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Joint Costs

A joint production process results in two or more products from a single production process. The costs incurred until the point where the joint products split off are called joint costs. There are two methods to allocate joint costs among joint products: 1) the physical method, which allocates based on production volume, and 2) the relative sales value method, which allocates based on sales value at the split-off point. Manufacturers must also decide whether to sell joint products at the split-off point or process them further before selling based on relevant costs that differ between the two alternatives.

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92 views8 pages

Joint Costs

A joint production process results in two or more products from a single production process. The costs incurred until the point where the joint products split off are called joint costs. There are two methods to allocate joint costs among joint products: 1) the physical method, which allocates based on production volume, and 2) the relative sales value method, which allocates based on sales value at the split-off point. Manufacturers must also decide whether to sell joint products at the split-off point or process them further before selling based on relevant costs that differ between the two alternatives.

Uploaded by

Hum92re
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Joint Products

A joint production process results in two or more products , called joint


products .
Examples :
Slaughtering of animals for various cuts of meat.
Processing of petroleum into various products such as kerosene and gasoline.
• The point in the production process where the joint products are
identifiable as separate products is called the split-off point . The
costs( material , labor and overhead) to this point are called split-off
point costs or joint costs .
Allocation of joint cost to joint products :Two
methods .
• Physical Method : in which the joint costs is allocated among the joint
products in proportion to the volume of production ( units produced).
• Relative-sales-value method : in which the joint costs is allocated
among the joint products in proportion to their sales at the split-off
point.
Example :
• Suppose the JD 2250 joint costs relate to the products (A) and ( B) .
The quantities and sales are as follow :
units Sales price per unit
Product A 500 2
Product B 250 6

• Required : allocate joint costs between (A) and (B) using the previous
approaches .
Sell or Process Further Decisions.
• Manufacturers with joint production processes sometimes must
decide whether a product should be sold at the split-off point or
processed further before being sold . This called Sell or Process
Further Decisions .
• Relevant costs for this decisions are those that differ between the two
alternatives .
• Joint costs does not change in total whether products are processed
further or not ( sunk cost)
Examples :
• Consider the following :
• Joint costs JD 35100.
product Sales price per unit units
A 16 1500
B 8 2000
C 25 400

• Manufacturers want to process , the following information is available


:
product Sales price per unit Further more costs
A 20 6300
B 13 8000
C 32 3600

Explain whether to sell products in the spilt-off point or process them


further more .
Consider the previous decision calculate the net profit of the company.
Exercise
• Consider the following information :
Sales price on Sales price Further more Number of
spilt-off point after costs units that
processing could be sold
Product A 2 3 2 100
Product B 7 8 3 160

A constraint :the capacity of the firm can process one product .

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