Nonprofit accounting: Program cost or Overhead?

Allocating salaries and wages to programs whenever possible is the true cornerstone of nonprofit accounting.

First, it gives you a truer picture of just what it costs to make certain services available. The more granular you can get, the better decisions you can make.

Second, fair or not, your nonprofit will often be judged by how much of the budget goes directly to programs and how much is “overhead”. For some reason, overhead is viewed as undesirable.

Third, many MORE grants are available to cover program costs, while far fewer will cover “operating expenses” or “overhead”.

Do yourself and your fundraisers and development people a favor — allocate costs whenever possible as program costs.

How?

Well, take a look at this example.

The True Blue Hippo supports a wide variety of environmental programs. There’s the Hippo Bathtub Program, the Hippo Medical Fund, and the Hippo Hippo Birthday Initiative. Your administrative assistant, Buddy York,  works on all three programs.

Buddy is paid $15/hour for 20 hours a week, or 86 hours a month,  (we usually compute months as having 4.3 weeks), or $1290 per month.

You ask Buddy to track his time for a month, and you see that he spends 15% of his time on the Bathtub Program, 40% on the Medical Fund, and 38% of his time on the Birthday Initiative.  The remaining 7% is spent on general administrative tasks.

(Okay, I know you’re all itching to apply for Buddy’s job right now because spending 38% of your time on a Hippo Birthday Initiative just sounds like TOO MUCH FUN!)

Here’s how you turn your chief paperwork guru’s wages into programs costs:

.15 x $1290 = $193.50 allocated as Bathtub Program cost

.40 x $1290 = $516.00 allocated as Medical Fund Program cost

.38 x $1290 = $490.20 allocated as Birthday Initiative Program cost

.7 x $1290 =  Overhead or Operating cost

The final step in this analysis is to get really granular on your program costs. There are a number of ways to figure this out — you can do yearly or monthly analyses, for instance.  Just pick one and apply it uniformly to all costs.

So say we’re doing a monthly analysis.  If we do 20 Hippo Baths in a month, then each Hippo Bath costs $9.675 of Buddy York’s time ($193.50/20). You’d round that up to $9.68 if required.

But wait — there’s more!  (And I’m not talking Ginsu knives!)

If Buddy is a W-2 employee, then your group is also paying a matching Social Security contribution, right? That’s also got to be allocated to the program costs, as well as any medical insurance premiums you pay on his behalf and any other benefits.

THAT is how you translate wages and salaries into program costs.

Your job this month: go through every bill you’ve paid and check you’ve written and look at ways to turn it into a program cost.

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