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• Categories of expenditure

• Allocation of Costs

The accounting requirements of SORP 2 will mean that many charities will have to reconsider how they treat items of expenditure in their accounts.

CATEGORIES OF EXPENDITURE

With the introduction of the Statement of Financial Activities expenditure will fall into two broad categories:-

• costs of generating funds

• charitable expenditure

For charities whose gross income is less than £250,000 ( formerly £100,000) traditional classifications can be used. However, on a practical note they rarely fit on to one side of paper in a print size that is legible.

Costs of Generating Funds

This category is quite straight forward. It includes advertising, publicity material and the costs associated with fundraising events and public appeals, e.g. stationery, staff time, hiring venues.

Charitable Expenditure

Expenditure in this category falls into four main headings:

• Grants payable in furtherance of Charity’s objects

• Costs of activities in furtherance of Charity’s objects

• Support costs

• Resources expended on managing and administering the Charity

To decide what falls into this category you will need to look at the objects of your organisation.
The costs of carrying out the primary objects will be directly charitable.

Example:
A day care centre for the elderly.
Costs of activities in furtherance of the Charity’s objects would include:

1. Costs of opening and running the centre, (heating, wages etc).

2. Cost of members welfare, (food, therapy, transport, special equipment etc).

3. Costs of training staff in healthcare, nursing, counselling and other welfare related areas.

Support costs in the above example may be organizing the transport rota.

Where your organisation is a little unusual you will have to think carefully about what your primary aims are. You may find that some expenditure belongs in part to this category and in part to another. For example, an employee may do some directly charitable work and some administration. In such a case you need to decide how to split the costs.

This is the category which catches all the leftover bits! The following are examples of the type of expenditure you would find here:-

1. Office rent, rates, maintenance and insurance.

2. Management and administration salaries and expenses.

3. Legal , professional and audit fees.

4. Bank charges.

5. Expenses of the AGM and management meetings.

6. Fidelity insurance

7. General office costs

8. Staff training for administration support etc.

You need to disclose in the accounts how the costs are allocated. It is a good idea to consider this carefully before the accounts are drawn up.
Once you have decided how to make an allocation you should stick to it for future years unless there is a good reason to change it.

Below are some suggestions of the way expenses may be split between different categories:-

1. Wages- on approximate time spent on each activity, e.g. 50% charitable 50% administration.

2. Premises Costs- on area, e.g. one quarter of the premises is taken up by the administration office therefore 75% charitable 25% administration.

3. Equipment- on approximate time used in each category,  e.g. a computer and printer say 60% publicity and fundraising and 40% administration.

While it is not practical for the allocations to be made down to the nearest hour or nearest nut and bolt, they must be sensible. Above all, the method of allocation should be consistent from year to year.