Indirect Costs in CAP

Introduction to Indirect Expense Allocation

Indirect expenses are general costs incurred by an organization that cannot be directly attributed to a specific program or project but are necessary for the overall operations of the nonprofit. These may include administrative salaries, rent, utilities, and other overhead costs. Allocating these costs to programs gives you a clearer picture of the program’s true cost. CostAllocation Pro provides a streamlined and automated solution for managing these allocations.

For organizations wanting to post indirect expense allocations, CostAllocation Pro can help reduce manual effort and allow users to automate the entries.

Indirect Expense Allocation Process in CostAllocation Pro

CostAllocation Pro allows nonprofits to allocate indirect costs using direct salaries (excluding fringe benefits) as the allocation base.

                  1. Input of Indirect Rate: In the Configurations page of CostAllocation Pro, the user enters the organization’s indirect cost rate as a percentage. This rate represents the proportion of indirect costs (such as administrative salaries and overhead) that should be allocated to the programs and grants based on direct salaries.

                  2. Application of the Indirect Rate: Once the indirect rate is entered, it is applied to the total direct salaries for each employee. The indirect allocation is calculated for each employee based on their salary distribution across customers and classes for the period. This means that if an employee’s salary is allocated to multiple programs or grants, the indirect cost is also proportionally allocated to those same programs and grants.

                  3. Single Line Allocation: The indirect expense allocation is included in the payroll allocation entry. Specifically, the allocation is recorded as a “Single Line Allocation” in the journal entry. A single expense account is debited based on the salary allocation amounts and corresponding indirect cost percentages, which are spread across the appropriate customers and classes. Simultaneously, the same expense account is credited back to the Indirect Cost Pool class.

                  • Debits: The expense account is debited by the indirect expense amount for each customer and class based on the employee’s salary allocation.

                  • Credits: The same expense account is credited back to the Indirect Cost Pool class for the total amount of indirect costs being allocated.

 This ensures that the organization can see detailed line-by-line records of actual indirect expenses in the Indirect Cost Pool class, but with a negative expense line for the amount credited out of the Indirect Cost Pool as a result of the indirect allocation.

Net Zero Effect of Indirect Expense Allocations

One key feature of CostAllocation Pro’s indirect expense allocation process is the “net zero” effect for the indirect expense portion of the journal entry. Since the same expense account is debited and credited in equal amounts, there is no overall net effect on the organization’s Profit and Loss report at the organizational level. This ensures that indirect expenses are appropriately allocated and categorized without distorting the overall financial picture.

 Syncing with QuickBooks Online (QBO)

The process of syncing with QuickBooks Online (QBO) is user-triggered in CostAllocation Pro. Typically, this sync occurs once per month after the user has completed the payroll allocations in CostAllocation Pro. Users can review the allocations before syncing, confirming accuracy.

 Once the allocations are finalized, the entire journal entry—both the payroll and indirect expense allocations—is synced into QBO.

Customization and Flexibility in Allocations

CostAllocation Pro offers a degree of flexibility when it comes to indirect expense allocations. However, only one indirect rate can be defined and applied to all direct salaries charged across the organization. This single rate is applied uniformly to all grants, programs, and customers that are allocated direct salaries.

 Reconciliation and Reporting

Posting the indirect expense allocation as a single-line allocation helps retain the original categorization of indirect/admin expenses in the organization’s statement of functional expenses for reporting to funders and auditors, particularly in relation to Form 990 and annual financial audits. This level of detail ensures that nonprofits can report both direct and indirect costs with full transparency, offering funders and auditors a clear view of how costs are distributed across programs.

 For organizations with reimbursement-type grants, this reporting is especially important, as it allows the agency to show a $0 net income for the grant, showing that all funds were properly expended.

Conclusion

CostAllocation Pro automates and simplifies the indirect expense allocation process for nonprofits. With its integrated approach, CostAllocation Pro ensures that indirect costs are accurately calculated, posted, and reconciled in QuickBooks Online, reducing manual errors and increasing compliance with grant and audit requirements.

 Whether managing payroll allocations, indirect expenses, or reporting, CostAllocation Pro provides nonprofits with the tools they need to maintain financial transparency and accuracy, helping them save time on accounting and focus on their mission rather than manual financial processes.