Information about the costs of implementing programmes and projects with a social purpose is requested to non governmental organisations by donors. It is important for this kind of organisations to select a proper method to categorise expenses, understanding the need of differencing between cost allocation for profit accounting and cost allocation for a non-profit one.
The way you decide to allocate costs will have an effect on the image you give to your donors; on the budgets of the organisation, on reimbursement, on the provision of key information about projects (viability and sustainability), among others. There is not a specific rule in allocating costs; each organisation should choose the most convenient method, taking into account their structure, programmes, and mission, while making sure that the selected method is reasonable, allowable, and allocable. Those organisations that have the information of their programmes and projects well laid-out have better control of their resources and budgets, and are in a position to sign agreements that are very beneficial to them.
Before selecting a costing methodology, it is important to organise the NGO’s financial report into logical sub-categories according to the purpose for which they are incurred (programme and support services); and then allocate the sub-categories into cost categories. In this sense, the main cost categories are direct and indirect. Direct costs are those costs which can be identified specifically with a project and therefore must be charged to that project; while indirect and shared costs are those incurred for common or joint purposes, which means that they cannot be specifically and easy allocated to a specific project or activity, yet they are fundamental to the general operation of the organisation. There is not an exact list of costs that must be considered as indirect costs. In order to allocate indirect costs, the direct allocation method is suggested: these costs must be prorated individually as direct costs to each category and to each award using a calculated base that is known as an indirect cost rate. Other types of allocation are simple method and multiple allocation base method.
When referring to cost allocation, it is critical to consider cost drivers. A cost driver is the direct cause of a cost and its effect is on the total cost incurred. They can be assigned to each cost based on their relation to salary basis, programme hours, square footage, and administrative allocation.
Examples of direct costs for non profit organisations include activities and expenses which are fully related and linked to the project or programme, such as staff salaries, materials, or other programme-exclusive expenses. Indirect costs are generally related to adminsitrative and general expenses, such as accounting and auditing, human resources (administrative staff), insurances, executive costs, utilities, office supplies, and overheads (which, in turn, include facilities costs, membership and licensing fees, and equipment costs).
One way to proof that you have total control of your financial information, is having your cost allocation methodology documented as a policy (Cost Allocation Policy), have consistency in the use of the selected methodology and create and share a complete description of the criteria to classify direct, indirect costs and which cost center they belong to.
