Is My Nonprofit Allocating Joint Costs Properly?March 19, 2019
Attention nonprofit organizations…make sure you’re allocating joint costs properly. The accuracy of your functional expense report depends on it!
Does your nonprofit spend enough on its mission programs? Nonprofits face heightened scrutiny when they spend too much on management activities and fundraising efforts and not enough on their mission. Luckily, some activities serve both of these purposes (mission and fundraising), and expenses derived from them are known as “joint costs.” Allocating these expenses in your functional expense report can help boost your organization’s reputation in the eyes of nonprofit rating agencies, donors and the press…but it can be complicated. We’re here to help.
What is Joint Cost allocation?
Sometimes, nonprofit fundraising activities serve a joint purpose.
For example, an animal rescue league may send a mailing that asks for a donation, but also may include tips on how you can help your local animal shelter, through volunteering your time to walk and play with the animals (their call to action).
If the fundraising activity accomplishes program goals in addition to a fundraising appeal, the organization might consider a joint cost allocation. In the above example, an organization can allocate the cost of producing the letter between fundraising and program expenses.
3 Essential Criteria
The three criteria that must be met in order to apply a joint cost allocation methodology are:
- Purpose. The purpose of the activity must be to carry out a program function or management and general function.
- Program Function: The activity should call for specific action by the audience that will help accomplish the organization’s mission
- Management and General Function: The “purpose” criterion is not met if a majority of compensation or fees for any party’s performance of the joint activity varies based on contributions raised for that activity.
- Audience. The audience for the fundraising activity cannot be selected based on prior donors and must be selected for one or more of the following reasons:
- The audience’s need (or potential need) to use the action called for in the purpose criteria
- The audience’s ability to follow through on the action called for in the purpose criteria
- The organization is required to direct the management and general component of the joint activity to the particular audience or the audience has reasonable potential for use of the management and general component.
- Content. The content condition is met if the joint activity actually supports program or management and general functions. The joint activity calls for specific action by the audience that will help accomplish the organization’s mission. If the action is not clearly evident, information describing the action and explaining the need for and benefits of the action are provided.
If you determine that joint costs incurred in activities that include fundraising have been allocated you must disclose the following information in the financial statements:
- The types of activities that resulted in joint costs
- The fact that such costs have been allocated
- The total amount allocated during the period and portion allocated to each functional expense category
- The amount of joint costs for each of joint activity (encouraged, but not required).
Common mistakes to avoid when allocating joint costs:
- Ignoring the three Criteria: Organizations need to ensure that all three criteria have been met in order for the organization to allocate the costs of a joint activity.
- Over-allocating costs as a program expense: Many not for profit organizations make the mistake of categorizing educational materials as program expenses, when they may not qualify. These materials may not meet the “purpose” criterion of calling for a specific action.
Need help allocating joint costs? Contact any member of our Not-for-Profit Services Team.