What s Behind the Income Statement and Statement of Functional Expense? Barbara Clemenson, CPA, CFRE

Transcription

1 What s Behind the Income Statement and Statement of Functional Expense? Barbara Clemenson, CPA, CFRE

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? Clemenson - Behind the Income Statement 2

3 What are Costs? Manufacturing Model Direct Materials Direct Labor Overhead Clemenson - Behind the Income Statement 3

4 What are Costs? Direct Costs Direct materials Direct labor Indirect Costs Overhead 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. Clemenson - Behind the Income Statement 4

5 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? Clemenson - Behind the Income Statement 5

6 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. Clemenson - Behind the Income Statement 6

7 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? Clemenson - Behind the Income Statement 7

8 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 Clemenson - Behind the Income Statement 8

9 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? Clemenson - Behind the Income Statement 9

10 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! Clemenson - Behind the Income Statement 10

11 Example The City Mission Statement of Functional Expenses Allocate Facility Costs Allocate Support Ministry Costs Allocate Administration Costs Allocate Communication Costs Allocate Contribution Costs Clemenson - Behind the Income Statement 11

12 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? Clemenson - Behind the Income Statement 12

13 What does it all come down to? ETHICS!!! Integrity Honesty Accountability Responsibility Clemenson - Behind the Income Statement 13

14 Summary Costs 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! Clemenson - Behind the Income Statement 14