Nonprofit Cost Analysis - Step #3: Allocate Direct Costs

In this step we begin the cost allocation process, starting with program-specific expenses (direct costs). Direct costs include each program’s labor costs and other directly attributable expenses.

This should be a straight-forward step for nonprofits that have been keeping finances in distinct program categories. The key here is to take the existing cost information and sort the line items into their respective program areas, as defined in Step 1 of this analysis (Define Your Programs).

If you decided in Step 1 to reorganize your programs in new ways, then this step may take more time as you think through where each cost fits in the new categorization. The principle is the same: distribute each cost item into one of the new program areas you have specified for this analysis.

Sample list of direct costs:

• Salaries and benefits for staff members working exclusively on one program
• Travel expenses and personal equipment costs attributable to these staff members
• Supplies and materials for particular programs
• Rent, where the program uses a particular facility in exclusivity
• Contract fees for the program’s partners

Direct Cost Allocation Sample