Fiscal Responsibility and Cost Allocation Tools
for
Small and Medium Size Entities
PRESENTED BY
DANIEL W. BRADLEY, CPA
OF YOUNG, OAKES, BROWN & CO., P.C.
ALTOONA, PENNSYLVANIA
IN CONJUNCTION WITH
THE COMMONWEALTH OF PENNSYLVANIA’S
OFFICE OF CHILD DEVELOPMENT AND EARLY
LEARNING
WITH THE ASSISTANCE OF THE BRAIDING
PRESCHOOL FUNDING TASK FORCE
INDEX
CHAPTER 1
INTRODUCTION TO BRAIDING
FUNDING
CHAPTER 2
TOOLS AN ORGANIZATION
NEEDS TO BE SUCCESSFUL
CHAPTER 3
PRESCHOOL PROGRAMS AND
FUNDING
CHAPTER 4
COST ALLOCATION
PRINCIPLES
CHAPTER 5
WORKSHEETS AND
GUIDELINES
CHAPTER 6
CASE STUDY INVOLVED WITH
USING THE WORKSHEETS FOR
A SAMPLE ORGANIZATION
APPENDIX A
DEFINITION OF TERMS USED IN
THIS WORKBOOK
RESOUNCES
APPLICABLE WEBSITES
The Commonwealth of Pennsylvania’s Office of Child
Development and Early Learning would like to express its
sincere gratitude to the members of the Braiding Preschool
Funding Task Force
CHAPTER 1
INTRODUCTION TO BRAIDING FUNDING
BACKGROUND OF ‘BRAIDING FUNDING’
Under the Rendell Administration, multiple new preschool funding streams were
established to promote the early education agenda and prepare the Commonwealth’s
young children for school success. As a result of the new funding streams, the Office of
Child Development and Early Learning (OCDEL) convened the Braiding Funds Task
Force with the goal of assisting early education and care providers to utilize the funds
appropriately and efficiently. The Task Force looked to assist providers in understanding
the fiscal requirements of the different programs, how these requirements worked in
relationship with each other, and how to braid the funding to achieve the next level of
best practice in fiscal accounting.
OCDEL in partnership with key early education and care practitioners from programs
representing all OCDEL funding streams came together to consider the issues and
prepare materials to assist providers in improving their practices.
TARGET AUDIENCE
The target audience for this manual and professional development opportunity is
administrators and fiscal staff of small and medium size programs already using basic
budgeting techniques, who wish to develop a deeper understanding of the concepts
around cost allocation and management of multiple funding streams.
Ideally the program administrator and the fiscal staff member would attend the workshop
together in order to best support the continued development of the fiscal practice at the
site. To receive the best results, program management and fiscal operations must be
inextricably linked together in overall program management.
OBJECTIVES
Review of the material in this chapter will enable participants to:

Understand and apply a number of basic accounting principles from the ‘tool kit’
to program operations

