Using Cost Pools in QuickBooks Online

Using a Cost Pool to group similar costs that need to be allocated periodically simplifies the allocation process significantly, especially when paired with tools like CostAllocation Pro and QuickBooks Online (QBO).

What is a Cost Pool?

A cost pool is used to group related expenses in preparation of allocating the costs at a future time. A common use of cost pools is to group payroll & related costs—including salaries, payroll taxes, and fringe benefits—into a specific QBO class. These payroll costs are often aggregated in a “Payroll Cost Pool” class under the Administrative parent class. At the end of each period, the costs are credited from the payroll cost pool class and debited to the relevant expense accounts for each program, to accomplish accurate programatic expense tracking.

Key Components of the Payroll Cost Pool

1. Grouping Payroll Costs: Salaries, taxes, and fringe benefits are grouped under a QBO class for a specific period. Additional expenses like third-party fringe benefits (paid through payables) can also be included.

2. Class Structure: Nonprofits often structure their QBO classes around their three main functional categories:

   • Programs

   • Fundraising

   • Administrative

These align with the Statement of Functional Expenses on the Form 990. To achieve more detailed reporting, organizations can create subclasses—for example, subclasses for specific fundraising events or distinct programs. For administrative functions, the Payroll Cost Pool is a sub-class of the Administrative category, and you may also have other cost pools, for example, an indirect cost pool.

Configuring the Payroll Cost Pool in CostAllocation Pro

In CostAllocation Pro, the Configurations page plays a pivotal role in setting up payroll allocations. Here’s how it works:

• The top section allows users to map the expense pools (like the Payroll Cost Pool) to their QBO classes. These classes will appear as credit lines in the allocation journal entry once it’s synced to QBO from CostAllocation Pro.

• It’s important to note that debit and credit mappings for payroll cost pool entries typically point to the same GL account. This ensures that when the entry is posted, the cost pool is zeroed out, and the expenses are distributed across the correct programs or administrative accounts.

• In the bottom section, users can configure the Expense Pools Funding Source, determining which customer will be credited on the allocation journal entry. If no customer is needed for the credit lines, this field can be left blank.

Why Use a Payroll Cost Pool?

The payroll cost pool method brings multiple advantages to nonprofit organizations:

• Simplified Expense Allocation: By grouping payroll costs and using CostAllocation Pro to automate journal entries, organizations can drastically reduce the manual effort required for payroll allocations.

• Accurate Reporting: With the proper class and account mapping, nonprofit organizations can ensure that their Statement of Functional Expenses (particularly for Form 990) remains accurate, transparent, and easy to produce.

• Flexibility with Funding Sources: The option to leave the customer field blank or include a funding source gives users flexibility depending on the reporting needs of specific of the user.

Conclusion

The payroll cost pool method is often a preferred way to manage allocations. This approach saves time and improves reporting.