Allocating Joint Costs: Discussion on Methods and Recommendations – Bus 630, Week 3

Summary

Allocating joint costs is a process in accounting. Students learn about three methods to do this, their pros and cons, and a recommendation.

Joint Costs and Products

Joint costs are those of making two or more products together. Joint products are those products. The split-off point is where the products become separate.

Three Methods of Allocation

Physical measures of output, relative sales value and net-realizable-value methods are three ways to allocate joint costs. Each method uses different data to do this.

Advantages and Disadvantages

Allocating joint costs helps value inventory. It is not useful for management decisions. Using allocated costs to change those costs can fail.

Recommendation

The relative sales value method at split-off is recommended. It is simple and fair. It is not affected by other production or costs after split-off.

Key terms

Joint production process

A process that makes two or more products together.

Joint product cost

The cost of the input and the joint production process.

Split-off point

The point where the individual products become separately identifiable.

Physical measures of output

A method of allocating joint costs based on a physical characteristic.

Net-realizable-value method

A method of allocating joint costs based on the final sales price minus any incremental processing costs.

Relative sales value method

A method of allocating joint costs based on the relative sales value of each joint product at the split-off point.

Questions this document helps with

• What is the difference between joint costs and separate product costs?
• Which method of allocating joint costs is most accurate?
• How do you decide which method to use for allocating joint costs?

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