Full Cost Analysis

4.5 mins |

Summary

Determining the actual total cost of each program by allocating all direct and indirect costs (also known as service line contribution or total cost allocation)

(e.g. service line contribution, total cost allocation)

A full cost analysis helps leaders understand the true total cost of operating each of an organization's programs. It accurately allocates both direct costs (e.g., program staff) and indirect costs (e.g., rent, technology, management staff). Each program's total cost can then be compared to that program's restricted revenues to determine whether the program is covering its own costs, or is a net contributor or net user of the organization's unrestricted revenue.

How it's used

Conducting a full cost analysis provides senior leaders with a clear understanding of how the organization's resources are currently being used. This helps leaders make more informed decisions about strategy and fundraising. It also allows them to better direct scarce resources to the services, beneficiaries, sites or geographies that are most critical to achieving the organization's mission.

More specifically, a full cost analysis can be used to:

  • Compare programs by measuring the cost per unit (e.g. outcome or beneficiary) of each program or service
  • Identify and prioritize cost-saving opportunities
  • Fundraise from donors based on the true costs of delivering a program, or price the program so that it covers the full cost (for paying beneficiaries)
  • Project the costs of expanding a program (or the cost savings from shrinking it)
  • Determine the net financial contribution of each program, answering the question: Which programs are covering their own costs or even generating surplus funds, and which ones require subsidies?
  • Calculate relatively accurate "return on investment" that can enable more robust comparisons of performance between programs or judgments about whether a program should be continued and/or improved

Methodology

  • Determine the purpose and scope of the analysis.
    • Identify which critical decisions this analysis will help make.
    • Carefully delineate the programs. (e.g. Is each site or age group a separate program?)
    • Select a time period.
  • Gather financial data for the given time period and calculate the direct costs of each program.
  • Allocate indirect costs to each program.
    • For each major indirect cost, identify the cost driver. (What would cause costs to go up or down in this category?) For example:
      • Number of employees often drives HR costs.
      • Number of program participants usually drives program materials costs.
      • Office space usage and facilities usage drives rent costs.
      • Total program budget often drives finance department costs.
    • Allocate indirect costs to each program using the cost driver. (e.g. A program that has 10 out of 100 staff could be allocated 10-percent of HR department costs.)
    • Add allocated indirect costs to direct costs.
  • Add indirect costs to direct costs to calculate the total cost of each program.
  • Compare the total restricted revenue for the program to the total cost of the program to determine if it is a net user or net contributor of unrestricted revenue (net contribution equals revenue minus total cost.
  • If desired, calculate the cost per beneficiary, outcome, or other unit.

Related tools

Additional information

Nonprofit Finance Fund: Nonprofit Finance 101
This broad list of resources can help nonprofit organizations learn more about finance, cost analysis and fiscal health.

Nonprofit Cost Analysis Toolkit: Six Steps to Finding the True Costs of Programs
This toolkit provides detailed information on how to conduct a full cost analysis, including detailed instructions, examples, and templates for each step of the process.

Costs Are Cool: The Strategic Value of Economic Clarity
To make resource-related decisions intelligently, nonprofit leaders need to have a clear picture of the full costs of operating their programs and services.

Don't Compromise Good Overhead
In tough times like today's, donors are scrutinizing overhead costs more than ever. But both funders and nonprofits have a stake in protecting the "good overhead" that forms the backbone of an organization's ability to make a difference.

Managing in Tough Times
Tough times require trade-offs. Making good trade-offs requires a clear understanding of the results an organization intends to deliver and the resources it will need to succeed.

Examples and case studies

Harlem Children's Zone: Learning to Grow with Purpose
To refine its intended impact and chart a clear growth plan, Harlem Children's Zone used true-cost analysis to bring economic clarity to its 16 programs.

The Association for the Advancement of Mexican Americans: Focusing for Impact
True-cost analysis played a role in helping Association for the Advancement of Mexican Americans clarify the net financial contribution of each of its programs to inform program prioritization and fundraising target-setting.

Expeditionary Learning Schools/Outward Bound: Staying True to Mission
Expeditionary Learning Schools used true-cost analysis as part of an effort to compare financial health and mission advancement across its 126 schools to decide what to prioritize.

More Bang for the Buck
Can nonprofit organizations become more efficient without sacrificing quality? Experiences from Teach for America, Jumpstart, and Year Up show the value of truly understanding a program's "cost per outcome."

Our Piece of the Pie: From Data to Decision-Making
Our Piece of the Pie (OPP) used true-cost analysis to identify variation in economic efficiency across two sites. Based on the results, the organization decided to relocate resources to the more cost-efficient of the two sites, allowing OPP to serve more youth with the same budget.

VolunteerMatch: Balancing Mission and Margin
VolunteerMatch had developed two revenue-generating business units, and the management team believed there were other possibilities worth pursuing. But neither of the existing operations was profitable, and many on the VolunteerMatch staff feared that some of the new options might make the organization too commercial. Were there ways to improve the performance of existing ventures? And which of the potential new activities, if any, could contribute to the organization's margin without compromising its mission?

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