Define “braiding” of preschool funding

Derive the benefits associated with braiding funds
1-1
DEFINITION OF BRAIDING PRESCHOOL FUNDING
The use of multiple sources of public and private funding to support program
operations and services to individual children, with each source or thread of funding
traceable and identifiable from a management and accountability perspective.
Together the threads braid together to form a rope of coherent support for
programming for children. To properly braid funds, appropriate cost allocation
methodologies must be used and applied, assuring that there is no duplicate
funding of the costs of services or programs.
WORKING WITH ACCOUNTANTS
Programs are encouraged to use these materials in conjunction with the advice of an
accountant/auditor and well trained fiscal staff.
The needs of a particular organization depend on various requirements. For example, in
some cases, due to a law, regulation, contract, or agreement, an organization may be
required to undergo an annual financial statement audit. If this is the case, the
organization’s auditor can be an invaluable asset for providing advice, technical
assistance, and training on many topics including braiding funding. In the United States,
audits can only be conducted by Certified Public Accountants (CPAs); however, much
accounting and auditing work is performed by uncertified individuals, who work under the
direction and supervision of a certified accountant.
A CPA is licensed by the state of his/her residence to provide auditing services to the
public, although most CPA firms also offer accounting, tax, litigation support, and other
financial advisory services. The requirements for receiving the CPA license vary from
state to state, although the passage of the Uniform Certified Public Accountant
examination is required by all states. This examination is designed and graded by the
American Institute of Certified Public Accountants.
With that being said, many organizations have no legal requirement to undergo an
annual audit, and, as a result, many accountants, who may not necessarily be CPAs,
can provide much of the same assistance mentioned in the preceding paragraph and
more. An auditor is somewhat limited in the services he/she may provide to an auditee,
that is, the organization being audited; however, an accountant who is not auditing the
entity is free of many of those restrictions and, as a result, can actually act as a member
of management.
From an organization standpoint, the key is finding a qualified individual to act as your
auditor or accountant. Ask for and follow-up on references from organizations like yours.
The selected individual must be someone that the organization is comfortable with, but
also must be well qualified to serve your organization. Accounting principles vary by
industry and as a result, the selected organization must be familiar with the appropriate
accounting principles governing your organization.
1-2
CHAPTER 2
TOOLS AN ORGANIZATION NEEDS TO BE SUCCESSFUL
Introduction
Many early learning programs resist operating like a business because management
feels that focusing on mission fulfillment will be enough to continue in existence.
The future presents challenges to many organizations as the demand for public funds
and private contributions becomes more competitive. As a result, organizations must
operate both efficiently and effectively by avoiding attributes that lead to poor
performance and the inability to deliver service in a cost-effective manner.
Organizations that operate both efficiently and effectively employ business tools and
techniques that result in profitability, such as:
 Strategic plans
 Budgets
 Accurate and appropriate interim financial statements
 Proper cost assignment and allocation
 Dashboard to highlight significant variances
 Proper resource management
 Effective internal controls
 Cash management
Unfortunately, many organizations fail to use the above mentioned tools.
Efficient and effective management of early learning programs requires an acceptance
by management that a focus on financial management and the use of business tools
does not taint the mission, but rather enhances the operations of the entity. The
organization’s board as well as its program and fiscal management must embrace
appropriate business techniques; and both program and fiscal management must show
a willingness and desire to learn about and utilize business management tools
appropriate to their organization.
2-1
Every organization must operate within its means or have the ability to generate more
resources. Planning and budgeting, appropriate cost allocation and cost assignment,
appropriate internal controls, adaptability, the utilization of on-going performance
measures, appropriate marketing strategies, and proper human resource management
greatly enhance the organization’s chance of success well into the future.
The Toolkit
Various tools, techniques, and strategies are utilized by successful organizations. This
section will introduce and explain several of these tools, techniques, and strategies.
Business Plans
Business plans are the long-term (five to ten years) guides that organizations follow to
fulfill its mission. The business plan provides the link between the mission and the
actions to attain the desired outcome based upon opportunities available to the
organization due to the skills and expertise of the organization’s staff, as well as their
commitment to the organization’s mission. The business plan explains what an
organization does and why it exists.
Budgets
A key component of the business plan is an organizational budget that provides
direction, control, and a start to future year’s budgets.
Budgets should always be prepared at the program level, and then pieced together to
arrive at an organizational budget. Expenditures should be classified by natural
category (i.e. salaries, benefits, rent, etc.) as well as by functional categories
(program versus management and general versus fundraising) by program to assist in
outcome measurements. Program expenses are related to the mission statement.
Management and general expenses are incurred to operate the organization and not
directly related to the performance of the service. Fundraising expenses are those
incurred principally to solicit resources.
As mentioned previously, a business plan should be for the long-term (5 to 10 years),
and, as a result, a budget for each period should also be prepared. With that being said,
do not become married to the budgets contained in the business plan. Things do
change and, therefore, consider each year individually. As the organization begin
preparing its next year’s budget, staff should not assume that just because the
organization had a certain expense in a prior year that that expense is valid for the
current year.
The organization needs to assign revenues and expenses to its projected operations.
This process must be done in a realistic manner and not with an overly optimistic or
pessimistic slant. If during this process, something does not make sense, investigate
why immediately. Don’t wait until you actually have a problem.
2-2
Typically, the organization should determine the amount of projected revenue before
