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Overhead allocation to restricted charity funds

What is the best bookkeeping practice to allocate overheads to different charity funds?

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Our goal is to have a clear, hopefully simple and transparent system for overhead allocation.

Our charity is grant funded and we use a 'charge out' rate system when bidding. This is fairly common practice in our 'industry'. The charge out rate includes an allocation for overheads and a small contribution to reserves to ensure future sustainability.

We are interested in any best practice bookeeping models which are simple to use. 

This year we tried to a system of charging only wage costs to funds and then an overall recovery charge to each fund at the year end, however, this was challenged by our accountants who wanted more transparency over lump sum 'overhead recovery' allocations. 

I believe we have a few options, however, I am open to suggestions from the community. Here are a couple of suggestions below. 

1)  'Charge' each 'fund' with the charge out rate according to time spent 
i.e. debit: individual fund expense accounts and credit a 'overhead recovery' account
Then debit: 'overhead recovery' and credit: 'expenses' to effectively clear out the expenses

This approach is transparent, however, how do we deal with under or over recovery?

2) On a periodic basis, allocate overheads to each fund 
i.e. debit:  individual fund expense account and credit: various overhead expense accounts

This has potentially less journals however may be harder to tie back to the charge out rates.
There's also the question of what basis to use for the allocation? Fund income, hours spent, wage expenses (the largest cost) or some combination of all 3?

Thank you in advance for your contributions. I hope this explains the question clearly enough. Please ask for clarification where required.

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By Paul Crowley
11th Jun 2021 11:46

Do not get so many now as charities and restricted funds take up so much time.
My concern was to make sure funders agreed that the out turn worked and make the figures work in the accounts to fit.
The problem on one that I was involved with was that charity was making a profit on the overheads.
Charging out in total to all the funders more than they had actually paid

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By paul.benny
11th Jun 2021 12:32

So what you have is cost-plus pricing, where cost = direct labour plus share of overheads. This straightforward absorbtion costs

The first thing is to make sure that your labour cost includes the full employment cost - ER NI/Pension, any benefits, and then to make sure that your labour charge-out rate will recover the full cost. For example, if you are charging a daily rate, ensure that it allows for holiday, and allowance for sickness and other non-chargeable time.

Then you need to allocate overheads. I’d probably use labour cost as a basis of allocation. Most costs are driven by headcount and more costly people generally come with greater overhead. Overhead charge-out is then total overheads divided by total chargeable units.

You’ll end with something that says projects are charged direct labour at £100/day and overhead contribution at £50/day (or whatever).

Not all costs and not all chargeable time are spread evenly over the year, so you are unlikely to get exactly 100% recovery every month- some will be over, some under. You should plan for 100% recovery over the year. By monitoring recoveries against plan you can check whether you need to take action – cutting costs, increasing recovery rates.

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By paulhammett
11th Jun 2021 19:04

Have you asked your accountants what basis they suggest you adopt to meet their concerns about ‘transparency’. I would.

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