Cost Accounting is a finance and management framework first developed for manufacturing. A company allocates costs (such as materials, salaries, utilities, etc) to determine a unit cost to produce a good. A really good example of this is the phone in your hand – Someone did cost accounting to determine the average cost to make that phone unit. Until all the costs were divided by the number of phones there is no way of knowing how much to charge for each phone in order to make a profit.
Cost Accounting is not a true cost. It’s an ASSIGNED cost.
This concept is really valuable to communicate impact. However, it’s rarely used in the world of social impact. We think this is for three reasons, the first is that Nonprofit leaders aren’t familiar with the concept. A second (and related reason) is that many feel it makes a leap* (in logic, or assumption).
*I was on the phone last week with an executive director. She said, “I just don’t know what we can say it’s $1700 to impact each family; it varies so much! Sometimes it’s more like $30 and sometimes it’s more like $4000.” My point exactly!
Think about a college or university. I’m certain not every student has the same cost. But… somewhere along the line, someone had to figure out an average and then calculate a tuition based on that average.
The third reason is the budgeting process. Too often we just assign fundraising goals to ‘development’. We need to go one more step and then link that back to impact.
Nonprofits and social impact organizations need to be comfortable using cost accounting. Without cost accounting you can’t really build a business/impact model. Without doing the math of cost accounting you don’t have a solid funding rationale.
When we’re not comfortable with cost accounting the default is to try and ‘sell’ tangible things. The ‘absolute costs’ associated with starting a new program. The hard costs of a transportation vehicle, or building. This is the stuff that drives CFO crazy — as it should.
Here is a simple Cost Accounting for (Social) Impact framework:
- Figure out how much money you need. (This could be as simple as adding up expenses in a budget).
- Assign that to a program. (Or portions of that to several programs).
- That is the cost (accounting) for impact.
- If the program has units, you can divide that per unit. For example, ‘families served’, you can divide that to get an ‘investment per family’.
Cost accounting is a simple concept but social impact leaders need to be comfortable using it. It’s often the missing link between income and impact.
A deeper application:
We can also apply cost accounting to ‘initiatives’. Think about 3 big outcomes you want to achieve over the next 1000 days – Don’t focus on the programs… or the budget… but just the outcomes. Maybe you want to reach a tipping point in terms of a movement. Maybe it’s to make sure there is no wait list for your service. Then assign costs to these outcomes. This helps you frame a story (and OUTCOME) around impact. It tells a vision story – and builds a funding rationale.
We recently helped a Hospice Agency apply this thinking. The organization wanted to raise $2M and we asked: WHY? The executives first pointed to budget needs, growth… but the ‘why question’ eventually came back to this goal: to provide night-shift workers so that the agency could be responsive at every hour of need. We were able to tell a story about ‘Being there when people need us’ – that guided the need for $2M. We then further divided that into pillars with outcomes tied to innovation, access and care. Each had a story, outcomes, and a funding rationale. These became our Innovation Initiative, Access Initiative, and Care Initiative which communicated growing and existing work – not new programs we had to create.