determining expenses, since an organization cannot spend what it does not have.
Certain expenses are relatively fixed or only impacted by inflation. An organization
should first project these expenses. Next, project the remaining expenses based on what
it will cost to achieve the organization’s goal for next year. Determine these remaining
expenses in terms of dollars based upon how much labor will be needed, what benefits
will be provided, what payroll taxes are required, how much is needed in the area of
supplies, etc.
Now that the organization has estimated current revenues and expenses, how did we
end up, that is, do we have an excess of revenues or an excess of expenses? If we
have an excess of expenses, do we have unrestricted net assets that we brought
forward from the prior year in sufficient amounts to cover the excess? If not, the budget
may needs to be revised; however, we also need to consider other sources of cash. For
example, does the organization have an available line of credit to cover the shortfall in
the current year, or are there certain fixed assets that are not currently needed that could
possibly be sold.
The planning process never ends. The current year budget should be compared to
actual events on a continuous basis; however, the current year budget should not be
changed unless a new funding source becomes available, a new program is started, or
some other unanticipated significant event occurs.
Key Financial Statement Consideration and Performance Measurements
Financial Statements communicate the measure of performance, success and
accountability of an organization. Financial ratios/analysis include budget comparisons,
trends, and financial statement relationships expressed in analytical terms.
Cash is the most liquid and desired asset. One of the skills required by every successful
organization is the ability to manage its cash in order to permit it to pay its current bills.
Management frequently is confused when the increase in net assets for the year does
not translate into an increase in cash. The cash flow statement details how much cash
was provided or used from operating activities, as well as from investing and financing
activities. A cash flow statement reconciles the net income or loss of the organization to
the changes in its cash balance during the period.
After considering cash, an organization also needs to be aware of its working capital,
(the excess of current assets over current liabilities). To properly and easily determine
its working capital an organization should use a classified balance sheet, separating out
current assets and liabilities, fixed and other assets, and long-term liabilities.
2-3
The executive director and the Board are frequently provided with a list of the
organization’s current cash position as well as what bills are due within thirty days. In
some cases, due to revenues not coming in as timely as they should, an organization
should have available short-term financing to cover temporary cash shortfalls.
To stretch every available dollar as far as possible, a successful organization takes
advantage of cash as well as volume discounts. A cash discount is available if bills are
paid within a specified period, while volume discounts result when organizations buy in
larger quantities.
A few simple “dashboard” type calculations/ratios can alert management to potential
problems on a timely basis.
Many early childhood programs use an enrollment report that compares staffed capacity
to enrolled capacity. Most programs develop the revenue estimates based on the
numbers of children that can be served. Since most early childhood programs have staff
salaries and benefits as a high percentage of the budget, insuring that enrollment is
sufficient to support the staffing patterns is critical. Immediate measures must be taken
when these areas are out of sync.
Other extremely useful management tools are comparative analysis. Comparing your
budget to actuals on an on-going basis highlights significant difference between actual
results and expectations, with a review to determine the cause of the variance and
whether the expenses are truly needed. Trend analysis compares financial statements
amounts for multiple periods in a side-by-side format. Common-size statements restate
all financial statement components as a percentage of a common denominator.
As mentioned earlier, working capital is the excess of current assests over current
liabilities – a margin of safety, if the organization timely retires all of the current
obligations using the current assets. The current ratio, i.e. current assets/current
liabilities, is another measure of liquidity, where if the current ratio is less than 1:1, the
organization lacks sufficient current assets to pay all current liabilities. The receivables
to working capital ratio (Accounts receivables/working capital) may be indicative of
collection problems.
The number of days in working capital ratio (budgeted expenses for the
year/365/working capital) determines the number of days an organization could stay in
existence with no other revenues being earned. Whenever the number of days in
working capital drops below an established level, the organization needs to review its
collection efforts, reduce budgeted expenses, or seek credit on a long-term basis.
Cost Allocation/Assignment
Cost Allocation/Indirect Cost Plans assist decision makers on an on-going basis, provide
cost control, and measure compliance with requirements.
2-4
Cost assignment is usually associated with a direct cost, while cost allocation is
associated with indirect costs. Assigning direct costs is typically not an issue, because
the classification is usually obvious. Indirect expenses are usually less obvious because
they serve more than one purpose.
Costs allocation can be accomplished in a variety of ways. First, determine to what cost
center/function/program indirect costs should be allocated.
Next, determine an
appropriate cost driver, such as direct labor hours/dollars or square footage, that will be
used as the basis to allocate/drive out the costs.
Costs are allocated and assigned for several reasons. Generally accepted accounting
principles require financial statements to be cost allocated by functional categories for
nonprofit organizations. A grantor may specify that only certain costs are permitted to be
charged against their grant, which may necessitate cost allocated to a grant and also by
functional categories, if there is a limit on certain types of costs, such as administration.
To determine the true cost of an activity in order to determine the amount to charge for a
service, cost assignment and allocation is imperative.
Internal Control Procedures
Internal control in any organization is the responsibility of management. As part of
continuous quality improvement, organizations should evaluate the need to change,
update or modify procedures.
Internal control is a process, which is affected by those individuals on the Board, within
management, and the organization’s staff, designed to provide reasonable assurance
about the achievement of the entity’s objectives with regards to reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with applicable
laws and regulations. Internal control consists of five interrelated components:

