Functional Expense Allocation: Program, M&G, and Fundraising Under FASB ASC 958

Functional expense allocation classifies every nonprofit expense by its purpose — program services, management and general, or fundraising — in parallel with its natural classification. FASB ASC 958-205 requires both views on the statement of activities, and ASC 958-720 governs allocation methods and joint costs. Time studies, FTE allocations, square footage, and direct charging are the standard techniques. Inaccurate allocations drive audit findings and Form 990 amendments.

Plain-language definition

Every dollar a nonprofit spends has two labels. The natural label says what it bought: salaries, rent, supplies. The functional label says why it was spent: to run a program, to manage the organization, or to raise money. Functional expense allocation is the work of putting the second label on every dollar, using defensible methods.

Detailed definition

FASB Accounting Standards Codification 958-205 requires nonprofits to present expenses by both natural classification and functional classification. The three functions are:

• Program services. Activities that carry out the mission — direct service delivery, public education on mission topics, research tied to mission goals. Each major program is generally disclosed separately.
• Management and general (M&G). Organization-wide oversight: executive direction not tied to a specific program, financial management, audits, legal, human resources, general recordkeeping, board governance.
• Fundraising. Cultivation, solicitation, and stewardship of donors. Includes direct-mail appeals, grant writing, event costs, donor database management, and major-gifts officer compensation proportional to time spent on fundraising.

ASC 958-720 governs the mechanics: what costs belong in M&G (versus programs), how to allocate joint costs from multi-purpose activities, and what methods are acceptable. Acceptable methods include time studies, FTE allocations, square footage, usage logs, and direct charging. Every method must reflect actual consumption of resources and be applied consistently from period to period.

How it works

Consider a small nonprofit with these total expenses for the year: personnel $600,000, occupancy $120,000, professional fees $40,000, supplies $30,000, depreciation $20,000 — total $810,000.

Step 1: Choose methods.

• Personnel: quarterly time study.
• Occupancy: square footage (65% program, 25% M&G, 10% fundraising).
• Professional fees: direct charge where possible; $15,000 audit fees to M&G, $10,000 grant writing to fundraising, $15,000 program evaluation to programs.
• Supplies: FTE allocation matching personnel ratios.
• Depreciation: square footage, same as occupancy.

Step 2: Apply the time study. Study results for $600,000 personnel: 70% program, 18% M&G, 12% fundraising → $420,000 / $108,000 / $72,000.

Step 3: Apply square footage to occupancy and depreciation. $120,000 rent: $78,000 / $30,000 / $12,000. $20,000 depreciation: $13,000 / $5,000 / $2,000.

Step 4: Supplies on FTE ratio (70/18/12). $30,000 supplies: $21,000 / $5,400 / $3,600.

Step 5: Professional fees direct-charged. $15,000 M&G, $10,000 fundraising, $15,000 program.

Totals by function:

• Program: $420,000 + $78,000 + $13,000 + $21,000 + $15,000 = $547,000 (67.5%)
• M&G: $108,000 + $30,000 + $5,000 + $5,400 + $15,000 = $163,400 (20.2%)
• Fundraising: $72,000 + $12,000 + $2,000 + $3,600 + $10,000 = $99,600 (12.3%)

Total: $810,000. Program ratio 67.5%, within Charity Navigator’s acceptable range for most subsectors.

Related terms

• Natural classification — expenses reported by what was purchased (salaries, rent, supplies).
• Statement of Functional Expenses — matrix presentation crossing natural rows with functional columns.
• Joint cost allocation — splitting costs from activities that combine fundraising with program or M&G, only if ASC 958-720-45 criteria are met.
• Restricted funds — separate from functional allocation; a program expense can be funded from restricted or unrestricted net assets.
• Program ratio — program expenses divided by total expenses; a common (imperfect) watchdog metric.

Common mistakes

1. Treating the ED as 100% program. Executive Directors perform M&G and fundraising work. Allocating the full salary to programs inflates the program ratio and is a routine audit finding.
2. Stale percentages. Applying the same 70/20/10 split for five years without review. ASC 958-720 requires methods that reflect current resource consumption; staffing or program changes demand updates.
3. Missed joint-cost criteria. Mailing an appeal with a general mission-awareness insert and allocating half to program. If the purpose, audience, and content criteria are not all met, the full cost is fundraising.
4. Ignoring M&G entirely. A non-zero but tiny M&G ratio (under 5% for a mid-sized org) usually signals that governance, finance, and HR costs were dumped into programs. Watchdogs and sophisticated funders look for this.
5. Hidden fundraising. Grant-writing salaries often sit under program costs because the writer is embedded in a program team. Grant writing for unrestricted or general operating support is fundraising under ASC 958-720.

DEFINITION

Statement of Functional Expenses

A financial statement matrix presenting expenses simultaneously by natural classification (rows: salaries, rent, etc.) and functional classification (columns: program, M&G, fundraising). Required for voluntary health and welfare entities and encouraged for other nonprofits under ASC 958-205.

DEFINITION

Joint cost allocation

Allocation of costs from activities that combine fundraising with program or management elements, permitted under ASC 958-720-45 only if the purpose, audience, and content criteria are met.

DEFINITION

Management and general (M&G)

Expenses for organization-wide oversight, business management, general recordkeeping, budgeting, financial reporting, and governance not directly attributable to a specific program or fundraising activity.