To help donors, creditors, and others in assessing an organization's service efforts, including the costs of its services and how it uses resources, a statement of activities or or notes to financial statements shall provide information about expenses reported by their functional classification such as major classes of program services and supporting activities. (p.9)

The IRS instructions dealing with functional expenses provide substantial advise on how to assign or allocate overhead costs:

In General - Column (A) All organizations must complete column (A) unless they are using an approved DOL form or Form 5500 as a partial substitute for Form 990. See General Instruction F.

Columns (B), (C), and (D)
These columns are optional for all organizations except section 4947(a)(1) nonexempt charitable trusts and section 501(c)(3) and (4) organizations. Section 4947(a)(1) nonexempt charitable trusts and section 501(c)(3) and (4) organizations must complete columns (B), (C), and (D).

In Part II, the organization's expenses are designated by object classification (e.g., salaries, legal fees, supplies, etc.) and allocated into three functions: program services (column (B)); management and general (column (C)); and fundraising (column (D)). These functions are explained below in the instructions for the columns. Do not include in Part II any expense items you must report on lines 6b, 8b, 9b, 10b, or 16 in Part I.

For reporting to the IRS only, use the organization's normal accounting method to report total expenses in column (A) and to segregate them into functions under columns (B), (C), and (D). However, for state reporting requirements, see General Instructions E and G. If the accounting system does not provide for this type of segregation, a reasonable method of allocation may be used. The amounts reported should be accurate and the method of allocation documented in the organization's records.

Report, in the appropriate column, expenses that are directly attributable to a particular functional category. In general, allocate expenses that relate to more than one functional category. For example, allocate employees' salaries on the basis of each employee's time. For some shared expenses such as occupancy, supplies, and depreciation of office equipment, use an appropriate basis for each kind of cost. However, you should report some other shared expenses in column (C) only. The column instructions below discuss allocating expenses.

Column (A) - Total
For column (A), total each line item of columns (B), (C), and (D) in Part II. Except for expenses you report on lines 6b, 8b, 9b, 10b, or 16 of Part I, you should use column (A) to report all expenses the organization paid or incurred.

Column (B) - Program services
Program services are mainly those activities that the reporting organization was created to conduct and which, along with any activities commenced subsequently, form the basis of the organization's current exemption from tax. They may be self-funded or funded out of contributions, accumulated income, investment income, or any other source. Fundraising expenses should not be reported as program related expenses even though one of the functions of the organization is to solicit contributions for other organizations.

Program services can also include the organization's unrelated trade or business activities. For example, publishing a magazine is a program service even though the magazine contains both editorials and articles that further the organization's exempt purpose and advertising, the income from which is taxable as unrelated business income.

If an organization receives a grant to do research, produce an item, or perform a service, either to meet the grantor's specific needs or to benefit the public directly, the costs incurred represent program service expenses. Do not treat these costs as fundraising expenses, even if you report the grant on line 1 as a contribution.

Column (C) - Management and general
Use column (C) to report the organization's expenses for overall function and management, rather than for its direct conduct of fundraising activities or program services. Overall management usually includes the salaries and expenses of the chief officer of the organization and that officer's staff. If part of their time is spent directly supervising program services and fundraising activities, their salaries and expenses should be allocated among those functions.

Other expenses to report in column (C) include those for meetings of the board of directors or similar group; committee and staff meetings (unless held in connection with specific program services or fundraising activities); general legal services; accounting (including patient accounting and billing); general liability insurance; office management; auditing, personnel, and other centralized services; preparation, publication, and distribution of an annual report; and investment expenses (however, report rental income expenses on line 6b and program-related income expenses in column (B)).

You should report only general expenses in column (C). Do not use this column to report costs of special meetings or other activities that relate to fundraising or specific program services.

Column (D) - Fundraising
Fundraising expenses are the total expenses incurred in soliciting contributions, gifts, grants, etc. Report as fundraising expenses all expenses, including allocable overhead costs, incurred in: (a) publicizing and conducting fundraising campaigns; (b) soliciting bequests and grants from foundations or other organizations, or government grants reportable on line 1c; (c) participating in federated fundraising campaigns; (d) preparing and distributing fundraising manuals, instructions, and other materials; and (e) conducting special events that generate contributions reportable on line 1a, in addition to revenue reportable in the right-hand column on line 9a. However, report any expenses that are directly attributable to revenue shown on line 9a (i.e., the direct expenses incurred in furnishing the goods or services sold) on line 9b.

• Journyx, a sophisticated web-based application used by many large corporations and government agencies, offers a wealth of features and is available for free to organizations with less than ten employees or users. A separate module costing under $1,000 is available to link Journyx directly with QuickBooks. Modules to link to most major accounting and human resource management packages are also available. Organizations with 10-25 employees can expect to pay between $1500 and $2000 for the system with larger organizations paying even more. For organizations with sophisticated grant-reporting needs, this package may well be a worthwhile investment.
  
  
• Three other widely used commercial time-management systems are:
  
  • Kronos
    
  • Timeslips
    
  • Replicon (Cost: approximately $6,500 for a 50-user license)
  
  
  
• GetMyTime.com charges $2 per employee per month for a simple but versatile time tracking system. Data is readily downloaded and exported to Quickbooks. You can also load lists of employees and other information from QuickBooks into GetMyTime.
  
  
• Quickbooks offer a couple of tools for tracking time. QuickBooks includes the Pro Timer utility on the program CD. It is our understanding that this separate system can then be installed throughout your organization. The stopwatch feature is useful for employees working directly with Quickbooks.
  Two useful Pro Timer technical notes are available on the QuickBooks website here and here.