Control environment
o This component encompasses the individual attributes of its people,
including their integrity, ethical values, and competence as well as the
environment in which they operate. It includes tone at the top of an
organization. Control environment establishes the foundation for the
remaining components.

Risk assessment
o Every entity must be aware of the risks that it faces. It must set activities
and objectives so that the various components of an organization are
working in conjunction with one another. An entity must establish
mechanisms to identify, analyze, and manage the related risks.
2-5

Information and communication systems
o These systems enable the entity’s employees to capture and exchange
the information needed to conduct, manage and control its operations.

Control activities
o An organization’s policies and procedures

Monitoring
o The entire process of an entity must be monitored on an on-going basis
and modification made if necessary.
Policies assist management in the communication of established and approved
procedures. They also communicate the mission, goals, objectives, and operating style
of management. They can motivate and control.
Risk of financial loss is inherent in any organization. An organization must attempt to
reduce the risk of loss as part of its stewardship obligation. As a result, it is imperative
that an organization’s governing body, management, and other personnel understand
the controls that exist so that the risk of loss can be assessed, controls can be
monitored, and necessary controls can be improved or implemented.
Often controls are required by the funding source, program standards, or at the
discretion of program management and need to be carefully considered and
incorporated. Some common controls that reduce the risk of loss include using an
appropriate accounting system; having written policies and procedures; using prenumbered purchase orders, invoices, receipts, receiving reports, and checks; reconciling
bank accounts in a timely manner; signing checks after reviewing all appropriate, original
documentation; maintaining an imprest petty cash system (where the receipts and
remaining cash always equal some fixed dollar amount) reconciling underlying details to
general ledger balances on an on-going basis; requiring dual signatures on checks;
depositing all receipts intact on a daily basis; exercising appropriate oversight by the
board of directors; and performing background checks on all new hires.
With the above being said, before implementing any internal control, an organization
must assess the cost/benefits of implementing that control. Only those controls where
the benefits exceed the costs should be implemented.
Some of the risks facing an organization are insurable risks. Examples of insurable risk
include damage to property due to fire, flood, earthquake, or other natural disasters;
injury or loss of life to individuals on your premises; theft or vandalism of property;
property damage or injury to persons involved in an automobile accident, where the
automobile is owned by the nonprofit or operated by the organization’s employees or
volunteer while performing duties for the organization; and claims against directors and
officers for personal liability resulting from actions by the organization or by the directors
in the performance of their duties.
2-6
As it relates to directors’ and officers’ liability, directors and officers, while performing
their official duties, must act in good faith and in the best interests of the organization.
Many states have enacted The Model Business Corporation Act, which defines a
director’s duty of care as that of an ordinary prudent person.
A general rule is that directors or officers will not incur personal liability for the torts of an
organization merely by reason of their official capacity. Such individuals are not liable for
torts committed by or for the organization unless they participated in the wrongful act.
Many states have also enacted legislation that indemnifies an officer or director of a
nonprofit organization, if that officer or director receives no compensation for his or her
services as an officer or director.
Another risk facing an organization is the risk of loss due to fraud. Two types of fraud
that affect organizations:


management fraud or fraudulent financial statements
employee fraud or theft of assets
The best defense against fraud is an appropriate internal control system, which might
include a whistleblower program and/or a hotline.
Human Resources Management
Salaries, payroll taxes, and fringe benefits usually comprise between 60-85% of the
costs of operating many early education and care organizations. As a result,
management must possess the requisite skills to deal with complex payroll issues as
well as the required personnel management skills.
Periodic performance reviews are an excellent time to discuss with the employees the
value of the benefits provided to them, the value of the employee to the organization and
the need for any improvement on the part of the individual.
Other effective and valuable tools to use in relation to personnel management are:

