Non-Profit Cost Allocation Plan Strategies Crafting an Effective - - PowerPoint PPT Presentation

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Non-Profit Cost Allocation Plan Strategies

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Crafting an Effective Plan to Distribute Direct and Indirect Expenses

A Live 110-Minute Teleconference/Webinar with Interactive Q&A

Today's panel features: Sharron O'Donnell, Senior Manager, Bader Martin, Seattle, Wash. Colette Kamps, Senior Manager, Henry & Horne, Scottsdale, Ariz.

Q&

Wednesday, June 30, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific

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Non Profit Cost Allocation Non-Profit Cost Allocation Plan Strategies

June 30, 2010

Sharron O’Donnell, Bader Martin sodonnell@badermartin.com Colette Kamps, Henry & Horne colettek@hhcpa.com

Today’s Program

Situations Requiring Cost Allocations Slides 6-10 (Sharron O’Donnell) (Sharron O Donnell) Key Definitions And Descriptions Slides 11-21 (Colette Kamps) M th d F A bli A C t All ti Pl Slid 22 35 Methods For Assembling A Cost Allocation Plan Slides 22-35 (Sharron O’Donnell) Joint Costs/OMB A-133/UBTI Slides 36-44 (Collette Kamps)

5

Situations Requiring Cost All ti Allocations

Sharron O’Donnell, Bader Martin Sharron O Donnell, Bader Martin

Cost Allocations:

f h ill b d d Summary of what will be covered today

• What situations require cost allocations? Why are proper

q y p p allocations important? What are some of the problems in allocating?

• Definitions/descriptions of program, fundraising, and

management/general costs

• Cost allocation plans
• Joint costs

Joint costs

• Cost allocation methods for Circular A-133 audits
• Regulatory requirements

7

Why I s Cost Allocation I mportant? Why I s Cost Allocation I mportant?

• Increasing public scrutiny

g p y

• Donors becoming more sensitive due to increased

activity by “watchdog groups” Government regulators

• Government regulators
• Area fraught with faulty bookkeeping and willful

Area fraught with faulty bookkeeping and willful misrepresentation

8

Allocating Costs:

h i i i ll i What situations require cost allocations?

An allocation plan that properly assigns costs to An allocation plan that properly assigns costs to programs is essential when making decisions. Reliable and consistent financial reporting Users of your financial information can make informed decisions.

9

How Much I s Enough? How Much I s Enough?

• Is there a percentage or a range of percentages that is

correct? Do you know how much it costs to run a program?

• Do you know how much it costs to run a program?

10

Key Definitions And D i ti Descriptions

Colette Kamps, Henry & Horne Colette Kamps, Henry & Horne

Allocating Costs:

h i i i ll i What situations require cost allocations?

• Natural vs. functional
• Accounting standards

– Require nonprofits to report expenses by functional classification classification – Voluntary health and welfare organizations are required to present a Statement of Functional Expenses

• Voluntary health and welfare organization:

Formed for the purpose of performing voluntary p p p g y services for various segments of society; organized for the benefit of the public. It concentrates efforts in attempt to solve health and welfare problems. p p

12

Allocating Costs:

fi i i d d i i Definitions and descriptions

• Program expenses
• Supporting services expenses

– Management and general expenses – Fundraising expenses

13

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Program expenses: Expenses related to activities carried

g p p

• ut to fulfill the mission; include both direct and indirect

expenses

• Reporting by functional classification includes reporting

by major program and supporting expenses N d t d t i th i ti ’ j – Need to determine the organization’s major programs – Requires judgment and knowledge of the organization

14

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Considerations in determining major programs

g j p g – Report as a separate program if revenues or expenses are > 10% – Separately report programs making up (in total) at least 75% of total program expenses – Is discrete program financial info available? Is discrete program financial info available? – Does management separately evaluate? – Form 990 requires disclosure/description of three q / p largest programs – More than 10 may become overly detailed

15

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Supporting services expenses

– Management and general – Fundraising b h d l – Membership development

16

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Management and general expenses

g g p – Relate to the overall direction of the organization – Although indispensible to the organization, they are not identifiable with a specific program and are not a fundraising activity fundraising activity. – Include oversight, business management, record

g

, g , keeping, budgeting, financing

17

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Common types of management/general expenses

