The Benefits of Automatic Expense Allocations

One of the most time consuming tasks of many non-profit accounting departments is making sure that expenses are properly allocated across the various programs and grants.     It doesn’t have to be time consuming, though.   With the proper accounting system, allocating expenses can be a breeze.   Microsoft Dynamics GP, for example, helps you automate the process with fixed and variable allocation accounts.

Fixed allocation accounts apply when you want to allocate the expenses by a fixed percentage or dollar amount.   For example, assume that you have four programs that you are allocating your Internet connectivity expenses to and you are basing your allocations on the number of employees working in each program.   The breakdown is as follows:

Program

Number   of Employees

Percentage

Program A

3

30%

Program B

2

20%

Program C

4

40%

Program D

1

10%

TOTALS

10

100%

 

Since the number of employees working in each program does not typically change from month to month, you can automate this by setting up a Fixed Allocation account for your internet expenses.  The Fixed Allocation account is configured so that 30% of the bill always goes to Program A and 20% of the bill always goes to Program B and so on. Then when the internet bill arrives, you distribute the entire amount to the allocation account and the system automatically re-distributes the bill to the four programs listed above based on the relative percentages.

Fixed allocations work well when the relative percentages are constant, but what happens when the percentages vary from period to period?  For example, suppose that the internet expense is allocated for the month of January based on the hours worked in each Program, as shown in the following table?

Program

Hours   Worked

Relative   Percentages

Program A

400

26.67%

Program B

260

17.33%

Program C

540

36%

Program D

300

20%

TOTALS

1500

100%

 

In this case, the expense allocation is variable depending on how many hours were worked that month in each Program.

As with Fixed Allocations, automating this is relatively easy with Microsoft Dynamics GP.   This is done through what are known as Unit Accounts and Variable Allocation Accounts.   Unit Accounts are statistical accounts that allow you to track statistics such as Hours Worked in the General Ledger.   They are entered as one-sided journal entries and they can be used in your financial statements (e.g. Cost Per Employee) or they can be used to calculate variable allocations.

Variable Allocation Accounts are similar to Fixed Allocations accounts, except that they use other financial accounts or unit accounts to calculate the relative allocation percentages.     For example, in the preceding scenario, a Variable Allocation Account would be set up that tells the system to automatically allocate the internet expense based on the relative hours worked.    When the internet expense is entered, the system looks at the hours worked in each Program and then calculates the relative percentage of hours worked.  It will then allocate, as in the case of our example, 26.6%  of the expense to Program A and so on.    In February, the hours worked in each Program will be different and the internet expense will be allocated based on the relative percentages of the February hours worked.

The bottom line is that the Fixed and Variable Allocation Accounts in Microsoft Dynamics GP can save a non-profit a tremendous amount of time.  Consider, for example, the experience of one of our clients, the Food Bank Council of Michigan.    They converted from Peachtree to Dynamics GP and were able to save more than four days per month in man-hours simply by automating their General Ledger distribution allocations.   These hour saved were then freed up for more mission-critical purposes.

For more information on the allocation capabilities of Microsoft Dynamics GP, please feel free to visit our website www.manersolutions.com or e-mail James at [email protected].

Maner Costerisan – a Michigan-based CPA firm and technology consulting firm specializing in helping Not-for-Profits improve operations and support their mission through financial accounting, CRM and productivity software solutions.    We are Certified Partners for Microsoft Dynamics GP,  Intacct and Avectra Social CRM.    For more information on how we can help you excel in these challenging economic times, please contact us (517) 323-7500 or visit our website www.manersolutions.com.

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ERP professionals providing insight and advice for not for profit organizations.