Because you’re allocating based on number of units, the cost attached to all units is the same. You’re not weighting the cost allocation based on sales value. This method is considered less desirabledue to the fact that physical measuresusually have no relationship to therevenue-generating abilities of a product.
- You tie the revenue from selling a unit to the cost of making a unit.
- To use this method, all the joint products must be measurable by some basic unit of measurement.
- In situations where such measurement is not possible, the joint products must be converted to some common denominator.
To use this method, all the joint products must be measurable by some basic unit of measurement. In the table, the cost per unit is the same for both products. That’s because the joint cost allocation isn’t related to cost because it uses the physical measure method.
How is the relative sales value method applied?
Net realizable value method When such products are further processed after split-off, their total costs also include further processing cost. Constant Gross Margin Percentage Method Joint costs are apportioned in the ratio of Joint Cost Value at Separation Point. This method is not suitable when all the Joint Products do not yield constant gross margin %. Product costing methods are used to assign a cost to a manufactured product. 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.
- In cost accounting, the matching principle matches revenue with the expenses related to it.
- One type of monetary measure of joint cost allocation is the sales value method.
- The resulting cost allocation equitably spreads costs across products, resulting in roughly the same margins for each product.
- Constant Gross Margin Percentage Method Joint costs are apportioned in the ratio of Joint Cost Value at Separation Point.
- Winter Pine is the more expensive product; the all-year-use two-by-fours are cheaper.
You also see the physical measures method of allocating joint costs. The constant gross-margin percentage NRV method allocates joint costs to joint products produced during the accounting period in such a way that each individual product achieves an identical gross-margin percentage. The two major methods of allocating joint costs are (1) the net realizable value method and (2) the physical quantities method. The net realizable value method allocates joint costs to products based on their net real- izable values at the split-off point. The constant gross margin percentage method allocates joint costs such that the gross margin percentage is the same for each product. Joint Cost Allocation To use this method, simply divide the total production cost by the appropriate measure of output volume to yield the cost per unit of output.
What are the methods of joint product costing?
Sales Value at Split-off•Sales value at split-off method –allocates joint costs to joint products onthe basis of relative sales value at thesplit-off point. You can allocate joint costs based on the revenue the units generate. Market refers to the market value (sales value) of the product. The market-based method you see here is the sales value at splitoff method.
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.
How do you allocate joint costs using physical output method?
The physical-measure method allocates joint costs to joint products produced during the accounting period on the basis of a comparable physical measure, such as the relative weight, quantity or volume at the splitoff point. The physical measure method allocates cost by the weight, volume, or some other measurement of the product that’s produced. In this case, assume that the weight or volume for each two-by-four is the same. (Well, yeah. They are both two-by-fours.) So you allocate joint costs based on the number of units produced. Under quantitative unit method (also known as physical unit method), the joint cost is allocated among joint products on the basis of measurement units like tons, gallons, pounds or feet etc.
The resulting cost allocation equitably spreads costs across products, resulting in roughly the same margins for each product. However, product margins may still vary, depending on the costs incurred by each product after the allocation point.
Quantitative or physical units method of joint cost allocation
In situations where such measurement is not possible, the joint products must be converted to some common denominator. Use the following data relating to two chemicals A and B obtained from a joint process and allocate joint costs using each of the above methods. This method is suitable where physical quantity of joint-products closely reflects their costs e.g. different shades of a paint obtained from a single process may be allocated costs using physical quantity method.
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. D. The sales value at splitoff method use the sales value of the total production in the accounting period and not just the revenues from the products sold because the value is dependent on the relative weight, quantity, or volume at the splitoff point. The market value method is an industry preferred method for allocating joint cost among joint products because the market or sales value of any product is considered one of the most reliable indicator of its economic value and the costs attached to it.
Why does the physical measure method to allocate joint costs less desirable than the sales value at split-off point method?
One type of monetary measure of joint cost allocation is the sales value method. Three methods of allocating joint product costs are the physical units method, the market value method, and the net realizable method. The constant gross margin percentage method is also used to allocate joint cost. ASTM’s physical measurement standards specify the terminologies, materials, and methods related to the determination of the physical parameters of liquid spray and solid powder particles, perforated plates and screens, and wire cloths and sieves. The precision, calibration, and reporting requirements for these characterization procedures are also dealt with. In the table given below, the weight is used as the measurement unit to illustrate the use of quantitative unit method of allocating joint production cost.
One method of allocating joint costs is to allocate costs based on the benefits received from the expense. Following methods are commonly used for apportioning the joint costs among the joint products. Your crews cut down trees and produces two types of lumber for the construction industry. Both types are two-by-fours (two inches by four inches by eight feet in length).
