What are the methods for appointing of joint cost to joint products?

Joint products may be defined as two or more products produced simultaneously in a process, each having a sufficiently high saleable value to merit recognition as a main product. They cannot be produced separately. The processing of a particular material may result in the production of two or more products. If all the products are of equal economic importance and none of them can be termed as major products, then these will be referred to as joint products.

What are the methods for appointing of joint cost to joint products?

Methods of Accounting:

Apportionment of joint cost among the joint products is essential for determining the share of individual joint products correctly. Ascertainment of share of cost is required for pricing the products, valuing the closing inventory and ascertaining the profit or loss on sale of different products.

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Following methods are commonly used for apportioning the joint costs among the joint products.

(a) Physical Units Method:

Under this method the joint costs are apportioned among the joint products in the ratio of physical units of output produced at the point of separation.

For example, the physical base like raw material weight in physical quantity is used as the base for apportioning the joint costs. This method is very simple and easy to use. It is also technically a sound method.

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However this method cannot be used when output consists of different types of units such as liquids, solids, etc. It is also illogical to assume that all joint products are equally desirable and valuable since this method assigns same unit to high quality and low quality joint products.

Example 1:

The following data have been taken out from the books of Mass Coke Ltd.

What are the methods for appointing of joint cost to joint products?

The price of coal is Rs. 800 per tonne; the direct wages and overhead costs to the point of separation are Rs.400 and Rs.600 respectively per tonne of coal. Calculate the material, labour, overheads and total cost of each product on the basis of weight.

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Solution:

What are the methods for appointing of joint cost to joint products?

(b) Average Unit Cost Method:

Under this method, the total units produced at that point divide the total cost incurred up to the split-off point to get average cost per unit of production. All joint products are valued at the average cost. This method can be used when all products are expressed in terms of same units. It cannot be used when the units are not comparable.

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Advantages:

(a) It is very simple and easy to adopt.

(b) It is logical to use this method as all joint products are produced from the same raw material and same process.

(c) When this method is used all joint products will have uniform cost.

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Disadvantages:

(a) The apportioned costs cannot be used for setting prices particularly in a competitive market.

(b) It is not useful for scientific decision-making.

(c) This method fails to recognize the fact that all joint products are not equally costly and to give due weightage to this factor.

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Example 2:

Total production 25 000 units and total cost (up to split-off point) is Rs.6, 00,000. Average cost per unit = 6,00,000/25,000 = Rs.24 per unit. If the joint products produced are A – 10,000 units, B – 6,000 units, and C – 9,000 units.

Then the joint cost will be apportioned as follows:

What are the methods for appointing of joint cost to joint products?

This method cannot be used when the units are not comparable. It is used in tobacco industry, timber industry, and glue making industry.

(c) Survey Method:

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This method assumes that the difference in costs of joint products arises due to certain qualitative and quantitative factors like raw materials used, labour operations performed, time consumed for production and technical difficulties in manufacture.

Based on technical evaluation, weights are assigned to each product in the form of points. Apportionment of joint costs is made on the basis of these point values.

Advantages:

(a) This method enables accurate allocation of joint costs.

(b) It is considered more equitable than other methods, for it takes into consideration all related factors and assigns due weightage in the form of point values.

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(c) Usage of weight factors results in the fair allocation of joint costs based on the benefits received by each product.

Disadvantages:

(a) Assignment of weights is based on intuitive judgment and therefore arbitrary in nature.

(b) The weights used may be inappropriate in the first place and may become useless with the passage of time.

Example 3:

In a company the following joint costs are incurred: Materials Rs. 10,000, Wages Rs.5, 000, and Overheads Rs.5,000. The output of three joint products X, Y, and Z is: X – 100 units, Y – 600 units, and Z – 400 units. On the basis of technical evaluation the following weights were assigned to the products: X – 8, Y – 5, and Z – 3. Apportion the joint costs to the joint products on a suitable method.

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Solution:

The suitable method for apportioning the joint cost would be Survey method. Statement of Apportionment of Joint Costs

What are the methods for appointing of joint cost to joint products?

What are the methods for appointing of joint cost to joint products?

(d) Standard Cost Method:

This method can be used only when there is standard costing system in operation. Standard costs are set for each of the joint products and joint costs are apportioned among the joint products on the basis of standards set. This method has the advantage of measuring the efficiency and exercising control in producing joint products.

(e) Contribution Margin Method:

This method employs marginal costing technique for apportioning joint costs among the joint products. Under this method the total joint cost is divided into two categories viz., variable and fixed costs.

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The variable cost is allocated on the basis of physical quantities produced and fixed cost is allocated on the basis of contribution margin ratio. Contribution means excess of sales over variable costs.

Example 4:

From the following information, apportion the joint cost on a suitable method:

A company produces three grades X, Y, and Z of jam at a total cost of Rs. 15,000 of which fixed costs are Rs.6,000. The quantity produced and sold are 50 kgs, 30 kgs, and 70 kgs and their selling prices respectively are Rs.200, Rs.150 and Rs.120 per kg.

Solution:

What are the methods for appointing of joint cost to joint products?

