Nonprofit Accounting Basics

Allowable Costs/Cost Principles


John Meriscko

National Association of County and City Health Officials

These principles describe the cost accounting requirements associated with federal awards. The principles are included in the Office of Management and Budget (OMB) Circular A-21, "Cost Principles for Educational Institutions," Circular A-87, "Cost Principles for State, Local, and Indian Tribal Governments," Circular A-122, "Cost Principles for Nonprofit Organizations," and HHS CFR Title 45, Part 74, Appendix E, "Hospital Cost Principles for R&D."

Various organizations (educational institutions, nonprofit, and hospitals) and governmental entities (state, local, and Indian tribes) have unique aspects to their structure and accounting systems. Because of these unique aspects four different documents describing these principles were created. Except for the few differences due to the unique aspects of the organizations and entities, in most cases the documents are substantially identical. However when federal funds are initially awarded to an entity covered by one cost circular and then passed through to an entity covered by a different circular (e.g., a grant to a state passed through to a private nonprofit organization), the subrecipient is required to follow the cost principles applicable to it, not those applicable to the pass-through entity.

For example, Circular A-122 lists 53 different items of costs. Items of cost are synonymous with cost or expense categories. Cost items include advertising and public relations costs through trustee costs. Below are examples of three different cost items from A-122:

3. Alcoholic beverages. Costs of alcoholic beverages are unallowable.

4. Audit costs and related services

a. The costs of audits required by, and performed in accordance with, the Single Audit Act, as implemented by Circular A-133, "Audits of States, Local Governments, and Non-Profit Organizations" are allowable. Also see 31 USC 7505(b) and section 230 ("Audit Costs") of Circular A-133.

b. Other audit costs are allowable if included in an indirect cost rate proposal, or if specifically approved by the awarding agency as a direct cost to an award.

c. The cost of agreed-upon procedures engagements to monitor subrecipients who are exempted from A-133 under section 200(d) are allowable, subject to the conditions listed in A-133, section 230 (b)(2).

5. Bad debts. Bad debts, including losses (whether actual or estimated) arising from uncollectable accounts and other claims, related collection costs, and related legal costs, are unallowable.