Nonprofit program costs: allocate shared spending without hiding fundraising

A nonprofit's program director spends part of the week delivering workshops, part supervising staff, and part preparing a donor campaign. Charging the whole salary to the workshops makes their reported cost difficult to interpret. Charging every shared employee to administration creates a different distortion. Identify the activities before deciding where the costs belong.

Functional reporting groups expenses by purpose, such as program services, management and general, and fundraising. It is a different exercise from deciding which expenses a particular grant will reimburse. Maintain both views where needed, with a bridge between them, so a funder's recovery limit does not dictate the organization's account of its operating activities.

A salary remains a salary whether it supports a program or fundraising. Preserve the natural expense category while assigning the appropriate function. This allows reviewers to understand both what the organization spent money on and which activities used those resources.

FASB's ASU 2016-14 describes nonprofit expense presentation and allocation disclosures. Its examples also distinguish direct program conduct or supervision from general support, including grant accounting. The update explains changes to the codification; apply the current relevant guidance to the organization's facts rather than treating every employee associated with a grant as a program-delivery expense.

Define activities in terms staff recognize. Separate workshop delivery from donor solicitation and general finance administration. When a project code mixes these tasks, add a functional tag or a supported distribution. Creating dozens of unused account codes will not improve a classification that no one understands.

Use direct identification where the transaction clearly belongs to an activity. For genuinely shared costs, choose a method that reflects their use: supported staff activity for compensation, relevant occupied space for certain facilities costs, or identified systems usage where practical. These are possible inputs, not automatic rules for every account.

Write down why the method fits and which costs it covers. Headcount can be convenient, but convenience does not establish that a specialized laboratory and a small fundraising office consume equal resources per person. Review the basis when premises, staffing, delivery methods, or program scope change materially.

Avoid changing methods merely to improve a program-spending ratio. Retain the prior calculation and explain any justified change. The board needs to know whether a movement came from different operating activity, a corrected classification, or a revised method; those causes suggest different decisions.

In a hypothetical period, $30,000 of shared compensation is supported as 60% program activity, 20% management and general, and 20% fundraising. The resulting amounts are $18,000, $6,000, and $6,000. Assume the underlying activities have been reviewed for the relevant classification, including the distinction between program supervision and general administration.

A separate $9,000 facilities pool has an appropriate supported-use split of 60%, 25%, and 15%. Its allocation is $5,400, $2,250, and $1,350. Combining these two expense categories gives $23,400 for programs, $8,250 for management and general, and $7,350 for fundraising, totaling the original $39,000.

Keep the two bases visible. Applying the compensation percentage to facilities simply because the spreadsheet already contains it would change the result without explaining facilities use. This illustration shows the reconciliation method; it does not establish acceptable percentages for another organization.

The Form 990 instructions distinguish program services, management and general, and fundraising, and require accurate amounts with a documented allocation method. They specifically warn against reporting fundraising as program service expense merely because soliciting contributions is part of the organization's purpose. Some items also belong in other parts of the return, so the filing bridge needs its own review.

Have the preparer inspect campaign costs, executive activity, accounting work, and shared communications. A brochure may serve more than one purpose, but its educational language alone does not establish an allocation. Preserve the content, audience, and activity evidence needed to assess the applicable joint-cost and reporting requirements.

Reconcile the functional schedule to the ledger and retain explanations for reconciling items. Compare programs using consistent cost definitions and service measures. Cost per participant becomes misleading when one program includes shared staff and facilities while another includes only purchased supplies.

Discuss the support capacity required to maintain the work: finance, supervision, systems, and fundraising all consume resources. The aim is an honest view of those resources and their purpose. A documented schedule should help management explain changes and plan staffing, rather than reward whichever classification produces the most attractive percentage.