CB BureauA recently released paper, Conceptual Issues Faced in Development of Cost Accounting Standards, released by Institute of Cost of Works Accountants of India (ICWAI) questions if expenses made towards corporate social responsibility (CSR) be included in the total costs of the company. The paper also questions if donations and gifts including political donations be included in the overhead expenses of the company.
While production, administrative and marketing expenses can easily be justified as overhead costs, accountants are not able to find the right criterion for CSR and donations to pass them as ‘overhead costs’.
Earlier, donations were considered to be voluntary in nature, with little or no business consideration, and these were not considered as either business expense or resources used to carry on the business. Hence, such expenses were kept outside the realm of cost accounting.
Similarly, as per the paper, CSR activities were considered philanthropic in nature and not related to business. However, now that it is established that firms spend money on business considerations and no expenditure is incurred on pure philanthropic activities, all expenses incurred on those activities should be marked as business expenditure. Therefore, it is logical to consider donations and expenditure on CSR activities as overheads.
The paper further points out that once those expenditures are considered as a cost, the question that arises is how to relate those overheads to different functions.
The report suggests that management accountants and ICWAI should together think about the issue and create guidelines to facilitate classification of such overheads.
The paper suggests that expenses towards social development of institutions or community located close to production facilities may be included in production overheads, as those expenses are made towards smooth operation of the facilities.