What is joint product costing

What is joint product costing

Description/Paper Instructions

Joint product costing

What is joint product costing?

Joint product costing is a method of accounting for the costs of products that are produced simultaneously from a common input or process. These products are called joint products, and they may have different sales values. The joint costs are the costs that are incurred before the point at which the joint products are separated.

Why is joint product costing important?

Joint product costing is important because it allows companies to allocate the joint costs to the individual joint products in a way that is fair and accurate. This information is then used to determine the profitability of each joint product, which can help management make decisions about how to price and market the products.

How is joint product costing done?

There are three main methods of joint product costing:

Physical measure method: This method allocates the joint costs based on the physical attributes of the joint products, such as weight, volume, or number of units.

Relative sales value method: This method allocates the joint costs based on the relative sales values of the joint products.

Net realizable value method: This method allocates the joint costs based on the net realizable values of the joint products, after deducting the separable costs.

Which method should be used?

The best method of joint product costing to use depends on the specific circumstances of the company. The physical measure method is the simplest to use, but it may not be accurate if the joint products have different sales values. The relative sales value method is more accurate, but it can be difficult to estimate the sales values of the joint products if they are not sold at the split-off point. The net realizable value method is the most accurate, but it can be more complex to use.

Example of joint product costing

Let’s say a company produces two joint products, gasoline and diesel fuel, from a common input of crude oil. The joint costs of producing the two products are $100,000. The gasoline is sold at the split-off point for $120,000, and the diesel fuel is sold after further processing for $150,000.

The following table shows how the joint costs would be allocated using the three different methods of joint product costing:

Method            Allocation of joint costs

Physical measure method  Allocated equally, $50,000 to each product

Relative sales value method               $33,333 to gasoline and $66,667 to diesel fuel

Net realizable value method              $20,000 to gasoline and $80,000 to diesel fuel

Conclusion

Joint product costing is a complex topic, but it is an important one for companies that produce multiple products from a common input. The three methods of joint product costing described above are the most common, and the best method to use depends on the specific circumstances of the company.

In addition to the three methods described above, there are a few other methods of joint product costing that are less commonly used. These methods include the following:

Market value method: This method allocates the joint costs based on the market values of the joint products.

Weighted average method: This method allocates the joint costs based on a weighted average of the physical attributes and sales values of the joint products.

Sequential allocation method: This method allocates the joint costs sequentially, starting with the product that has the highest sales value.

The choice of which method to use depends on the specific circumstances of the company and the needs of management. However, all of the methods described above are based on the same fundamental principle: to allocate the joint costs to the joint products in a way that is fair and accurate.

What is joint product costing

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