Penny Lane Child Care rents a 5,000 square foot building that houses their administrative staff (1,000 square feet – 20%), child care programs (3,500 square feet – 70%) and fundraising staff (500 square feet – 10%).
All expenses related to the building costs, including rent, utilities, maintenance and insurance are pooled in a cost center that will be allocated to each functional and program area based on the square footage percentage occupied by the program. The allocation by square footage is an acceptable basis for allocating indirect costs because it demonstrates an equitable distribution of those costs.
Payroll costs are another example of indirect allocations since each employee might work in different programs during the pay period.
An equitable basis of allocating gross salaries, payroll taxes and fringe benefits would be a percentage of the total actual time worked, or the total payroll dollars charged by all employees in each functional area.