Joint and Product costing

7 important questions on Joint and Product costing

The most frequently used methods that are used to allocate joint costs up to the split-off point can be divided in which two categories?

- Methods based on physical measures
- Methods based on costs relative to market value

Physical measures method

Using the physical measures method, we simply allocate the joint cost in proportion to volume. This method assumes that the cost per unit is the same for each of the products, which may lead to misleading profit calculations when market prices of the joint products differ.

Sales value at spit-off method

When this method is used, joint costs are allocated to joint products in proportion to the estimated sales value of production.
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Net realizable value method

In this method we recognize that products may incur costs after the split-off point, as opposed to the sales value at split-off point method. The NRV at split-off can be estimated by deducting the further processing costs from the sales revenues.

Constant gross profit percentage method

IT could be argued that since products arise from a single productive process, they should earn identical gross profit percentages. This method allocated joint costs so that the overall gross profit percentage is identical for each individual product. The gross profit percentage is calculated by deducting the total costs from the total sales and expressing the profit as a percentage of sales.

Are joint cost relevant for decision making?

For decision making, only relevant costs, which re incremental costs relating to a decision, should be considered. Joint costs allocation are thus irrelevant for decision making, given that they will be incurred irrespective of which decision is taken.

Should joint cost be allocated to by products?

Given that by-products accidentally emerge during the production process, it is argued that the joint costs should only be allocated to the joint products ant that by-products should not be allocated with any portion of joint costs before the split-off points. Be product (net) revenues should be deducted from the cost of the joint products or main products.

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