QuickBooks for Nonprofits:
Allocating Costs to Program and Activity Classes
with ManagePLUS Gold
by Mark Wilsdorf
President, Flagship Technologies, Inc.
PDF and HTML versions of this paper are available at:
This paper shows a faster, easier, and more automated way to allocate income and expense from cost pool or "overhead" classes to other classes in nonprofit organizations (NPOs), using ManagePLUS Gold for QuickBooks. It demonstrates:
|•||Allocating indirect expense using drag-and-drop, with very little typing.|
|•||Allocating indirect expense among multiple classes based on management quantities ("cost drivers")—things like staff hours or direct program spending—which you have associated with individual classes.|
|•||Creating allocation Journal Entries (JEs) automatically.|
|•||Sending the JEs to QuickBooks with a single mouse click.|
The examples in this paper are very visual (lots of screen shots), but they also (1) serve as partial user's guide for working with ManagePLUS Gold in a NPO, and (2) include specific examples related to the accounting requirements for NPOs working with Federal grants and contracts. So if you're only wanting a general idea of how ManagePLUS Gold might benefit the accounting processes in your organization, feel free to skip the technical details for now and "just look at the pictures". You can always come back for the details later.
|Want to go directly to the visual examples? Jump ahead to the Creating allocations topic to see drag-and-drop allocation in action!|
Using Classes for Activity-Based Costing in Nonprofit Organizations
QuickBooks is a good choice for many nonprofit organizations (NPOs) because it is easy to use and flexible enough to support the specialized accounting needs of NPOs. One of the great features QuickBooks offers for NPOs is the classes feature.
Classes let you identify revenue and expenses with specific programs and activities of your organization, not just the financial (income and expense) categories in your chart of accounts. Setting up classes in QuickBooks to represent your organization's programs and activities, and assigning those classes when coding transactions, provides two major benefits:
|1.||It allows evaluating each program or activity separately, independent of the others, by associating revenues and costs with specific programs and activities. This supports a form of cost accounting known as activity-based costing (ABC). ABC is a valuable management tool because it gives managers, lenders, boards, and funding sources the information they need for separately considering the effectiveness (benefits vs. costs) of each program and activity. ABC lets you prepare a profit and loss report for each program and activity, independent of the others. Audited reports normally provide this kind of cost information, separately for each major program of the organization. |
|2.||It supports meeting external reporting requirements such as for Federal filings. IRS Form 990 requires that expenses be broken down into Program, Management, and Fundraising categories. Using classes to represent programs and activities such as fundraising helps to get this done.|
Deciding which class to assign when entering a transaction is simple in most cases. Donations received at your organization's booth during an annual charity event are fundraising income, and if you have a Fundraising class that's the one you'll choose when recording the receipt of those funds.
But what about things like office rent? Printer and photocopy paper? Payroll expenses of your IT department? These may be related to all—or at least several—of the organization's programs and activities, not any specific one. When entering transactions for things like these, the usual approach is to assign them to any of several "cost pool" classes you've set up for gathering categories of non-program-specific costs, usually referred to as indirect expenses. For instance, you might assign the above-mentioned expenses to a Management & Governance class. Then at the end of the accounting period (month, quarter, year), you would allocate the amounts accumulated for Management & General to program- and activity-specific classes.
|Office rent, copy paper, IT salaries, and so on would be referred to as overhead expenses in a for-profit business. The idea is the same in a NPO: indirect expenses pertain broadly to several departments/activities/segments of the organization and must be allocated among the program and activity classes to which they provided benefits. Assigning and allocating costs to activities of the business/organization which are responsible for them or benefit from them, is the essence of activity-based costing.|
In QuickBooks, allocation is typically accomplished by:
|1.||Determining a basis on which to allocate each cost pool to specific programs and activities. If your organization has a building used both for office space and for assembling personal hygiene kits for distribution in poverty-stricken areas, you could allocate the building's depreciation expense based on the number of square feet devoted to each activity—i.e., to classes named Management & Governance, and Public Health Program #1, for instance. |
|2.||Calculating the dollar amounts involved. For example, if 1600 square feet is devoted to office space and 6400 square feet is devoted to health kit assembly (a total of 8000 square feet), Management & Governance should be allocated 1600/8000 of the total depreciation expense for the building.|
|3.||Making Journal Entries (JEs) to assign the dollar amounts to those classes receiving the allocations.|
Allocation frequently involves several receiving or "target" classes, so quite a few calculations may be necessary—you might need to allocate the Management & Governance cost pool among Fundraising, Member Development, Public Education, Habitat Restoration, Lobbying, etc. So steps 1 and 2 are typically done outside of QuickBooks, in a spreadsheet such as Microsoft Excel. Step 3 however, requires manually making JEs in QuickBooks, and is subject to the usual typing errors, transposition errors, and same old "debits vs. credits" confusion which can muddle data entry from time to time, especially for inexperienced accountants.
