Cost Allocation with Sage MIP – Part I
Is your Cost Allocation process completed on Excel worksheets, and then hand-keyed to your financial and grant accounting system? Many financial accounting systems don’t really support the allocation of administrative costs to programs or grants, as they really aren’t geared for the grant funded nonprofit or governmental organization. And, often organizations unknowingly purchase a simple financial accounting system that is much more geared to a for-profit entity, yet there really is a huge difference in the needs of these two types of organizations. This discussion is geared to complexity of the NonProfit organization that is highly funded by federal and state grants, and therefore has need to appropriately allocate their administrative costs in a reasonable manner to the various grants.
Of course, every organization is required to have a written cost allocation plan. This plan becomes your roadmap to your allocation process, and if you are a NonProfit organization, and your grants originate from the federal government, then your organization must comply with the cost allocation requirements of OMB Circular A-122.
The Sage MIP Fund Accounting program offers three methodologies under which your allocation of costs can be carried out with ease. The first is to use the MIP distribution codes at the time you enter invoices. As an example, suppose your allocation plan indicates that all occupancy costs will be allocated to grants based on square footage utilization by grant. You measure the space, and build a distribution code where each grant lists its space in number of square feet. You may have 15 grant lines in that distribution code, and each has its assigned square footage entered. The total of the 15 lines equals total square feet. When making your entry for the monthly rent, you utilize the square footage distribution code, and it does the work of calculating the cost assignments based on the square footage by grant. And, for any other cost for which an allocation by square footage by grant is reasonable, you use the same distribution code.
You likely have different bases for other types of costs, but it’s important to keep it reasonable. Maybe you split all other costs based on direct salaries by program, or maybe over total expense by program. But – you simply build distribution codes in Sage MIP for each basis defined in your written cost allocation plan. At the end of your month, all of your allocation work is done, and you haven’t used a single spreadsheet!
The second possibility is for your organization to pool the administrative costs. Maybe you can work with a single Administrative Cost Pool, but different general ledger codes in that pool are spread differently, just as above. But, you would rather spread all costs at the end of the month. So – you create your location to house the pooled costs during the month. And, at the end of the month, you use your distribution codes to spread your costs using journal entries. You avoid the many transaction lines when you use the example above on a $20 invoice that is being spread to 30 grants. Your allocation is clean, and again, it didn’t take spreadsheets.
But – the best of all is to use the Sage MIP Allocation Management module. We often call this module “distribution codes on steroids”. You use the same administrative cost pool (or pools), and you build allocation codes that meet the criteria defined in your formal cost allocation plan. At the end of the month, you simply run the allocation routines, and you validate the work they did, and post the transactions that are created by the allocation route.
Life without allocation spreadsheets…..wouldn’t that be a Wonderful World?
You might also be interested in reading:
Your Accounting System –Isn’t it supposed to replace manual processes? Part II – Cost Allocation
Cost Allocation – What about your written plan?
Helping nonprofits, human resources departments with fund accounting and HRMS software, reporting, and accounting services; Huckstep & Associates assists organizations throughout the central United States from Minnesota to Texas and Colorado to Michigan.
