Question

What is an example of how joint costs could be used with a specific method?

Answer 1

SOLUTION :

MEANING :

​​Joint cost is the manufacturing cost incurred on a joint production process which takes common input button simultaneously produces multiple products called joint products example processing of crude oil soybean tailor steels gasoline, diesel fuel, lubricants and other products.

in order to unlock it cost to such joint products, accountants need to employ a suitable cost allocation method on consistent basis most common of these methods are as follows :

PHYSICAL MEASUREMENT METHOD :

joint cost are allocated based on number of units of physical quantity such as weight, volume or length of each product relative to total production this method can be represented in the following formula as mentioned :

cost allocated to a joint product :

* COST ALLOCATED TO JOINT PRODUCT = Total joint Cost Quantity of the Product & Quantity of total Production

  This method is suitable where physical quantity of joint products closely reflects the cost example different shades of a paint obtained from a single process may be allocated cos using physical quantity method

RELATIVE RELATIVE SALES VALUE METHOD :

This method allocates joint cost on basis of estimated sales value of a given joint product relative to the sales value of total joint production. This is illustrated in the following formula as shown in the image :

Cost cost allocated to a joint product :

* COST ALLOCATED TO JOINT PROpoct = Sale value of Product x Sale value of total Production Total joint cost

​​​​​​   this method is suitable when physical quantity of joint products does not reflect that value and a reliable estimate of their sales value can be easily made.

NET REALIZABLE VALUE METHOD (NRV) :

portronics that need for the processing, net realizable value method is more suitable because it takes into account the additional cost needed to further process and fill the joint products. This method joint cost is allocated to products using the following formula as mentioned in the picture below :

Cost allocated to joint product :

* COST ALLOCATED TO JOINT PRODUCT NRU of Product x Total Joint Cost NRV g total Production

Where NRV = estimated sales value minus estimated cost to further process and sell.

5 products of further process after split of the total cost also include for the processing cost.

EXAMPLE :

use the following data relating to two chemicals A and B obtained from a joint process and allocate joint cost using each of the above methods.

Chemical	A	B
Quantity (kg)	80	125
Sale Value	$15,000	$60,000
Further Processing Cost	$4,000	$2,000

Total manufacturing cost of joint process was $30,000.

SOLUTION :

Cost to be allocated to chemical A:

Physical Measurement Method	30,000×80÷(80+125)	11,707
Relative Sales Value Method	30,000×15,000÷(15,000+60,000)	6,000
NRV Method	30,000×11,000÷(11,000+58,000)	4,783

Where, 11,000 = 15,000 − 4,000 and 58,000 = 60,000 − 2,000

Now that we have estimated cost of Chemical A and there are just two products, we can calculate the cost to be allocated to chemical B just by subtracting the above costs from the total under each method respectively as shown below:

Cost to be allocated to chemical B:

Physical Measurement Method	30,000−11,707	18,293
Relative Sales Value Method	30,000−6,000	24,000
NRV Method	30,000−4,783	25,217

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