Elle Meyer

ACC548

Dr. Robinson

14 February 2023

Joint Costs Trick – Week 2 Article

This week I read an article written by Charity Watch, titled, “Joint Costs: Avoid This

Popular Accounting Trick!” This article focuses on nonprofit financial reporting and how they

have used ‘joint costs’ to falsify their financials (2022). Under FASB ASC 958-720, a charity

that includes an “action step” in their solicitations can claim these costs as program expenses,

rather than fundraising expenses (2022). This tactic has been seen to inflate spending for

program related services and decrease their fundraising services to keep their exempt status.

According to our reading, joint costs are the costs of a production process that yields multiple

products simultaneously (Rajan, Horngren, Datar, et al, 2021). In the world of nonprofits, the

costs of sending emails or letters with a call to action produces service program fees as well as

increased outside support. As joint cost allocation has caused scrutiny in the NFP sector,

allocating these costs to program service fees has been seen to help produce more contributions

and program service revenues for the organization (2022).

In this article, it is noted that the rules for joint cost allocation requires certain criteria to

be met before joint costs can be allocated to program service fees for a nonprofit (2022). As

these requirements are subjective, management accountants can help appropriately allocate the

costs accrued from solicitations. Within the current accounting standard, the allocation of joint

costs for nonprofits should be “rational and systematic” (2022). Further, the article outlines how
these charities can manipulate the meaning and guidance for these joint cost allocations to

enhance their funding. Would you rather your donation to a charity go towards a solicitation

stating an action step, or actually be used in action? This is the controversy developed within

this article surrounding joint cost allocation. The costs accrued by charities can be variable, but

with proper allocation, organizations can instill trust in their communities to generate higher

contributions.

Management accountants can play a key role in changing the joint cost allocation scandal

within the nonprofit sector. Reviewing current allocation methods as well as the general purpose

of the nonprofit, management accountants can allocate these costs based on individual products

or services (Rajan, Horngren, Datar, et al, 2021). These tactics can help determine which

strategies are producing the highest margins in donations as well as the greatest benefit. Proper

joint cost allocation will also produce an accurate representation of the organizations financial

position and business purpose. Management accountants can use the physical measure approach

of joint cost allocation for nonprofits (Rajan, Horngren, Datar, et al, 2021). In this instance, the

costs to buy supplies for the letters can be allocated to management fees. The costs of mailing

the letters, if they incorporate a ‘call to action’ related to their business purpose, can be allocated

to program fees if they have produced a donation in return. This can be measured by providing a

specific link or fund to donate. This can then create a measurement of donations to costs, where

management accountants can analyze if the benefits exceed the costs, through Cost-Volume-

profit analyses.

Overall, joint cost allocation regulations can be manipulated by charities for a few

reasons. Charity watch believes the main reason is to inflate program related expenses to prove

to communities they are maintaining their purpose. Despite it all, management accountants can
be employed by these organizations to appropriately, while maintaining integrity, allocate these

joint costs based on the outcomes. Finding the individual products within the joint cost activity

and allocating based on physical measure may be an efficient strategy for management

accountants.
 Works Cited

Charity rating process. CharityWatch. (2022). Retrieved February 11, 2023, from
https://www.charitywatch.org/our-charity-rating-process#solicitation-expenses 

Joint costs: Avoid this popular charity accounting trick! CharityWatch. (2022). Retrieved
February 11, 2023, from https://www.charitywatch.org/charity-donating-articles/joint-
costs-avoid-this-popular-charity-accounting-trick 

Rajan, M. V., Horngren, C. T., & Datar, S. M. (2021). Horngren's Cost Accounting: A
Managerial Emphasis. In Horngren's Cost Accounting: A Managerial Emphasis (17th ed.,
pp. 648-656). New York, NY: Pearson.