3 Things NonProfits MUST Know About Cost Allocation for State Approval

When we work with our NonProfit clients, one of the biggest struggles they face is properly accounting for cost allocation. 

From staff to board members, we often find a lack of detail and planning when it comes to cost allocation. What you don’t know CAN indeed hurt your organization when it comes to State Agency approval.

Let’s talk about why you need to have a deep understanding of this process.  We never want an organization to lose their state funding, risking everything for lack of accountability.

Cost Allocation: What Does That Mean?

Cost allocation is an accounting method used to determine cost to cost objects. In nonprofit accounting, it is used to determine the percentage of shared items that should be billed to each program.

A cost allocation plan tells your funding sources how you distributed the shared costs. You use cost allocation when you are sharing items that cannot be easily divided such as utilities, supplies, office space, etc. If you purchased a ream of paper for a printer that is used for all programs, will you count out each sheet of paper to each program? Of course not! Cost allocation allows you to divide that ream of paper between each program without having to equally divide those 500 sheets between each program.

Once you have multiple funding sources, it is time to submit a cost allocation plan. You will need to determine a method of choice. The State of Tennessee allows each agency to choose its method. The accountant creates a plan that is submitted and approved by your cognizant agent (your largest funding source). The plan has to be submitted on your letterhead, dated and signed by the Executive Director and the Accountant.

These items should be included in your cost allocation plan:

1. The purpose of the cost allocation allows the recipient of the plan to know why you have prepared this plan.
2. Specify which costs the plan applies. Detailing which costs the plan applies to gives the cognizant agency an understanding of your logic and thought process.
3. How the costs will be allocated specifies how you calculated each percentage using your method of choice.

Once these things have been submitted to the appropriate state agency, you will receive an approval letter.

As Nonprofit Accounting Specialists, we fully understand the methods used by the state to approve or deny compliance. Click here to submit your current plan and we will meet with you to discuss your unique situation, and recommend changes as needed.