This paper shows how to automate all three of these steps—yes, even the creation of JEs—with an inexpensive QuickBooks add-on called ManagePLUS Gold for QuickBooks. ManagePLUS Gold provides a quick, easy, approach for calculating and entering allocations, which is also more automated and less error prone than the common spreadsheet-and-Journal-Entry approach. For detailed information about the ManagePLUS Gold product, go here:
"How do I get started with activity-based costing?"
This paper doesn't spend much time on either accounting theory or on ideas for setting up QuickBooks classes and accounts. A number of excellent resources are available as books, and as white papers, blog articles, etc. on the Web. One of the best of these is a paper by Christine L. Manor, CPA, titled Using Classes in QuickBooks to Track Activities. It is a free download available at several locations on the Web. Here's one of them:
Christine's paper is brief (15 pages), well written, and well worth printing out to use as a reference if you are getting started with accounting for a NPO. (Christine also has authored a book which may be helpful, QuickBooks for Not-for-Profit Organizations, though I have not yet reviewed it personally.)
|If you are unfamiliar with using classes in NPOs the information in Christine's paper is nearly essential for understanding the ideas presented in this paper. So if you need some background information please read Christine Manor's paper.|
|Update: Upon learning that I had cited her paper, Christine Manor was gracious enough to review this paper and provide valuable comments. So you are reading an updated version which incorporates some of her suggestions. However, any errors or omissions remain fully my responsibility. - the Author.|
QuickBooks itself also offers some assistance with accounting for a NPO. The sample QuickBooks company file for nonprofits has a broad range of transactions, plus a good example Chart of Accounts and Classes list to help you get started. And as you probably already know, a separate edition of QuickBooks is available for NPOs, called QuickBooks Premier for Nonprofits.
QuickBooks Premier for Nonprofits doesn't really offer any unique features. It's mostly a repackaging of standard QuickBooks Premier features for marketing purposes. For instance, the "special" nonprofit reports in this edition are simply re-labeled or customized versions of reports available in all Premier editions.
Among the QuickBooks Premier editions, my personal preference is QuickBooks Premier Accountant because it really does offer features not available in other Premier editions, such as Client Data Review.
ABC and Federal grants and contracts
If your NPO receives Federal grants or has Federal contracts, you must follow the accounting requirements defined in Office of Management & Budget Circular A-122 (http://www.whitehouse.gov/omb/circulars_a122_2004/). That document prescribes very specific ABC approaches you must use for allocating the organization's expenses to its programs and activities.
|In a for-profit business, allocation methods are the choice of accountants and/or managers. They may be based on a simple estimate ("I think 10% of Office & Administrative expense should be charged to Department A") or on some physical or financial factor related to the classes receiving the allocations—tons of production, gallons of fuel consumed, dollars of direct expense, etc.|
|In nonprofits working with Federal programs, cost allocation is constrained by Circular A-122's rules about the specific allocation bases which must be used for different kinds of indirect costs.|
The rules in Circular A-122 are quite specific but most of them aren't anything unusual. The examples in this paper should help you with allocating expenses according to the Circular A-122 requirements.
A Few "Ground Rules"...
To prevent accounting details from clouding your view of the basic allocation ideas, the examples in this paper are based on a simplified set of classes. You'll likely use a more comprehensive set of classes in your organization—the "real world" Classes list proposed in the Manor paper mentioned above has more than 30 classes in it, for example.
And understand that these are contrived examples. Hopefully seeing a few numbers which don't appear to be realistic (because they aren't!) won't distract from the information being conveyed. The examples were built for simplicity, not reality.
Definitions of few important terms:
|activities||Refers to various activities/areas/departments/segments of your organization which you have identified as distinct from others, such as Fundraising, Member Development, Management & Governance, IT Department Costs, Facilities Costs, Habitat Restoration, Public Education, etc.|
Identifying activities divides the work within the organization into "chunks" which can be evaluated separately for management decision making ("Is our IT department cost effective, or should we consider hiring outside IT services?"). You'll normally set up a QuickBooks class for each major activity, so you can separately track the revenue and expense associated with it.
|programs||Programs are a subset of the organization's activities. This term implies activities which deliver goods and services to the organization's beneficiaries; activities which represent the organization's primary missions, goals, and work.|
Their analog in the for-profit business world would be a profit center. While the goal is not profits in an NPO the concept is still similar, because programs represent the "output" of the organization.
|supporting services||Any major activity which isn't a program is normally a supporting service, which makes supporting services the "other" subset of the organization's activities. This term implies activities which are necessary to the overall functioning of the organization but are only indirectly related to delivering goods and services to the organization's beneficiaries.|
Their analog in the for-profit business world would be a cost center or support center—areas of the business which don't directly produce an output of the business but are nonetheless necessary for the business to function.
Copyright and trademarks
This publication is: Copyright © 2012 Flagship Technologies, Inc. All rights reserved.
ManagePLUS and ManagePLUS Gold are trademarks of Flagship Technologies, Inc. QuickBooks and the QuickBooks logo and graphic images are trademarks of Intuit.