Before discussing the methods of allocating joint costs to products I would like to define what it really is. Joint product costs may be defined as those costs which arise from the common processing or manufacturing of the products produced from a common raw material. Whenever two or more distinguish-ably different products are created from a single cost factor, joint product costs result.
Methods of allocating joint costs to products: The allocation of joint materials and manufacturing costs incurred up to the split-off point can be made by the following methods of allocating joint costs to products:
1. The market or sales value method based on the relative market values of the individual product.
2. The quantitative or physical unit method based on some physical measurement unit such as weight, linear measure, or volume.
3. The average unit cost method.
4. The weighted average method based on predetermined standards or index of production.
Market or Sales Value Method. This method of allocating joint costs to products enjoys great popularity because of the argument that the market value of any product is a manifestation in its production. The contention is that if one product sells for more than another, it is because more cost is expended to produce it. Therefore, the only logical way to prorate joint cost on the basis of the respective market values of the items produced.
The methods of allocating joint costs to products is really a weighted market value basis using the total market or sales value of each unit (quantity sold times the unit sales price). The procedure can be illustrated as follows :
Joint products A, B, C, and D are produced at a total manufacturing cost of $ 1 20,000 ; quantities produced are : A, 20,000 units ; B, 1 5,000 units ; C, 10,000 units; and D, 15,000 units. Product A sells for $.25; B, for $3; C, for $3.50; and D, for $5.
Management may have decided, however, that it is more profitable to process certain products further before they are sold. Nevertheless, this condition does not destroy the usefulness of the sales value at the split-off point for allocation and decision-making purposes.