Cost allocation may not be the most exciting task—especially if your nonprofit operates multiple programs—but it’s a critical one. Donors, funders, and regulatory agencies all want transparency into how your organization uses its financial resources. Additionally, compliance with Generally Accepted Accounting Principles (GAAP), as established by the Financial Accounting Standards Board (FASB), is a must.
Understanding and applying FASB standards correctly can help your nonprofit allocate costs fairly and consistently. Let’s break down the key principles you need to know.
FASB standards require nonprofits to present expenses in two key ways:
Your nonprofit must disclose this breakdown in one of three locations:
Proper cost allocation ensures that program expenses—the core of your nonprofit’s mission—are clearly distinguished from supporting services, which help keep your organization running.
While program services drive your nonprofit’s impact, FASB requires that all supporting activities be classified into three distinct categories:
These are essential administrative functions that aren’t tied to a specific program, fundraising event, or membership activity. They typically include:
Any activities aimed at securing donations fall into this category, including:
For organizations with a membership model, this category includes:
If membership comes with significant benefits or obligations, you’ll need to report these expenses separately in your financial statements.
Some expenses support more than one function. For instance, a fundraising event may also include educational content related to your mission. In such cases, FASB allows nonprofits to allocate costs between functions—but only if specific criteria related to purpose, audience, and content are met. If those criteria aren’t satisfied, all costs must be categorized as fundraising.
One common mistake in cost allocation is treating the management and general category as a catchall. Some expenses that appear to be overhead—such as mortgage interest on a building—should actually be allocated to specific programs whenever possible. Similarly, shared expenses like insurance should be divided appropriately across functions. Misallocating costs can result in underfunding key programs or misrepresenting financial efficiency to donors.
FASB requires nonprofits to disclose their cost-allocation method—and estimates or guesswork won’t cut it. That’s why having a clear, well-documented strategy is essential.
If your nonprofit needs guidance on setting up a cost-allocation plan that ensures compliance and financial transparency, our accounting professionals can help. Contact us to simplify the process and create a system that works for your organization.
The HoganTaylor Nonprofit team of business advisors and CPAs is comprised of former CFOs, controllers, and industry experts with extensive experience providing the guidance organizations need to lean forward again in their leadership. If you have any questions about this content, or if you would like more information about HoganTaylor’s Nonprofit practice, please contact David Stiles, CPA, Nonprofit Practice Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.