Allocating Expenses

Expenses are allocated to show the total cost of activities, services, and projects.  It is very important for the board and management to know the total costs of activities, services, and projects so both can see how the nonprofit’s resources are used.

Expenses that benefit an activity, service, or project should be charged to the activity, service, or project according to the relative benefit received by the activity, service, or project.

• Salaries are allocated through using timesheets to record the actual effort (typically the number of hours) for each employee per activity, service, or project.
• Timesheets should be reviewed and signed by both the employee and their supervisor.  This dual review helps ensure the accuracy of the timesheet
• Fringe benefits expenses for each staff typically are allocated based on salary allocations.
• Expenses for facilities are typically allocated based upon the staffing effort for each activity, service, or project.  Two frequently used measures of staffing effort are full time equivalents and salaries.
• General and administrative expenses should be shared by all activities, services, or projects.  Again staffing effort could be used as the allocation basis.  Total costs for each activity, service, or project could also be used.

The basis used for allocation of expenses also needs to be consistent.  If the allocation basis is frequently changed:

• Management of the financial results of the activities, services, and projects becomes more difficult since the resources available for the activities, services, or projects may change because the allocated expenses change.
• Budgeting for individual activities, services, or projects and the nonprofit as a whole is more difficult since each new activity, service, or project could have a different allocation basis.