprofits

Learn how to make smarter strategic decisions on program performance with the proper allocation of costs.

Classifying expenses is a time-consuming but necessary process for nonprofit organizations. It is critical for nonprofits to properly measure the resources needed to effectively run their programs and ensure they secure the funding necessary to maintain their sustainability. Having a direct and indirect cost allocation plan is important to determine the cost of operating programs accurately. Cost allocation is the process of assigning costs to a specific functional area in a nonprofit. We will discuss how to identify direct costs and indirect costs, how to establish cost pools, and what bases and methods are allowable to allocate the pooled costs. We will provide real-world examples of how to set up your accounting system to support your allocation plan, provide sample cost allocation reports, report cost allocations for grant reporting, and prepare for audits and your 990. We will also discuss using accepted cost allocation methodologies and how it can help you present your fundraising costs more accurately and what costs qualify for this allocation. We will review a list of nonprofit accounting software applications that provide the ability to perform cost allocations. We will also cover the complicated government regulations for compliance with indirect cost allocation rates.

Learning Objectives

• You will be able to identify why nonprofits must allocate costs.
• You will be able to differentiate between direct and indirect costs.
• You will be able to identify different methods of allocations.
• You will be able to recognize how to develop a cost allocation plan.