Joint Cost Allocation Methods

Joint cost is the manufacturing cost incurred on a joint production process which takes common inputs

Physical measurement method

Joint costs are allocated based on number of units or physical quantity such as weight, volume or leng
Quantity of the
Cost Allocated to Product
a Joint Product = Quantity of Total
Production

Total Joint
Costs

This method is suitable where physical quantity of joint-products closely reflects their costs e.g. differe

Relative sales value method

This method allocates joint costs on the basis of estimated sales value of a given joint product relative
Sale Value of the
Cost Allocated to Product
Total Joint
a Joint Product = Sales Value of Total Costs
Production

This method is suitable when physical quantity of joint products does not reflect their value and a relia

hich takes common inputs but simultaneously produces multiple products called joint-products e.g. processing o

as weight, volume or length of each product relative to total production. This method can be represented in the

ects their costs e.g. different shades of a paint obtained from a single process may be allocated costs using phys

iven joint product relative to the sales value of total joint production. This is illustrated in the following formula:

ect their value and a reliable estimate of their sale value can be easily made.

ucts e.g. processing of crude oil simultaneously yields gasoline, diesel, jet fuel, lubricants and other products. In

be represented in the following formula:

cated costs using physical quantity method.

the following formula:

and other products. In order to allocate costs to such joint products, costs accountants employ one of the sever

mploy one of the several cost allocation methods. Most common of those methods are:

Question 1
1

Physical measurement method

Product
401
402
403
404
405

output
4,500
6,000
4,500
3,000
2,000
20,000

Joint Cost
Cost per batch Annual Output
$
$
200,000.00
45,000.00
90,000.00
200,000.00
60,000.00
120,000.00
200,000.00
45,000.00
90,000.00
200,000.00
30,000.00
60,000.00
200,000.00
20,000.00
40,000.00
200,000.00
400,000.00

Relative sales value method

Product
401
402
403
404
405

Sales unit
100,000
140,000
100,000
40,000
20,000
400,000

Price/unit
Sales Value
Joint Cost
$
$
$
0.40
40,000.00
200,000.00
0.60
84,000.00
200,000.00
0.70
70,000.00
200,000.00
0.80
32,000.00
200,000.00
1.00
20,000.00
200,000.00
246,000

Question 3
Helen Barnes should accept the offer from the toy company since the product
is a by product which by no means have additional cost after splitoff point.
This means that every sales value realised is 100% profit. Normally by products are taking ag
cost incured after splitoff point

Question 4
Signatron should use the relative sales value approach for cost allocation
since it can reliably estimate the sales value at splitoff ponit. This method will give a more rea
gross profit margin. Physical method will be usefull if signatron is to make a pricing decision

Question 2
Unit cost
$
0.50
0.50
0.50
0.50
0.50

Cost per batch Unit cost

$
$
32,520.33
0.33
68,292.68
0.49
56,910.57
0.57
26,016.26
0.65
16,260.16
0.81

e the product
toff point.
lly by products are taking against any

llocation
s method will give a more reasonable
to make a pricing decision

Product
Product
less cost

Product
Product
less cost

Income statement
Unit
401
3,000
402
3,000
6,000
6,000

Income statement
Unit
401
3,000
402
3,000
6,000
3,000
3,000

Recommendation:
Helen Barnes should accept the order of 6000 unite o
The order will be met partly 401 and 402.
This order will result in a gross loss of N39.02/unit
This is less than the proposed carrying cost of the inv

ome statement
Unit price
Amount
0.40
1,200.00
0.40
1,200.00
2,400.00
0.50 - 3,000.00
600.00

Carrying Cost
Quantity
Unit cost
Total carrying cost

ome statement
Unit price
Amount
0.40
1,200.00
0.40
1,200.00
2,400.00
0.33 975.61
0.49 - 1,463.41
39.02

ept the order of 6000 unite of 401.

rtly 401 and 402.
gross loss of N39.02/unit
posed carrying cost of the inventory of N720 from keeping the inventory

0.24
###
0.50
720.00