Accounting for Management Statement showing apportionment of joint cost

What are the methods for appointing of joint cost to joint products?

Note:

Fixed cost has been distributed in the ratio of contribution,

(f) Market Value Method:

Under this method the market values (sales values) of the joint products are used to apportion the joint costs incurred up to the point of separation. This method is considered logical since product with high sales value bears a larger portion of joint costs and one with low sales value bears smaller portion of joint costs.

In other words, the joint costs are apportioned on the basis of their ability to absorb joint costs. This ability is measured by sales value or selling price. The justification for this method is that the joint products should generate enough revenues to cover all costs plus a reasonable return.

However, this method may not be appropriate when the selling prices of joint products are highly fluctuating. Also determination of relative selling prices a difficult and time consuming exercise.

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The variants of this method are as follows:

(a) Market Value at the point of separation

(b) Market Value after further processing

(c) Market Value less completion cost of individual products

(d) Net Value method

(a) Market Value at the Split-off point:

Under this method the sales value of individual products at the split-off point is ascertained and the joint cost is apportioned among the products in the ratio of total sales value of individual products to total sales value of all products.

Some authors have suggested the market price of the products at the split-off point as the basis for apportioning the joint costs. However, the use of market price may lead to invalid apportionment of joint costs and present a number of problems in determining relative selling prices.

Example 5:

The following cost data are given below:

Joint costs of producing three joint products X, Y, and Z are Rs.9.000. Number of units produced at the split-off point is: X – 100; Y – 200; and Z – 300.

The products did not require any further processing after the split of point. The selling prices of the products per unit are given below: X – Rs.10; Y – Rs.15; and Z – Rs.20. Apportion the joint cost among the joint products using the Market Value at the point of separation.

Solution:

Sales values of Joint Products:

What are the methods for appointing of joint cost to joint products?

(b) Market Value after further processing:

Determination of sales value at the point of separation may be difficult. In order to overcome this difficulty, the ratio of market values of individual products after further processing to their total sales value may be used to apportion the joint costs. It is easy to ascertain the sales value at the final stage (i.e., completion of products after processing).

This method would be a convenient one when the outputs of the joint products are in different types of units such as pounds, litres, kilograms, etc. However, it may not be called a fair method since the cost of further processing costs to complete the products may not be same in all cases. Hence, the market values of the products at the final stage cannot be an accurate base for apportioning the joint costs at the split-off point.

Example 6:

From the following particulars, prepare a Statement of Appropriation of Joint Costs:

Joint costs details:

Materials Rs. 680; Wages Rs. 180; and Overheads Rs. 140. Three joint products A, B and C are produced at the split-off point.

These products are further processed and sold as follows:

What are the methods for appointing of joint cost to joint products?

Solution:

Total joint costs Rs.680 + 180 + 140 = Rs. 1,000

Apportionment Ratio based on total sales value of individual products =720 : 960 : 240 = 3 : 4 : 1

What are the methods for appointing of joint cost to joint products?

(c) Market value less further processing costs:

This method is used when sales values of joint products are not readily available at the split-off point. Joint products are further processed and the sales values at the final stage are ascertained. From these values of joint products, the further processing costs are deducted and net sales value at the point of separation is ascertained.

These net sales values are used as the basis for apportioning the joint costs to individual products. It is a good method for product pricing but not for planning and control.

Example 7:

From the data given below, prepare a Statement of Apportionment of joint costs to individual joint products A and B:

Total joint cost is Rs.9, 000. After the split-off point, an amount of Rs.6, 000 is incurred to complete 1,000 units product A and an amount of Rs. 1.000 is incurred to complete 500 units product B. the completed units of products A and B are sold at Rs.20 and Rs.10 per unit respectively. Use Market value less further processing costs Method.

Solution:

Statement of Apportionment of Joint Costs:

What are the methods for appointing of joint cost to joint products?

(d) Net Value Method:

Under this method, the following reduces the sales values of completed joint products:

(i) Estimated profit margin,

(ii) Selling and distribution expenses, if any,

(iii) Further processing costs.

The resultant net realizable values will be used as the basis for apportioning the joint costs among the joint products. This method is very difficult to use in practice since it requires detailed cost information and therefore very costly to operate.

Example 8:

Excel ltd. manufactures three joint products X, Y, and Z. The joint cost of manufacture for the period was Rs.65, 000. The estimated profit margin on each product as percentage of sales would be 30%, 25%, and 15% respectively.

What method is most commonly used for allocating joint processing costs to joint products?

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.

What are joint products explain the methods for its costing?

Joint products are two or more products that are generated within a single production process. They can't be produced separately and will incur undifferentiated joint costs. Take charge of your invoicing with SumUp Invoices. Joint products can't be separated until a specific 'split-off point' or 'separation point'.

Which method is the best for joint cost allocation?

Survey Method / Points Value Method Under this method joint costs are apportioned over the joint products, on the basis of percentage/point values, assigned to the products according to their relative importance. This method is considered to be more appropriate than other methods.

What methods can be used to allocate joint costs to main products quizlet?

The methods to allocate joint costs to products are the sales value at splitoff, physical-measure, NRV, and constant gross-margin percentage NRV methods.