Grant Accounting and Costs Convery 20131

 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. Convery 20132

 Types of Costs  Cost of Programs  Indirect Cost Allocation  Fundraising Costs  Activity Based Costing  Grant Accounting  Decision strategies related to costs Convery 20133

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 AGRANT 1 PROGRAM BGRANT 2 PROGRAM CGRANT 3 Also: Objects-of-expense or line-items; i.e., salaries, supplies, phone, travel Convery 20134

 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. Convery 20135

 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? Convery 20136

 Lease computers (or buildings) or buy them?  Add a program or not?  Accept a contract or not? Convery 20137

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 Convery 20138

 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. Convery 20139

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

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. Convery

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

 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. Convery

 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. Convery

 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? Convery

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

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

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

 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. Convery

 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 Convery

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 Convery

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? Convery

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 Convery