Nonprofit Insights

Joint Cost Allocation: When It Doesn't Fit Neatly

So, what about costs that don’t fit neatly into a functional category — or that span several? Nonprofits often conduct activities that simultaneously serve more than one organizational objective, especially in the area of fundraising.

For example, say your organization’s mission is to create awareness of s kin cancer. With summer coming, you send out a mailer that contains a handy card featuring the warning signs of melanoma. In the same piece is an appeal for donations. The warning signs, as educational material, could certainly be considered a program expense. But what about the appeal — is it Program or Fundraising?

In accordance with American Institute of Certified Public Accountants ( AICPA) Statement of Position 98-2, Accounting for Costs of Activities of Not-for-Profit Organizations and State and Local Governmental Entities That Include Fund Raising, unless three criteria are met, all costs associated with the joint activity are charged to fundraising — even if some of those costs are bona fide program costs. The accounting challenge is to determine whether you meet the tests and can allocate part of the joint costs to the other, non-fundraising components.

If an activity meets three specific criteria — Purpose, Audience and Content, in this order — then you should record the costs of the joint activities in the following manner:

• Costs that can be identified with a particular function should be charged to that
  function.
• Joint costs should be divided between Fundraising and either the appropriate Program activities, or Management and General activities.

If any of the three criteria are not met, then all of the costs of the joint activity should be charged to Fundraising. This includes costs that would be considered Program or Management and General costs had they been incurred in a different activity. The exception to this rule is that costs of goods or services provided in exchange transactions that are part of joint activities should not be reported as Fundraising costs.

For more information about our services to the public sector industry, Contact:
Jerry Gaither, Partner, Director of Public Sector Services at 972.448.6918.

The articles in this newsletter are general in nature and are not a substitute for accounting, legal, or other professional services. We assume no liability for the reader's reliance on this information. Before implementing any of the ideas contained in this publication, consult a professional advisor to determine whether they apply to your unique circumstances.