Grant Accounting and Costs

Convery 2013 1

Identify different strategies for allocating “overhead” costs to programs.

Describe the elements of activity-based costing and explain why it can supplement traditional cost allocation schemes.

Appreciate the unique aspects of grant accounting that make it challenging for NPOs.

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Types of Costs Cost of Programs Indirect Cost Allocation Fundraising Costs Activity Based Costing Grant Accounting Decision strategies related to costs

Convery 2013 3

• How do you build a chart of accounts that captures:– function or program, – granting source, and – natural expense (object-of-expenditure or line-

item) • for each revenue and expense item?

PROGRAM A GRANT 1

PROGRAM B GRANT 2

PROGRAM C GRANT 3

Also: Objects-of-expense or line-items; i.e., salaries, supplies, phone, travel Convery 2013 4

For what purpose or decision maker? What method (or philosophy) of costing?

◦ Activity-based costing◦ Full absorption costing◦ Variable costing

Are costs accumulated by jobs or processes, or activities or departments?

Note: “Costs” is a term used to distinguish the cost of the goods sold or service provided from other operating expenses, such as general and administrative or selling expenses.

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Direct and Indirect – are the costs easily identified with the product or service

Variable and Fixed – do the costs fluctuate based on the level of goods or services produced?

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Lease computers (or buildings) or buy them?

Add a program or not?

Accept a contract or not?

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• Capital budgeting decisions–Net present value– Internal rate of return

• Relevant costs–Not sunk costs–Maybe opportunity costs

• Break even analysis–Consider Contribution Margin = Sales Price

minus Variable Costs• Cost-volume-profit analysis–Analyze variable costs and fixed costs

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Sunk Costs – Costs incurred in the past – they are irrelevant to current decisions

Opportunity Costs – The values of benefits foregone by selecting one decision alternative over another.

Variable costs – The costs that increase or decrease in response to increases or decreases in business activity

Fixed costs – Costs that do not change when there is a change in business activity.

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First, charge direct costs to programs (e.g., salaries and related fringe benefit and payroll costs, supplies)

Next, allocated indirect costs to programs (e.g., occupancy costs, depreciation, general and administrative costs), if appropriate.

Convery 2013 10

Calculate an indirect cost rate by:

dividing total indirect costs for the year by an allocation base

Allocation bases could be total number of employees, total salaries expense, total number of square feet in the building, or some other rational basis for comparing how programs used administrative costs.

Separate indirect cost rates may be applied to specific types of costs.

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Apply the indirect cost rate to each program based on its share of employees, square foot, or other measure used in the allocation base.

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Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund-Raising (Dec. 1998)

Revises SOP 87-2 on joint costs making it more difficult to allocate “educating the public” or “advocacy” costs to program expenses.

Provides that costs of all materials and activities that include a fund-raising appeal should be reported as fund-raising costs unless a bona fide program or management & general function has been conducted in conjunction with the appeal for funds.

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Costs that are clearly identifiable should be charged to program, management and general, or fund-raising. The joint costs of a bona fide program or management and general function should be allocated between those cost objectives and fund-raising.

Criteria of (1) purpose, (2) audience, and (3) content must be met in order to conclude that a bona fide program or management & general function has been conducted in connection with fund-raising.

Goes beyond SOP 87-2 by covering total costs, not just joint costs, and applying to state and local governmental entities, as well as to NPOs.

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Activity based costing (ABC) moves away from ‘allocations” to cost drivers and activities within a process or program◦ Look for the programs that consume the greatest share of costs

or energy◦ Identify costs by what drives the costs so that inefficiencies can

be eliminated.

Even small nonprofit organizations are appreciating the importance of the true “cost” of a program

Much difficulty with allocation of indirect costs◦ Which allocation base is best: FTE, time, square footage?◦ How much documentation is enough to support the allocation

method?◦ What procedures are used to audit allocation of expenses?◦ Will the funder reimburse for indirect costs?

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1. Identify the process to be costed.2. Identify the activities that make up that

process.3. Identify resources required for each of

the activities and what the resources are expected to produce Express the result of each activity by defining bother outputs and outcomes.

4. Identify the factors that drive the costs incurred by the activity.

5. Choose the application rate.6. Analyze results.

Convery 2013 16

• Employ an in-house financial manager and/or accountant

• Maintain a relationship with the external auditor all year long

• Purchase a computer that meets your needs (approx. $1,000)

• Purchase software that is integrated:–Accounting (e.g., general ledger,

receivables/billing, payables)– Spreadsheets–Database for contributions and donor records

Convery 2013 17

• Appoint an Active Board Treasurer who reviews financial information monthly

• Coordinate so that the external financial information (e.g., IRS Form 990 and audited financial statements) are also useful as a management tool.

• Get technical assistance when needed:–workshops–my website (see cover for address)– colleagues in the nonprofit sector

Convery 2013 18

Exchange or nonexchange transactions?

If exchange transactions grant funds received but not yet spent are considered “deferred revenue”, not increases to restricted net assets.

◦ NPOs (including universities) often consider “performance” on a grant or contract that results in a report or “deliverables” back to the sponsor to be an indication of an “exchange” contract.

If nonexchange transactions grant funds received are considered temporarily or permanently restricted.

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Gifts-in-kind◦ Noncash contributions

Contributed services◦ Need an information system to capture

volunteer time

SFAS No. 116 requires recognition of contributed services at fair value if the services received◦ Create or enhance nonfinancial assets, or◦ Require specialized skills, are provided by

individuals possessing those skills, and typically would need to be purchased if not provided by donation

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Can you report on each of the following objectives in one report, or do you need specialized reports?◦ Compliance with the budget◦ Compliance with laws and regulations◦ Compliance with terms of grants and restricted gifts◦ Fairness and conformity with generally accepted

accounting principles (GAAP)◦ Performance - efficiency and effectiveness

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To INTERNAL PARTIES:◦ Management◦ Board

To EXTERNAL PARTIES: Audited annual financial statements

◦ IRS - Form 990◦ Specific grantors’ reports (federal, state, local government,

university, private foundation, community foundation, United Way - unrestricted or designated, individual donors - restricted or unrestricted gifts)

On: Compliance with laws and regulations Fairness and conformity with GAAP Performance

◦ effectiveness - did you meet your program goals?◦ efficiency - did you use your resources efficiently?

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• of the financial position, results of operations, and cash flows

• on different reporting forms– Audited annual financial statements– IRS - Form 990– Specific grantors’ reports • federal government• state government• local government• university• private foundation• community foundation• United Way - unrestricted or designated• individual donors - restricted or unrestricted gifts

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