Principles of allocating expenses

There are many ways to allocate costs. For a given situation, there may be more than one reasonable way. Use the following principles to decide on the best approach for your organization:

• The basis for allocating expenses should be reasonable. In other words, there should be a clear relationship between the cost of an item, the activities it relates to, and the basis of allocation. For example, it would generally not be reasonable to allocate office heating costs on the basis of staff salaries, since there is simply no relationship between the two.
• The amounts allocated should be reasonable in relation to the other costs and value of activities to the charity. For example, if one activity has $5,000 of direct costs and another has $500,000 of direct costs, it is probably not reasonable to divide the indirect costs equally between the two activities.
• The allocation method should be applied consistently over time. The approach used one year should continue to be used the next, unless circumstances change significantly and in a way that specifically supports a change in how costs are allocated.
• Allocation methods should be consistent for similar items. For example, it is probably not reasonable to allocate rent on the basis of square footage used in each program while allocating property taxes on the basis of the number of staff engaged in each activity.
• The basis of allocation should be as simple as possible. Greater complexity should be justified by the improvement in the quality and accuracy of the information. For example, you could allocate costs based simply on the primary function of each staff member or based on details of the actual amount of time each staff member spends on each function each week. If you expect both of these methods to give you similar information, use the simpler method. For example, it is much easier to allocate costs based on each staff member's primary function than it is to have them record their time on time sheets each week and then to analyze these sheets.
• Whatever expense allocation method you use, it must be clearly documented. This will help you apply the method consistently, particularly where staff or volunteers change.  This will also allow you to explain your allocation process to auditors or the Canada Revenue Agency (CRA).

Keep in mind:

• Funded projects may have guidelines on what types of costs can be allocated to them and budgeted levels for such allocations. These guidelines may differ from project to project. You will need to comply with these requirements for each project. This can greatly complicate your accounting.
• You may not have to allocate costs invoice-by-invoice.  For example, the cost of office administration (such as the receptionist and bookkeeper's salaries and benefits, their associated office supplies and so on) might be accumulated in an Administrative Costs section of the general ledger and allocated to the programs once a month rather than each time a salary cheque is issued or an invoice is paid.
• It is possible to allocate costs more than once. For example, the cost of providing and supporting personal computers to staff could be allocated to the staff cost (noted as "1" below); then, the cost of staff (including their allocated PC costs) could be allocated to specific programs (noted as "2" below).

  For example:

  Cost of employee salaries	$635,000
  Allocate (1):
  Cost of employees' PCs	15,000
  Cost of annual PC maintenance	4,000
  Total cost of employees	$654,000
  Allocated to (2):
  Charitable programs	$534,000
  Fundraising	75,000
  Management/administration	45,000
  Total employee costs allocated	$654,000

  In this way, some cost allocation processes in larger organizations can become extremely complex and sophisticated.