what’s behind the income statement and statement of functional expense? barbara clemenson, cpa,...

What’s Behind the Income Statement and Statement of Functional Expense?

Barbara Clemenson, CPA, CFRE

Clemenson - Behind the Income Statement © 2

Outline: It’s all about Cost!

What are costs? Direct Costs Indirect Costs

What are cost allocations?Why can’t an accounting system

simply take care of cost allocations?What does it all come down to?


What are Costs?

Manufacturing Model Direct

Materials Direct Labor Overhead


What are Costs?

Direct Costs Direct

materials Direct

labor

Indirect Costs Overhea

d

Problem with manufacturing model: Service economy

More costs are “overhead,” -- not directly traceable to any one product

Even the manufacturing world is much more reliant on “overhead” than on Direct Labor.


What are Costs?

What does it cost to… Direct

Materials Direct

Labor Overhead

Feed a homeless person?Cure someone of cancer?Educate a college student?Advocate for legislation?Provide membership services? Issue a grant to a nonprofit

organization?Help someone pay their rent?


What are Cost Allocations?

Allocation is the process of assigning

indirect costs to specific products,

processes and/or services.

It is an art, not a science!

It is based on what is reasonable and

makes sense in the situation.


What are Cost Allocations?

What are the overhead cost allocations to…

Feed a homeless person?Cure someone of cancer?Educate a college student?Advocate for legislation?Provide membership services? Issue a grant to a nonprofit

organization?Help someone pay their rent?


Why can’t an accounting system simply take care of cost allocations?Cost/Benefit Analysis

Sometimes it is easier to allocate entire expenses throughout the year to one division/program, and then simply allocate the total once at the end of the fiscal year.

Examples I have a building that is partly used for a homeless

shelter and partly used for administration I have staff that oversees and/or supports several

different programs


Why can’t an accounting system simply take care of cost allocations?Cost/Benefit Analysis Unknowns

Sometimes I don’t know ahead of time how to allocate expenses, so I wait until the end of the year and then use a reasonable basis for those expense allocation.

Examples How much time is the maintenance staff going

to spend in servicing each division? How much time is the IT department going to

spend in each division?


Why can’t an accounting system simply take care of cost allocations?After I have done allocations and know the

types of services provided and number of people serviced, then I can estimate cost per unit.

I will not come up with the same answer as another accountant. It depends on what we include and what we don’t include, and especially on how well we understand the operations of the organization!


Example

The City Mission Statement of Functional Expenses

Allocate Facility Costs

Allocate Support Ministry Costs

Allocate Administration Costs

Allocate Communication Costs

Allocate Contribution Costs


So my questions….

…when I look at an Income

Statement are ALWAYS:

How did they estimate their

noncash income/expenses?

How did they classify their costs?

How did they allocate their costs?


What does it all come down to?

ETHICS!!!IntegrityHonesty

AccountabilityResponsibility


SummaryCosts are not simple. They include both

direct and indirect costs.We assign indirect costs through allocations

that make sense, are reasonable and reflect the organization’s actual operations.

We have to allocate costs because it would be too expensive to assign every cost when it is incurred, and because we’re dealing with unknowns.

Proper cost allocation comes down to ETHICS!

what’s behind the income statement and statement of functional expense? barbara clemenson, cpa,...

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