Formal, written job description for all employees to assist employees understand
their duties and what is expected of them

An organizational chart that graphically depicts where each employee fits within
the organization and the authority and responsibility of each position

Personnel manuals that explain what is expected of all employees.
2-7
As it relates to payroll issues, a nonprofit is treated like a for-profit entity to a large
degree. The same payroll taxes and reporting responsibilities, except that 501 (c)(3)
organizations are exempt from the Federal Unemployment Tax Act, apply, including
Federal Insurance Contributions Act (Social Security or FICA); federal, state and local
income tax withholdings; State Unemployment Tax Act (SUTA); Immigration Reform and
Control Act, in which an employer must only hire individuals who can legally work in the
United States; Child Labor Laws; Fair Labor Standards Act, which deals with minimum
wage requirements for non-exempt employees; and the New Hire Reporting
requirements, in which all employers must report certain information regarding newly
hired employees to a designated State agency to locate parents, establish/enforce an
order for child support payment as well as to detect and prevent erroneous benefit
payments under unemployment and workers’ compensation programs.
Substantial penalties from the Internal Revenue Service, state, and local taxing agencies
exist for noncompliance, including noncompliance related to nonpayment of taxes, late
payment, late filings, and filing incomplete or erroneous returns.
To reiterate, management must have an intimate knowledge of their responsibilities
related to the referenced reporting requirements as well as other legally mandated
requirements related to payroll tax management and reporting to minimize the exposure
to significant penalties that can result and that have forced some organizations to close
their doors due to an inability to survive these penalties. Certain penalties can also be
assessed against the individual(s) responsible for payment and reporting who failed to
do so. This is an extremely important part of the job of management and should not be
relegated to an insignificant role within the organization. Professional services exist that
provides these services. If an organization had problems in this area previously, get
professional help for these services—they may come at a cost, but they are extremely
beneficial compared to the potential penalties for noncompliance.
The Employee versus Independent Contractor Issue
Many organizations utilize independent contractors versus employees, and, as a result,
save payroll tax and employee insurance cost. These independent contractors also
benefit by not having taxes withheld from their checks and can take advantage of
various tax benefits. As a result, on occasion, an organization and the individual may
agree to treat the individual as an independent contractor versus an employee, when in
fact the opposite is proper. These situations have caused many abuses of the
employment tax laws.
An organization frequently needs to offer a variety of employee benefits to attract and
retain qualified employees. Some of the more commonly offered fringe benefits are
health insurance; life insurance; vision and dental insurance; disability income insurance;
paid holiday, sick and personal days; workers’ compensation; family and maternity
leave; retirement plans; employer provided child-care; and education assistance. All of
these employee benefits come at a cost to the organization, and, as a result, the
organization should make it clear to its employees the value of these benefits.
Frequently, the costs of benefits as well as required payroll taxes add in excess of 40%
to the wages paid to employees.
2-8
The Roles and Responsibilities of the Board of Directors
Under the law a director has a duty of care as well as a duty of loyalty. These duties
require a director to be well informed and active, while exercising prudent care when
acting in his capacity as director, ensuring that the director always put the organization’s
best interest above his own or that of any other organization or person. By doing so, the
director should avoid actual or perceived conflicts of interest.
The board has a responsibility to ensure that management is conducting its affairs in an
appropriate manner. This does not means that the board must micro-manage the
organization, but by the same token, the board cannot simply assume that management
is acting in a proper way. The board must be vigilant in looking out for the best interest
of the organization and find that delicate balance between micromanaging and being
hands off.
SPECIAL CONSIDERATRIONS FOR A NON-PROFIT ORGANIZATION
The Privileges and Responsibilities of a Nonprofit
By virtue of being a nonprofit organization, the Internal Revenue Service and State
governments have granted non-profit organizations certain privileges; however, with
privilege comes responsibilities.
Usually the government’s involvement with organizations is geared toward protecting the
nonprofit organization and fostering an environment conducive to the purposes and
activities of most organizations.
Some of the privileges granted by the Internal Revenue Service (IRS) include favored
tax status through tax exemption. In addition, Section 501 (c) (3) organizations are
granted the ability to solicit tax deductible contributions from donors. In return for these
privileges, the IRS monitors the actions of organizations to ensure that the applications
filed with and approved by the IRS continue to hold true as the nonprofits conduct their
activities. Organizations that have been granted exemption may lose their privileges if
they engage in certain prohibited transactions or activities.
Organizations granted tax exemption under either section 501(c) (3) or (4) are subject to
the Excess Benefit Transaction rules, known as the Intermediate Sanctions Law. An
excess benefit transaction is any transaction in which the economic benefit is provided
by either a section 501(c) (3) or (4) organization, directly or indirectly, to, or for, the use
of any disqualified person if the value of the economic benefit provided exceeds the
value of the consideration (including the performance of services) received for providing
such benefit.
A disqualified person generally includes a person who, at the time of a transaction
deemed an excess benefit transaction, or at any time during the three years immediately
preceding the date of the transaction, was in a position to exercise substantial influence
over the affairs of the organization.
2-9
A disqualified person (which can include relatives of the disqualified person) who is
determined to have received an excess benefit is liable for an excise tax. In addition, the
disqualified person will be required to pay back the excess benefit to the organization, or
be subject to an additional penalty for the excess benefit. Managers of organizations
who engage in excess benefit transactions are subject to additional excise taxes.
All organizations are subject to a variety of laws and regulations. Many organizations
receive grants and subsidies from various branches of governments. As a result of
accepting these grants and subsidies, the organizations typically have additional rules
and regulations to comply with that are unique to the grant or subsidy.
Most organizations are corporations in which states have granted legal substance by
virtue of filing their articles of incorporation and by-laws with the state. Corporation can
enter into contracts that are enforceable under the law, can sue and be sued, and can
be subject to enforcement of the laws of the local, state, or federal government.
Like any corporation, the nonprofit should maintain adequate board minutes, retain all
contracts, retain their articles of incorporation and by-laws, retain its notification from the
IRS of tax exemptions granted, and retain all audits and IRS or required state filings.
IRS Reporting Requirements for Nonprofit Entities
Organizations whose gross receipts are normally more than $25,000 per year must file
an annual information return, Form 990. Organizations whose gross receipts are less
than $100,000 during the year and whose total assets are less than $250,000 at the end
of the year may usually file Form 990 EZ. An organization whose gross receipts are
normally less than $25,000 per year are required to electronically file a postcard, Form
990-N, with the IRS.
Most states exempt non-profits from taxation of income, but require the filing of an
information return. Many states accept a copy of the federal Form 990 or Form 990EZ in
lieu of requiring the detail to be included on the state prescribed form.
Organizations that engage in business activities or own income producing property may
be required to file, in addition to their Form 990, a Form 990-T and pay any tax that is
due. Any nonprofit organization, normally exempt under Section 501(a) of the Internal
Revenue Code, must file Form 990-T if it has annual gross income from an unrelated
trade or business in the amount of $1,000 or more. The IRS defines gross income as the
gross receipts, minus the cost of goods sold. Unrelated trade or business income is the
gross income derived from any trade or business that is regularly carried on and is not
substantially related to the organization’s exempt purpose.
An organization, that is required to file Form 990 and that fails to do so, is subject to a
penalty of $20 per day for each day the failure to file continues. The maximum penalty
for each return required to be filed is the lesser of 5% of the nonprofit’s gross receipts or
$10,000. The penalties and maximum limits are increased for nonprofit organizations
with annual gross’ receipts in excess of $1 million.
2-10
Lobbying
The IRS does not permit 501(c) (3) organizations to participate in the legislative process
to more than an insubstantial degree. The IRS will consider an organization to be
carrying on lobbying activities, if it contacts or urges the public to contact at any
government level, members of a legislative body for proposing legislation and supporting
legislation, opposing legislation, and advocating the adoption or the rejection of any
legislation. Direct lobbying involves directly communicating with a member or an
employee of a legislative body or with a government employee or official who can
participate in the creation of legislation. Grass-roots lobbying involves an attempt to
influence the opinions of the general public or a sector of the general public.
Determining what constitutes an insubstantial amount of lobbying requires judgment;
however, a nonprofit may make a safe harbor election with the IRS to abide by dollar
ceiling amounts of expenses it incurs in lobbying activities. The dollar ceiling amounts
are based on a sliding scale established by the IRS, in which the allowable percentages
of total exempt expenditures decrease as total exempt expenditures increase. By
making this election, the nonprofit takes the judgment out of the determination of what is
meant by insubstantial. If it is determined that a nonprofit has exceeded the
insubstantial limit of lobbying activities, it is subject to a substantial excise tax on the
excess expenditures.
Political activities differ from lobbying. Political activities involve participation or
intervention, whether direct or indirect, in a political campaign on behalf of, or in
opposition to, a candidate for public office at any government level. Direct or indirect
participation or involvement includes making statements supporting or opposing a
candidate, or publishing or distributing statements that support or oppose a candidate. If
your nonprofit is determined to have carried on any political activity, it will lose its tax-exempt privilege.
Private Inurement
This is another situation in which an organization’s tax exemption will be lost.
Private inurement results when the assets or revenues of a nonprofit benefit an
individual or other non-tax-exempt entity. Examples of private inurement are excessive
compensation to an individual; or where an individual other than a beneficiary of the
entity’s mission may be allowed to use, rent free, an asset of the tax-exempt
organization.
2-11
AUDITS
GAAS versus GAGAS versus OMB Circular A-133
An organization that is required to have an audit conducted can be subject to three
different levels of audits. The three levels of audits are those conducted under:

Generally accepted auditing standards (GAAS)

Generally accepted government auditing standards (GAGAS), also known as a
“Yellow Book” audit

The Office of Management and Budget of the United States (OMB) Circular A133
Every audit encompasses GAAS. An audit encompasses GAGAS as well as GAAS only
when required by law, regulation, contract, agreement, policy or voluntary choice. An
audit encompasses OMB Circular A-133 as well as GAAS and GAGAS when an
organization has more than $500,000 of expenditures of federal financial assistance in
their accounting year.
Forms of federal financial assistance includes grants; cooperative agreements; donated
surplus property; food commodities; loans; loan guarantees; property; interest subsidies;
insurance; and direct appropriations. However, if an organization is determined to be a
vendor versus a subrecipient, OMB Circular A-133 would not apply. For subsidy
payments paid to child care providers, the provider is considered to be a vendor and, as
a result, OMB Circular A-133 would not apply.
The assistance may come as pass-through funds from state and local governments or
another non-profit, or directly from the federal government. The complexion of the funds
as federal does not change merely by passing through the “hands” of a non-federal
entity. In some cases, the determination of the source of the funds is not clear from the
grant agreement, particularly if the grant funds have passed through multiple recipients.
The OMB has issued circulars to assist entities in administering the use of federal
dollars.
These circulars provide principles and standards of compliance for
organizations awarded federal financial assistance. OMB Circular A-l22, Cost Principles
for Not for Profit Organizations, establishes principles for determining applicable costs
and covers the allowability and reasonableness of costs, cost allocation as well as the
definition of direct and indirect costs. OMB Circular A-l10, Uniform Administration
Requirements for Grants and Other Agreements with Institutions of Higher Education,
Hospitals, and Other Not-for-Profit Organizations, establishes standards for the
administration of federal financial assistance to organizations.
2-12
OTHER POTENTIAL AUDITS
Funding agencies can also audit or monitor the activities of programs they fund. As a
result, due to the number of potential parties who may be auditing or monitoring your
program, it is imperative that your organization incorporate sound financial management.
2-13
CHAPTER 3
PRESCHOOL PROGRAMS AND FUNDING
OBJECTIVES
Review of the material will enable participants to become more familiar with the various
types of funding available to Preschool programs as well as gain a greater
understanding of the funds.
The following program summaries are provided on the Office of Child Development and
Early Learning’s website.

Accountability Block Grant-Pre K (ABG)

Child And Adult Care Food Program (CACFP)

National School Lunch Program

Title I — Improving The Academic Achievement Of The Disadvantaged

Head Start

Head Start Supplemental

PA Pre-K Counts

Keystone STARS

Child Care Works Fees

Child Care Private Fees

District Funded Pre-K
3-1
The program summaries provide information related to the:

Purpose of the funds

Eligible providers

Requirements related to family and child eligibility

Means by which families can access services from a particular program

Lead teacher qualifications and professional development, if applicable to a
program

Mandatory class size and staff/child ratios

Reporting requirements of both the program and child/family

Required curriculum

Child assessment requirement, if any, for a program

Reference to the regulations for a program

Source of funding

Major categories of allowable as well as unallowable expenses

Financial reporting time lines

Payment mechanisms to providers

Fiscal year of the funding

Whether parent fees are required or permitted

How funds are allocated by the funding agency.
3-2
CHAPTER 4
COST ALLOCATION
OBJECTIVES
Review of the material in this chapter will enable participants to:
A.

Differentiate between direct and indirect costs

Discuss when costs can be allocated

Discuss various cost allocation methodologies
COST ALLOCATION
A cost is allocable to a particular cost objective (for example, a grant, contract,
project, or service) in accordance with the relative benefits received. A cost is
allocable to an award if it is treated consistently with other costs incurred for the
same purpose in like circumstances and if it:

Is incurred specifically for the award;

Benefits both the award and other work and can be distributed in
reasonable proportion to the benefits received, or

Is necessary to the overall operation of the organization, although
a direct relationship to any particular cost objective cannot be
shown.
Direct costs are those that can be identified specifically with a particular final cost
objective (for example, a grant, contract, project, or service).
Indirect costs are those that have been incurred for common objectives and cannot
be readily identified with a particular final cost objective.
Typical examples of indirect costs may include depreciation, operating and
maintenance costs of a facility, and general and administrative costs, such as the
salaries and expenses of the executive director and accounting.
B. ALLOCATION OF INDIRECT COSTS
Where an organization has only one major function, or where all major functions
benefit from its indirect costs to approximately the same degree, the allocation of
indirect costs may be accomplished using a single base, such as total direct costs.
4-1
Where an organization has several major functions which benefit from its indirect
costs in varying degrees, allocation of indirect costs may require the accumulation of
such costs into separate cost groupings which then are allocated individually to
benefiting functions by means of a base which best measures the relative degree of
benefit. For example, indirect salaries, payroll taxes, and benefits might be allocated
based on full time equivalents, while occupancy related costs might be allocated
based upon square footage of direct space utilized.
EXAMPLE 4-1
An early learning classroom has 20 students. The total cost of the classroom is
$100,000. Of the 20 students, 12 are funded by PA Pre K Counts, 6 by Head Start and
2 by CCIS. A reasonable allocation of cost could be based on the number of students.
As a result, $60,000 of the total cost would be allocated to PA Pre K Counts ($100,000 X
12/20); $30,000 to Head Start ($100,000 X 6/20); and $10,000 to CCIS ($100,000 X
2/20). This assumes there are no direct costs to a particular funding stream.
EXAMPLE 4-2
An early learning classroom has 20 students. The total cost of the classroom is
$100,000. Included in the $100,000 is $10,000 of direct costs attributable to PA Pre K
Counts. All other costs are considered indirect costs. Of the 20 students, 12 are funded
by PA Pre K Counts, 6 by Head Start and 2 by CCIS. A reasonable rationale allocation
of indirect cost could be based on the number of students. As a result, $54,000 of the
total cost would be allocated to PA Pre K Counts ($ 90,000 X 12/20) as indirect cost and
the $10,000 of direct costs would be added to the indirect costs arriving at a total cost of
$64,000. In addition; $27,000 of indirect costs would be allocated to Head Start
($90,000 X 6/20); and $9,000 to CCIS ($90,000 X 2/20).
EXAMPLE 4-3
An early learning center has three classrooms. Classrooms #1 and #2 each has 20
students, while Classroom #3 has 10 students. Each classroom is 450 square feet. The
total cost of the three classrooms is $500,000, of which $60,000 is attributable to rent
expense. The center has decided to allocate all expenses other than rent based upon
the number of students, while the rent will be allocated based on square footage.
As a result, Classroom 1 and 2 are each allocated $176,000 of the non-rent operating
costs (20 students/50 students total X $440,000), while Classroom 3 is allocated
$88,000 of the non-rent operating costs (10 students/50 students total X $440,000).
The rent is allocated equally to each classroom since each is the same size.
4-2
As the above example illustrate, multiple methodology are available to an organization to
allocate its costs, provided the methodology results in a reasonable, rationale allocation
of costs based upon the benefits derived.
Some examples of proper bases (drivers) to allocate costs are relative benefits derived,
direct costs, direct salaries, square footage, or full time equivalents.
Some examples of improper bases (drivers) are total funding by program or whether
excess funds are available in a budget.
4-3
CHAPTER 5
WORKSHEETS AND GUIDELINES
The Commonwealth of Pennsylvania’s Office of Child Development and Early Learning
has developed the following version of a Braiding Funds Worksheet.
The use of this worksheet is not required, but is extremely useful to organization
demonstrate that cost have been allocated to the various funding streams in a
reasonable, rationale manner.
This worksheet is comprised of the following components:

