Many companies, such as petroleum refiners, produce and sell two or more products simultaneously

For example, ExxonMobil sells petroleum, natural gas, and raw liquefied petroleum gas (LPG), which are produced when the company extracts and refines crude oil. Similarly, health care providers offer multiple services, such as medical treatment, nursing care, and rehabilitation, to patients. The question is “How should these companies allocate costs to ‘joint’ products and services?” Charitable organizations also have to understand how to allocate joint costs, especially because of increased scrutiny by nonprofit watchdogs.

Joint-Cost Allocation and the Wounded Warrior Project^*

Around the world, charities raise money from philanthropic donors to fulfil their missions. In the United States, the Wounded Warrior Project (WWP), the largest veteran’s charity in the United States, raises money for programs and services for wounded military veterans. However, in 2016, WWP ousted its two top executives over a joint-cost allocation controversy.

U.S. accounting rules allow charities to allocate costs of certain fund-raising mailings as a public-interest service if the solicitations are educational and include a call to action, such as contacting public officials. The mailing costs are joint costs that must be allocated to either programs, fund raising, or administration. In 2015, WWP reported that $308 million, or 78% of its budget, went to veterans’ programs—a share that charity watchdogs consider respectable. However, this amount included more than $47 million of fund-raising mailing costs allocated to programs as educational components. Without it, programming and services were only 65% of WWP’s budget.

Charities argue that incurring joint costs is efficient because it combines multiple goals in a single campaign. Others argue that joint costs allow charities to overstate the program portion of its work, misleading donors into believing that more is being done for a cause than is really the case.

Ricky Fitchett/ZUMA Wire/Alamy Stock Photo

In 2016, when media reports surfaced WWP’s joint-cost allocation and some questionable expenses, including spending hundreds of thousands of dollars on public relations and lobbying campaigns to deflect criticism of its spending and to fight efforts to restrict how much charities such as WPP spend on overhead, WPP fired its chief executive officer and chief operating officer. By 2017, WPP changed the calculation of its program-expense ratio to better reflect its activities.

This chapter examines methods for allocating costs to joint products. We also examine how cost numbers appropriate for one purpose, such as external reporting, may not be appropriate for other purposes, such as decisions about the further processing of joint products.