– Relating to board and committee meetings – Providing executive direction and organization planning (salary

• f executive director)

– Accounting, auditing, budgeting, financial reporting – Procuring and retaining personnel (human resources) – Office services (receptionist, mail distribution, filing duties) – Preparing the annual report – Disseminating information to the public about the organization’s use of donated funds – Costs of advertising for ticket sales or admissions of a performing arts organization, museum, zoo, or similar

• rganization

18

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Further consideration of advertising expenses

g p – Is the purpose of the advertising primarily to generate revenue from services/admissions, or is it i il t t th i ti d it primarily to promote the organization and its services? – Is the related fee charged de minimis compared with the actual fair market value? – Does the related fee help to increase the effectiveness of the organization’s programs? effectiveness of the organization s programs?

19

Allocating Costs:

fi i i d d i i ( ) Definitions and descriptions (Cont.)

• Fundraising expenses: Costs related to activities that involve

i d i i l d ib ( h d h) inducing potential donors to contribute assets (cash and non-cash), services or time C t

• Common types

– Conducting of fund-raising campaigns – Conducting special events M i t i i d li t – Maintaining donor lists – Preparing/distributing fund-raising materials – Recruiting volunteers (even if revenue not recognized) – Conducting solicitations – Professional fund-raiser (do not net with revenue) – Other activities involving soliciting contributions

20

Allocating Costs (Cont.)

• Problems with fundraising costs/ratios

– Allocations are often subjective, not objective. – Some contributions do not requiring ongoing fund raising expenses (bequests, ongoing foundation support) support) – Highly dependent on nature of the organization – The ratio can be affected by temporary events (stage y p y ( g

• f a capital campaign, the economy)

21

Methods For Assembling A C t All ti Pl A Cost Allocation Plan

Sharron O’Donnell, Bader Martin Sharron O Donnell, Bader Martin

Allocating Costs:

ll i l Cost allocation plan

• Direct identification: Can be identified with a particular

function; only allocate when direct identification is not ibl ti l possible or practical

• Indirect expenses: Allocation to more than one function
• Indirect expenses: Allocation to more than one function

– Need to have a cost allocation plan

23

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Cost allocation plan

p Need to have a basis for how costs are allocated Need to be consistent Objective methods are preferable to subjective. The plan needs to be documented.

24

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

Cost allocation plan (1) Determine what types of indirect costs the

• rganization has (document)

(2) D t i th t i t b i f h t (2) Determine the most appropriate basis for how to allocate each of these costs (document) (3) Perform the studies and calculations necessary to (3) Perform the studies and calculations necessary to determine percentages of allocation (document) (4) Maintain the studies and calculations as supporting d t ti f t ll ti l documentation for your cost allocation plan (5) Periodically re-evaluate The determination of how to allocate costs is based on The determination of how to allocate costs is based on judgment; can use financial or non-financial data.

25

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Common cost allocation bases

Common cost allocation bases

– Salaries Time sheets, time studies – Employee benefits Salary dollars – Supplies Use studies headcount salaries – Supplies Use studies, headcount, salaries – Telephone Use studies, salaries – Postage Use studies, salaries Occupancy Square footage – Occupancy Square footage – Interest Asset/loan use – Insurance Square footage, asset use Depreciation Square footage asset use – Depreciation Square footage, asset use

26

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Review expense allocations for discrepancies

p p – If salaries are allocated to fundraising, associated benefits and payroll taxes should be allocated similarly. similarly. – Contribution income normally means there would be l t d f d i i related fundraising expenses. – Occupancy, insurance, etc. expenses should be Occupancy, insurance, etc. expenses should be allocated.

