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.