Program services are activities that result in goods and services being distributed to beneficiaries, customers, or members that fulfill the purposes or mission for which the organization exists. Supporting activities are all activities of a not-for-profit organization other than program services. Management and general activities include oversight, business management, general recordkeeping, budgeting, financing and related administrative activities, and all management and administration except for direct conduct of program services or fund-raising activities. Fund-raising activities include publicizing and conducting fund-raising campaigns; maintaining donor mailing lists; conducting special fund-raising events; preparing and distributing fund-raising manuals, instructions and other materials; and conducting other activities involved with soliciting contributions from individuals, foundations, government agencies and others. Membership-development activities include soliciting for prospective members and membership dues, membership relations and similar activities.

• 
  According to Statement No.117, Paragraph 26, this classification system was developed "to help donors, creditors, and others in assessing an organization s service efforts, including the costs of its services and how it uses resources...". Since donors make contributions in order to further a nonprofit s mission, they and the government are concerned that charitable dollars are used to achieve the organization's service goals efficiently.
  
  To help donors and boards, agencies such as the National Charities Information Bureau (NCIB) and United Way have established certain standards for the amount of an organization's budget that should be spent in each category. For example, NCIB recommends that at least 60 percent of annual expenses should be related to program services. In addition, many of the larger accounting firms have developed industry standards for the arts, libraries, human service organizations, and others to show what percent of expenses are commonly devoted to programmatic services and what percent to supporting services. (To obtain this information you might contact one of the national accounting firms who typically have teams specializing in nonprofits, or a local accounting firm that works extensively in the nonprofit sector.)
  
  Different sources recommend differing practices and policies for allocating expenses among the functional expense categories. Therefore, expense allocation practices vary widely from organization to organization within the nonprofit sector. For example, time spent by the executive director developing and overseeing programs can legitimately be considered a program services expense, yet some nonprofits will place the entire director's salary into the management and general activities function. Similarly, rent, utilities, insurance, supplies, and other expenses may be fairly divided among the various functional classifications and should not necessarily be considered exclusively management and general activities costs.
  
  The lack of standard allocation practices makes functional accounting a somewhat unreliable measure of nonprofit efficiency and effectiveness. Given the lack of clear guidelines, you will want to define for your own organization which expenses are legitimately programmatic and which are supportive. As long as your internal guidelines are reasonable and justifiable they are likely to be accepted by auditors and donors.
  
  Once you have established your own criteria for determining whether expenses are programmatic or supporting, you will need to develop a method for allocating costs among the functional areas. Some organizations use different allocation methods for different line items. For example, salaries may be allocated based on time and effort distribution summarized from periodic time sheets. Copier, postage and telephone activity can often be allocated directly to their specific uses as well (although doing so is often time consuming.) In other cases, organizations develop an indirect cost rate and allocate a percentage of expenses to each functional area. Refer to Financial Management FAQ 4: How Can We Allocate Indirect Costs to Programs?, for additional information.
  
  Since the lack of standard practices in allocating functional expenses makes comparisons between nonprofits difficult, you may want to track trends within your own organization over time: Within the guidelines you have established internally, what is the relationship between programmatic and supportive expenses over time? If your administrative or fundraising expenses are growing in relation to your programmatic outlays, you should understand what is causing the change and consider how you might reverse the trend.
  
  The Helpful Organization: A Sample Cost Allocation Methodology
  
  The Helpful Organization has two programs: Counseling and Training. Their total expenses are:
  
  

  Salaries and Fringe:
  Executive Director	$ 38,000
  Program Directors	$ 50,000
  Secretary	$ 27,000
  Rent	$ 12,000
  Supplies	$ 11,000
  Telephone	$ 3,300
  Postage	$ 2,500
  Copying	$ 2,950
  Total Expenses	$146,750

  
  The Helpful Organization uses the following methods for allocating its expenses into functional categories:

  Salaries and Fringe: The program directors’ salaries are allocated entirely to programs. The organization calculates hourly pay rates for the Executive Director and Secretary by dividing their salary and fringe benefits by the number of hours each works in a year. They track their hours using a time sheet and multiplying the number of hours spent on each functional area by the hourly rate to determine how to allocate their salaries to each benefitting functional area.

  Rent: Rent is allocated based on the percent of staff time that serve each function (as determined by staff time sheets). Since 80 pecent of staff time supports the program function, 80 percent of the rent is charged to the program function, as well.

  Supplies: Some supplies are clearly programmatic (training packets, markers and easels, etc.). These are charged directly to the benefitting programs. Other supplies are allocated using the indirect cost rate. (See FMFAQ No. 4 for additional information.)

  Telephone: Telephone expenses are allocated using the indirect cost rate.

  Postage: Bulk mailings which can be easily traced to the counseling and training programs are charged tto those functions. The remaining postage expenses are distributed using the indirect cost rate.

  Copying: Copying for big projects is done at the local copy center. Those bills are charged to program and fundraising activities. Other copying expenses are distributed using the indirect cost rate.

Based on these allocation methodologies, the distribution of expenses to functional activities is as follows: