This page does not provide the detailed explanation of joint cost allocation methods but provides you a list of four methods that manufacturing organizations commonly use to allocate their joint production cost among various products. To find the detailed explanation and example of each method, click on the links provided with the name of the method in the list.
As defined earlier in this chapter, the term joint cost (or joint production cost) refers to the cost incurred upto split-off point (the point at which various products emerge from a joint production process in their separately identifiable form). In most of the cases, the organizations need to assign or allocate joint costs to individual products for various purposes such as computing cost of inventory, cost of goods manufactured and cost of goods sold.
Any cost incurred on a particular product after split-off point belongs to that particular product and is not allocated to any other product.
Methods to allocate joint production cost
A true joint cost has a characteristic of indivisibility. The methods used to apportion or allocate a joint cost are therefore arbitrary and not perfect. The four acceptable joint cost allocation methods are given below:
1. Market or sales value method
The market or sales value method allocates a joint production cost on the basis of relative market or sales values of individual joint products.
2. Quantitative or physical unit method
This method uses some physical measurement units (such as volume, weight etc.) to allocate joint production cost.
3. Average unit cost method
The average unit cost method, as the name implies, uses average unit cost to allocate the cost before split-off point.
4. Weighted average method
This method assigns predetermined weight factors to joint products based on various factors such as price, production complexity and unit size of the product.
The joint cost allocation using above methods is mostly not perfect, but is considered an arbitrary allocation. The information derived from such arbitrary allocation is therefore rarely helpful to the management.
The method selected to allocate joint cost should be the most appropriate, easy to employ and defensible in case the auditors review and require any clarification of the joint cost allocation.