Joint Product Cost Allocation

| Introduction | Product Costing | ABC | Absorption & Variable Costing | Allocating Support Costs | Allocating Joint Costs | Part II | Part III |

Source:

Textbook: Managerial Accounting, Creating Value in a Dynamic Business Environment (Fifth edition), Ronald W. Hilton

Notes: Management Accounting A, 2003 Semester 1, University of Sydney

Web: http://www.mhhe.com/business/accounting/garrison/Student/olc/garrison9emgracct_s/index.htm

General

Joint production process results in two or more products, which are termed joint products.

The point in the production process where the individual products become separately identifiable is called split-off point.

Joint product cost allocation is necessary for inventory valuation and income determination. However, it is not useful for making substantive economic decisions about the joint process or the joint products. (Page 619 - 621)

Allocating Joint Product Costs (Page 795, 797)

Three methods for allocating joint product costs

• Physical-units method - allocate cost to the joint products in proportion to their physical quantities
• Relative-sales-value method - in proportion to their total sales value at the split-off point
• Net Realizable value method - in proportion to net realizable value of each joint product

NRV = Sales Value - separable cost incurred after the split-off point

Physical method is least preferred because it is not based on the economic characteristics of the joint products.