Nonprofits sometimes misunderstand the difference between shared direct costs and administrative costs. Just because a resource is used by more than one program or functional area (administration or fundraising) does not define it as an administrative cost.

A high-level definition of administrative costs (aka, management and general; aka, indirect) is that they are resources used for the overall management of the entire organization. These are often expenses related to board governance, financial accounting, human resources, and organization-wide staff meetings.

Shared direct costs (aka, shared program costs; aka, allocable direct costs) are resources that each program uses to accomplish its mission work. Nonprofits most often acquire these resources centrally and make them available to each program as well as the administrative and fundraising functions. It is generally not possible (or would be prohibitively expensive and time-consuming) to track the exact amount used by each program or function. These are often expenses like office supplies, occupancy, technology, and equipment.

To allocate costs properly, we take a two-step approach. The first step is to allocate shared direct costs. The second step is to allocate the expenses aggregated in the administrative and fundraising categories.

To organize shared direct expenses best, we create a “To be allocated” or “Allocable expenses” cost center. This allocation cost center sits parallel to the other functional cost centers (programs, administration, and fundraising) in our structure. When incurring expenses and coding them into our accounting system, we choose this cost code. This step organizes all of our shared direct costs into one easily identifiable category.

Once we have allocated all of the shared direct costs, we move to the next step – allocating management and general costs and fundraising costs to programs. This step is crucial in giving us the full picture of what resources we need to fulfill our mission goals successfully in each program area.

Unlike shared direct costs, we do not need to allocate management and general costs or fundraising costs by line item. We can allocate these costs in aggregate, by using elegant chart of accounts line items created especially for this task. We often call these line items “Administrative Allocation” or “Fundraising Allocation.” The name is optional, though it should communicate how the line items are used.