Program-Wise Expense Allocation: Creating Accurate Cost Centers

 Most NGOs manage their expenditures efficiently, but many find it challenging to determine the true cost of running their programs.

On average, nonprofits allocate approximately 75% of their budget to program services. It is with such expenses that, if not budgeted correctly, statements of financial position end up obscuring the allocation of expenses to the delivery of the mission and how much actually benefits the beneficiaries.

Program-based expense allocation is how NGOs can overcome such a challenge. Implemented effectively, program-based expense allocation can make expense reports clean, enhance preparedness for audits, and enable top management to achieve a better understanding regarding sustainability in programs. This guide describes how NGOs can allocate their expenses in a programmatic way without burdening expense activities.

What is Program-Wise Expense Allocation

Program-wise expense allocation assigns an NGO’s total operating costs to individual programs based on how those programs use resources.

In other words, this means going beyond expense categories like “administration” or “operations” and asking, and answering a question like: Which programs used these funds, and how much?

For NGOs which implement a number of programs, like education, health, advocacy, and outreach programs, many costs can be shared. Office space, accounting staff, executive management, as well as technology, can handle more than one program concurrently. Allocation based on programs is a systematic approach to covering shared costs, rather than deploying them all to one place or equally for the lack of a reason.

Benefits of Accurate Program-Wise Expense Tracking for NGOs

Proper costing of programs goes a long way in helping NGOs transition from financial reporting at a higher level to financial decisions made at a lower level of actual costing. When both shared and direct costs are addressed and attributed correctly, financial data becomes more helpful.

• Clear visibility into true program costs. Shows the full cost of delivering each program, including shared support and compliance-related expenses.

• Stronger donor and grant reporting. Makes it easier to align expenses with funding restrictions and reduce follow-ups during grant reviews.

• More realistic budgeting and proposals. Improves cost estimates for future programs, renewals, and expansion initiatives.

• Audit-ready financial reporting. Supports consistent, defensible allocation methods that meet auditor expectations.

• Better internal accountability. Helps program and finance teams understand how operational decisions affect overall costs.

How NGOs can Allocate Expenses Across Programs Effectively

It is always best to allocate expenses to programs in a manner that involves a systematic approach. The majority of NGOs that undertake the responsibility of accurately handling expenses related to programs adopt a systematic procedure that involves description of the programs followed by description of expenses allocation.

This five-step process outlined below will provide a helpful guideline for non-governmental organizations on charging expenses to programs that better mirror expenses used by programs as well as maintaining a high degree of transparency and audibility.

Step 1: Define Programs Clearly

For any allocation to occur, a clear definition of programs has to be established. A well-defined program will ensure a focus on tracking expenditures based on organizational needs.

Key elements to be included are:

• Program objectives: What is the program trying to achieve?

• Beneficiaries: Who receives the service and how many?

• Scope and duration: Geographic reach, operational timeline, and activities.

• Funding source: Donor-specific restrictions or general funds.

Illustrative example showing how NGOs can document program objectives, beneficiaries, and funding sources.

Tip: Consider assigning specific program codes within your chart of accounts. This will enable you to link expenses more effectively to programs.

Step 2: Identify Costs

Now that programs have been defined, the next step is to properly identify what goes into running the programs. It is here that many NGOs go off the mark, not because cost information is suppressed, but because the information is only incomplete.

A practical method involves dividing costs into those that apply to a single program and those that are shared among multiple programs.

Direct costs are the easiest to identify. These are expenses that would not exist if a specific program did not exist. Common examples include:

• Salaries of staff working exclusively on a program

• Program materials, supplies, and equipment

• Travel and field expenses linked to program activities

These costs should be recorded directly against the relevant program cost center without further allocation.

Indirect or shared costs require more attention. These expenses support the organization as a whole and enable programs to function, even though they are not tied to a single activity. Typical shared costs include:

• Administrative and finance staff salaries

• Office rent, utilities, and internet

• HR, IT systems, and shared software tools

Ignoring these costs often leads to under-reported program expenses and distorted financial insights.

To avoid this, NGOs should focus on completeness before allocation.

A simple internal checklist helps:

• Are staff time and roles clearly mapped to programs?

• Are shared expenses consistently captured each month?

• Are one-time or seasonal costs (campaigns, evaluations, events) included?

This step does not require complex accounting systems. What it requires is discipline. When all costs, direct and shared are visible, the next steps of choosing allocation bases and distributing expenses become far more accurate and defensible.

Step 3: Choose an Allocation Base

Allocation bases guide the distribution of indirect costs, with the goal of creating consistent and defensible allocations that reflect program resource consumption rather than achieving exact mathematical accuracy.

For NGOs, the most effective allocation bases are those already supported by internal data. Choosing a base that looks good on paper but is difficult to track in practice often leads to inconsistencies later.

Below are the most commonly used bases in nonprofit program accounting, along with when each works best.

Many NGOs ultimately adopt a hybrid allocation model, using different bases for different cost categories. This approach aligns well with donor expectations and audit reviews, as long as the logic is documented and applied consistently.

A practical rule to follow:

• One cost category → one primary allocation driver

• Avoid changing bases mid-year unless operations change materially

When chosen carefully, the allocation base becomes a bridge between operational reality and financial reporting, making program cost data credible for internal decisions, donor reporting, and compliance reviews.

Step 4: Allocate Costs to Programs

With a base selected, costs can be allocated. Use a transparent worksheet that shows the expense, the allocation base, and the resulting program allocation.

Illustrative example showing how shared costs may be allocated across programs using different allocation bases. Figures are for demonstration only and do not represent sector benchmarks.

Volunteer hours valued using the Independent Sector 2024 hourly rate; hours and allocations shown are illustrative.

Tips for shared costs and in-kind contributions:

• Apply a standard value to volunteer hours and document the calculation

• Assign fair market value to in-kind donations

• Use proportional splits for joint activities (e.g., fundraising + program event) and keep supporting evidence

Step 5: Document and Review Allocation Methodology

Consistent documentation ensures that allocation processes remain transparent, auditable, and defensible.

Best practices:

• Keep a "Cost Allocation Policy" that indicates the methods, bases, and times of reviews

• Review allocations annually, or when changes in personnel, space, or programs occur

• Supporting documentation for the store includes time sheets, invoices, records of volunteer hours, and in-kind receipts

The recommended annual review of allocation procedures by CPA firms as well as nonprofit auditors makes sure there's conformity with the donor's expectations. Proper allocation strategies by NGOs will enable them to report program costs to their donors effectively.

Key Takeaways

Proper program-related allocation of expenses assists NGOs to better represent the use of funds being utilized for the achievement of missions. When expenses are clearly defined, allocated, and documented, explaining the finance statements to the sponsors, auditors, and other members becomes simpler. 

For NGOs, sustaining this level of accuracy over time often requires structured financial oversight. CFO Bridge supports nonprofits by:

• Designing practical, audit-ready allocation frameworks

• Aligning program cost reporting with donor and grant requirements

• Strengthening documentation and internal review processes

If your organization is looking to improve program-level cost visibility or prepare for funding and compliance reviews, CFO Bridge’s nonprofit finance experts can help build allocation systems that stay accurate as your programs grow.