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Accounting for Joint Costs Allocation Methods and Example

By August 5, 2021February 13th, 2024Bookkeeping

The company processes the bottles in a special piece of equipment that first melts, then reforms the plastic into large sheets that are cut to size. The filler is considered a byproduct.SRC can produce 25 table covers, 75 chair covers, and 5 pounds of package filler from 100 pounds of bottles. Assume that SRC allocates the joint costs to table and chair covers using the sales value at splitoff method and accounts for the byproduct using the production method. What is the ending inventory cost for each product and gross margin for SRC? Assume that SRC allocates the joint costs to table and chair covers using the sales value at splitoff method and accounts for the byproduct using the sales method.

The costs of the single input and related manufacturing process costs must be allocated to each of the joint products. The physical quantities method allocates joint costs based on a physical measure of output (e.g., pounds or yards of material). The sales value method allocates joint costs based on the relative sales value for each of the joint products. Regardless of the allocation method used, total joint costs and total profit remain the same. Companies must often decide whether to process a joint product further. If as a result of processing the product further, additional sales revenue exceeds additional costs, the wise decision is to process further.

  1. Because you’re allocating based on number of units, the cost attached to all units is the same.
  2. The easiest way is to sum up the joint cost for all the products, and divide by the total number of units.
  3. This method is popular due to the argument that a product’s market value reflects the cost incurred to produce it.
  4. This method is not suitable when all the Joint Products do not yield constant gross margin %.
  5. Regardless of what industry or type of business a company operates, it must earn money to be profitable.

This allows managers to calculate the total cost and assign a sale price to each product individually. When cost accounting, you want to select a method to plan and budget for joint costs. Choosing a method helps you know where you stand during joint production. You can assess if your actual joint costs are on track with your budget.

If a client wants a price quote for a special order, management only considers the variable costs to produce the goods, specifically material and labor costs. Fixed costs, such as a factory lease or manager salaries are irrelevant, because the firm has already paid for those costs with prior sales. The method is really a weighted market value basis using the total market or sales value of each unit (quantity sold multiplied by the unit sales price). The accountant for SRC needs to record the information about the joint and byproducts in the general journal, but is not sure what the entries should be.

About Dummies

The main costing methods available are process costing, job costing, direct costing, and throughput costing. Each of these methods applies to different production and decision environments. The constant gross margin percentage method assumes that each department has the same level of profitability. The gross margin percentages and total costs (as a percentage of sales) are the same for everything produced. In the real world, different products produce different levels of profit. An average unit cost is obtained by dividing the total number of units produced into the total joint production cost.

How is taxation treated during a company spinoff?

Because you’re allocating based on number of units, the cost attached to all units is the same. Joint cost allocation presents certain challenges, such as choosing the appropriate method for your products or services, avoiding irrelevant costs, physical measure method joint cost and updating cost information. When selecting a method, you need to consider the nature of your products or services, the availability and reliability of data, the purpose and use of cost information, and the impact on behavior and incentives.

In order to apply joint cost allocation, you must first identify the joint products or services that share the same inputs or processes. Next, you need to determine the total joint costs incurred before the split-off point. Then, select an allocation method and basis that is suitable to your purpose and situation. Subsequently, allocate the joint costs to each product or service based on the selected method and basis. Finally, analyze the cost information and utilize it to back up your pricing and marketing decisions. This method is suitable when physical quantity of joint products does not reflect their value and a reliable estimate of their sale value can be easily made.

Prior to the split-off point, production costs are allocated to jointly manufactured products. The NRV method accounts for all separable costs, regardless of how much higher or lower they are than your plan. NRV also handles any change to the final sales value (price tag) due to a change in market conditions.

The sales value at splitoff method of cost accounting

Use the split-off point to work out the proportion of joint costs that each product should carry. You can then multiply this share by the sales value to get the sales value of the project for each product, and use market value allocation methods to split these between them. Besides common costs can be apportioned to costing objects like products, jobs, department, etc. without much difficulty. But the apportionment of joint costs involves many complexities and difficulties in cost accounting. “Managers should consider only additional revenues and separable costs when making decisions about selling at splitoff or processing further.” Do you agree? Joint cost is an effective accounting procedure to determine the individual cost of those products which are produced or extracted together.

The Physical Quantities Method

It is the basis of individual price ascertainment of the joint products. The estimation of the individual cost (usually direct cost) involved in the manufacturing or extraction of joint products is a complicated task. Since the expense over raw material, labour and processing of such products are incurred as a collective cost. Finally, the physical measure method (allocating cost by the weight, volume, or some other measurement of the product) doesn’t relate revenue to expenses at all.

Winter Pine is the more expensive product; the all-year-use two-by-fours are cheaper. The following table explains how to allocate $208,000 in joint costs using the relative sales value method. In cost accounting, the matching principle matches revenue with the expenses related to it. You tie the revenue from selling a unit to the cost of making a unit. SW Flour Company has decided that their bread flour may sell better if it was marketed for gourmet baking and sold with infused spices. This would involve additional cost for the spices of $\$ 0.80$ per cup.

A-1 Fancy has $\$ 1,300$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.3. A-1 Fancy has $\$ 1,500$ more joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach.4. A-1 Fancy has $\$ 1,500$ less joint costs allocated to it under the net realizable value approach than the sales value at splitoff approach. That’s because the joint cost allocation isn’t related to cost because it uses the physical measure method.

The plant can be completed for an additional $10 million or abandoned and a different but equally valuable facility built for $5 million. Abandonment and construction of the alternative facility is the more rational decision, even though it represents a total loss of the original expenditure—the original sum invested is a sunk cost. If decision-makers are irrational or have the wrong incentives, the completion of the project may be chosen. For example, politicians or managers may have more incentive to avoid the appearance of a total loss.

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