Facesheet – The facesheet documents the total funding at the agency
level to be allocated across all budgets. To properly allocate costs, a
user will need to list the same funding stream multiple times to account
for different program hours or program year.

Direct Salaries and Benefits – This form collects the salaries and
benefits of the teachers and aides in each respective classroom. This
worksheet then allocates the total salaries and benefits of the teachers
and aides in the classroom to the respective funding source based upon
the number of children in the classroom, the number of days per year
for the respective funding sources as well as the hours per day.

Program Distributed Charges – This form collects all other program
expenses. This worksheet will distribute these charges to the respective
funding sources based upon the same allocation method as the direct
salaries and benefits mentioned immediately above.

Administrative Distributed Charges – Use this form to enter all
administrative and legal entity expenses. This worksheet will distribute
these charges to the respective funding sources based upon the same
allocation method as the direct salaries and benefits mentioned
previously.

Direct Program Charges – Use this form to enter any projected direct
program expenses. Direct program expenses are allowable only if the
program can make a strong justification as to why the expense should not
be allocated to all programs. This information must be entered on the
justification page which follows.

Direct Program Charge Justification- This form documents the
Organization’s case as to why certain expenses should be charged
directly to a particular program as opposed to being spread among all
funding sources.
5-1
CHAPTER 6
CASE STUDY USING THE COMMONWEALTH
OF PENNSYLVANIA’S OFFICE OF CHILD DEVELOPMENT AND EARLY
LEARNING’S VERSION OF A BRAIDING FUNDS WORKSHEET.
OBJECTIVES
Review of the material in this chapter will enable participants to:
A.

Understand the importance of cost allocation related to the various
funding available to Pre-K providers

