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Cost Allocation Analysis

As defined by the Code of Federal Regulations (CFR) Section 200.56: “Indirect costs mean those costs incurred for a common or joint purpose benefitting more than one cost objective, and not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved.”

If you have some experience with accounting, you may have a good understanding of the direct costs incurred by each of your programs. These are the items included on the face of financial statements -- specifically the statement of activity, the non-profit equivalent of the profit and loss.

Traditional accounting breaks down indirect (or overhead) costs by functions (e.g. administration, marketing, operations), rather than by programs. It fails to capture the relationship between these costs and the organization’s activities, and consequently, its mission.

For transparency, or to make a simpler presentation of the financial standing, two categories are required.

Program services:
Activities that result in a good or service being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which a nonprofit exists

Supporting Services:
Activities other than program services, which can include:

  • Management and General(M&G): Activities related to oversight
  • Fundraising:Activities to entice potential donors to contribute
  • Membership Development: Activities to gain or retain members

This can be the source of scrutiny for NPOs. The result is a cloudy economic picture where nonprofit management is uncertain of the financial health of their program areas and beneficiaries unclear where public funds are being used in the best way.

The allocation of all organizational costs, direct and indirect, across relevant programs or sites is at the heart of true-cost analysis.

Appropriate allocation of many types of costs can include elements of significant judgement. Your beneficiaries, the board of directors and the organization's future prospects depend on your implementation of long standing processes to ensure assurance procedures are executed.

Organization and Management Development Help

Nonprofit leaders, managers, staff, volunteers and service providers can complete this entire 12-module, online program for free at any time from anywhere in the world. All materials are available online. Free, learning modules include:

  1. Resources for Your Nonprofit
  2. Starting and Understanding Your Nonprofit
  3. Understanding the Role of Chief Executive
  4. Developing Your Management and Leadership Skills
  5. Building and Supporting Your Board
  6. Developing Your Strategic Plan
  7. Developing and Marketing Your Programs
  8. Managing Your Nonprofit's Finances and Taxes
  9. Developing Your Fundraising Plan
  10. Supervising Your Employees and Volunteers
  11. Evaluating Your Programs and Services
  12. Conducting Overall Final Fitness Test of Your Nonprofit

Facilitator Led program: $495 per attendee each session

Serving California, Arizona, Nevada

Call 323-743-3816