27

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Cost allocation methods

– Stand-alone – Relative value h l – Physical units Methods can be applied as single-stage or multiple- stage stage

28

Allocation Methods

• Stand-alone

– Activity A: $50/100 x $750 = $375 Activity A: $50/100 x $750 $375 – Activity B: $40/100 x $750 = $300 – Activity C: $10/100 x $750 = $75

29

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Example of relative value cost allocation plan:

p p

– Activity A: 2,500/3,000 x 750 = 625 2 500 + 625 = 3 125 2,500 + 625 = 3,125 – Activity B: 300/3,000 x 750 = 75 300 + 75 = 375 300 + 75 = 375 – Activity C: 200/3,000 x 750 = 50 200 + 50 = 250 200 + 50 = 250

30

Allocation Methods (Cont.) Allocation Methods (Cont.) Allocation Methods (Cont.) Allocation Methods (Cont.)

• Physical units

y – Mailing with total of 85 lines of text – 49 program – 28 fundraising – 8 management and general – 57.7% program – 32.9% fundraising – 9.4% management management – Total costs of production and distribution allocated between functions based on the above percentages

31

Allocation Methods (Cont.)

• Single-stage

Single stage – Natural expense – Determine allocation base – Allocate to function

32

Allocation Allocation Methods (Cont.) Methods (Cont.) Allocation Allocation Methods (Cont.) Methods (Cont.)

• Single-stage

Labor Labor hours Activity A Activity B Rent Square footage Activity A Rent Square footage Activity A Activity B

33

Allocation Methods (Cont.) Allocation Methods (Cont.)

• Two-stage

– Allocate overhead costs to functions Allocate overhead costs to functions – Some functions may then be allocated to other functions

34

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Common problem areas in presentation of expenses

– Reporting on only one program, while footnotes describe several programs – No fundraising expenses reported, while there was substantial contribution revenue Ad ti i i i t l l ifi d – Advertising expense inappropriately classified as program – Time devoted to allocation not warranted by the benefit received – Certain expenses were not allocated (occupancy, insurance, depreciation)

35

Joint Costs/OMB A- 133/UBTI 133/UBTI

Colette Kamps, Henry & Horne Colette Kamps, Henry & Horne

Allocating Costs:

i Joint costs

• Joint costs: Costs related to an activity that includes a

y fundraising appeal

• Start with the presumption that expense is a fundraising

expense.

• There are certain criteria which enable an organization

to be able to allocate some of the expense to program or to be able to allocate some of the expense to program or M&G.

• Examples: Web site, newsletter

37

Allocating Costs:

i ( ) Joint costs (Cont.)

• Criteria to overcome the presumption that the entire cost

p p is fundraising – Purpose – Audience – Content If all three criteria are met, allocate joint costs between fundraising and program (or M&G) g p g ( )

38

Allocating Costs:

i ( ) Joint costs (Cont.)

• Purpose criteria

p – Purpose of the activity includes accomplishing program activity. Consider:

• Call to action (other than call to make a

contribution) contribution)

• Compensation or fees test
• Separate and similar activity test (doesn’t

p y ( automatically disqualify)

• Other evidence

39

Allocating Costs:

i ( ) Joint costs (Cont.)

• Audience criteria

– Easier to meet if audience members do not include former donors and are not selected based on their ability to contribute. – Must be selected because they can help accomplish Must be selected because they can help accomplish both the program and the fundraising activity.

40

Allocating Costs:

i ( ) Joint costs (Cont.)

• Content criteria

– Content of the activity must support the program

41

Allocating Costs:

i ( ) Joint costs (Cont.)

• Disclosures required for joint costs

– The types of activities that resulted in joint costs. – The fact that such costs have been allocated – The total amount allocated during the period and the portion that was allocated to each functional expense portion that was allocated to each functional expense category

42

Allocating Costs:

ll i l ( ) Cost allocation plan (Cont.)

• Cost allocation methods permitted by OMB Circular A-

122 (federal funds) – Simplified allocation method – Multiple allocation base method Direct allocation method – Direct allocation method

43

Allocating Costs:

UBTI costs

• Allocating costs to unrelated business taxable income

g (UBTI) – A cost is indirect only if cannot possibly be allocated di tl directly. – Fundraising expenses are deemed specific to exempt Fundraising expenses are deemed specific to exempt purposes and are not allocable to UBTI. – Methods of allocating should be consistent. – Maintain documentation of allocation method used

44