Understand the braiding funds concept
ESTABLISHING A COST ALLOCATION PLA

Cost must be divided into two groupings:
o
o
B.
Program
Administrative

Costs must be consistently treated as either Program or Administrative

Expenses are going to potentially be in both cost classifications.
CASE STUDY OF THE ALLOCATION PROCESS
DCAH, Inc. is in the process of allocating costs to its various funded programs.
They have constructed a personnel cost worksheet, covering the proposed
salaries and benefits of their staff. In addition, they have built into their
worksheet the value of accumulated compensated absences to be carried over to
a subsequent period. These absences will be paid or used in a subsequent
period.
Next, DCAH separated their personnel and other costs into those that,
potentially, can be directly charged to a funded program. All other costs will be
allocated.
Next, DCAH’s management developed a schedule of classrooms, based upon
available staff; number of students by funding source; classroom hours for
funding sources as well as a calendar of total days by funding source.
6-1
The following is the relevant numerical data that has been collected based upon
the above information in summarized form. (NOTE : THE FOLLOWING
INFORMATION IS BEING USED FOR ILLUSTRATION PURPOSES ONLY
AND IS NOT INTENDED TO BE A RECOMMENDED OR FACTUAL CASE—IT
IS INTENDED SOLELY TO GIVE PARTICIPANTS AN OPPORTUNITY TO USE
THE WORKSHEETS. PLEASE, DO NOT GET CONCERN ABOUT CERTAIN
DATA WHICH IS CONTRARY TO WHAT MAY EXIST AT YOUR
ORGANIZATION. AGAIN, THIS IS ONLY AN ILLUSTRATION AND IS NOT
INTENDED TO REPRESENT A PRESCRIBED OR MODEL CLASSROOM, A
MODEL CALENDAR, A RECOMMENED SALARY/BENEFITS PACKAGE,
ETC.)
Funding available:
PA Pre K Counts
$190,000
Head Start
140,000
Child Care Private Fees, which includes revenue from CCIS
85,000
Expenses that DCAH feels they can justify as being direct charges not
subject to allocation:
Professional Development Costs in Excess of 6 hours required by Child Care
Private Fees funding:
PA Pre K Counts
$3,000
Head Start
2,000
Direct Salaries and Benefit Expenses Related to Teachers and Aides in the
Three Classrooms
Classroom 1: Teacher A: Salary $45,000 Benefits $13,500
Aide A:
Salary $20,000 Benefits $ 8,000
Classroom 2: Teacher B: Salary $40,000 Benefits $12,000
Aide B:
Salary $20,000 Benefits $ 8,000
Classroom 3: Teacher C: Salary $38,000 Benefits $11,400
Aide C:
Salary $20,000 Benefits $ 8,000
6-2
Students by Funding Source by Classroom:
Classroom 1: Pre K Counts 9; Head Start 9; Private 2
Classroom 2: Pre K Counts 15; Head Start 2; Private 3
Classroom 3: Pre K Counts 4; Head Start 13; Private 3
The calendar by funding source is summarized below:
Pre K Counts 200 days/5 hours/day
Head Start 180 days/5 hours/day
Private 260/4 hours/day
Program Distributed Charges total $60,000
Administrative Distributive Charges total $112,000
Using the above information, attempt to complete the sample worksheet.
6-3
APPENDIX A
Definitions of Terms Used in this Workbook
The following terms were presented in this manual.
inclusive.
Obviously, this list is not all-
Accounting equation – [Assets = liabilities + net assets] is the basis for the statement
of financial position, also called the balance sheet.
Accounts payable - A/P, the bills your organization owes to suppliers.
Accounts receivable - A/R, the amounts owed to you by your customers.
Accrual method of accounting - record income when earned, not when payment is
received. For expenses, record when goods or services are received, not when they are
paid.
Adjusting entries - entries necessary to update accounts for items that are not
recorded in daily transactions, which are made when books are closed at the end of an
accounting period.
Aging report - list of accounts receivable amounts and their due dates, used to alert
management to slow-paying customers. Also, for accounts payable to assist in
managing outstanding bills.
Allowance for bad debts- reserve for bad debts is an estimate of uncollectable
accounts receivables.
Assets - things of value held by the organization, such as cash, accounts receivable,
furniture and fixtures, and certain intangibles.
Balance sheet - statement of financial position that provides a financial "snapshot" of
your organization at a given point in time. It lists an organization’s assets, liabilities, and
equity.
Change in Net Assets – the difference between revenue and expenses.
Cash method of accounting - record income only when cash is received from
customers. For expenses, record only when checks are written to the vendor.
Chart of accounts - list of account titles used in your accounting records.
Closing the books - the procedures that take place at the end of an accounting period.
Adjusting entries are made, and then the revenue and gains and expense and loss
accounts are "closed." The change in net assets (revenues and gains minus expenses
and losses) that results from the closing is transferred to an equity account (net assets).
A-1
Credit memo - Writing off all or part of a customer's account receivable balance.
Credits - At least one component of every accounting transaction (journal entry) is a
credit. Credits increase liabilities and net assets and decrease assets.
Current assets - assets that are in the form of cash or will generally be converted to
cash or used up within one year. Examples are accounts receivable and inventory.
Current liabilities - Liabilities payable within one year. Examples are accounts payable
and payroll taxes payable.
Current ratio – current assets divided by current liabilities. It represents a measure of
liquidity. The result should be are less 1.00; otherwise, an entity does not have sufficient
current assets to meet its current obligations.
Debit memo - Billing a customer again.
Debits - At least one component of every accounting transaction (journal entry) is a
debit. Debits increase assets and decrease liabilities and net assets.
Depreciation expense - a procedure to annually write-off a portion of the cost of fixed
assets, such as vehicles and equipment.
Double-entry accounting - every transaction has at least two entries: a debit and a
credit. Debits must always equal credits. Double-entry accounting is the basis of a true
accounting system.
Expense accounts - the accounts used to keep track of the costs of doing business,
such as wages, payroll taxes, and rent.
Fixed assets - Assets that have a useful life of more than one year and exceed the
organization’s capitalization threshold, such as equipment and vehicles.
Foot - to total the amounts in a column, such as a column in a journal or a ledger.
General ledger- the collection of all balance sheet, revenue, gains, expense, and loss
accounts used to keep the accounting records of an organization.
Indirect costs -those costs that have been incurred for common objectives and cannot
be readily identified with a particular final cost objective. Examples are rent, office
supplies, and administrative salaries.
Journal - the chronological listing of transactions of an organization that are recorded in
sales, cash receipts, and cash disbursements journals. A general journal is used to enter
period end adjusting and closing entries and other special transactions not entered in the
other journals.
A-2
Liabilities - what your organization owes creditors, such as accounts payable, payroll
taxes payable and accrued payroll.
Long-term liabilities - liabilities that are not due within one year, such as notes
payables.
Net assets - accumulated change in net assets of the organization.
Post - to summarize all entries and transfer them to the general ledger accounts.
Prepaid expenses - Amounts paid in advance to a vendor or creditor for goods or
services, which is actually an asset of your organization since your vendor or supplier
owes your organization the goods or services. An example would be the unexpired
portion of an annual insurance premium.
Statement of Activities - an income statement or "P&L." that lists an organization’s
revenues, gains, expenses, losses, and change in net assets (profit or loss).
Trend analysis – comparison of information from one period to another. For example,
comparing expense for the current year to that of a prior year.
Trial balance - prepared at the end of an accounting period by listing all the accounts
with their associated balances in the general ledger. The debit balances equal the credit
balances.
Unearned revenue- deferred revenue or prepaid income represents money received in
advance of providing a service to your customer. It is a liability of your organization since
you still owe the service to the customer. An example would be an advance payment to
your organization for some services your organization will be required to perform in the
future.
Variance Analysis- reviewing information when a deviation from some standard exist,
such as reviewing expenses that are significantly different from the budgeted amount.
A-3
RESOURCES
National Association of Education for Young Children: Glossary of Financing Termshttp://www.naeyc.org/ece/critical/financing_glossary.asp
U.S Department of Health and Human Services- Administration for Children and
Families: Fiscal Glossary
http://eclkc.ohs.acf.hhs.gov/hslc/Program%20Design%20and%20Management/Fiscal/Fi
scal%20Glossary
Office of Management and Budget Circulars
http://www.whitehouse.gov/omb/circulars/