Question

1. Because of the difficulty of calculating the cost of byproducts and combined products, so how do you calculate byproducts and combined products?
2. Is this effective for judging no.1, what are its weaknesses?

Answer 1

Answer:

When it is difficult to determine the cost of joint and by-product generally there are two ways to identify cost-

a-· Allocate based on sales value. Add up all production costs up to the split-off point, and determine the sales value of all joint products as of the same split-off point, and then assign the costs based on the sales values. if any byproduct are any by-products, do not allocate any costs to them better to charge the proceeds from their sale against the cost of goods sold. This is the simpler of the two methods.

b-Allocate based on gross margin. Add up the cost of all processing costs that each joint product incurs after the split-off point, and subtract this amount from the total revenue that each product will eventually earn. This requires addition Basically it also dependent on the sale price and margin are either added up to the cost identifiable or reduced from the sale to meet up the profit requirement.

2- There is always a chance of mispricing as the whole price is set in an arbitrary manner, the actual variable cost and fixed cost concept get defeated in such a case. As the price is taken up either through sales value or by the arbitrary cost, which failed to allocate to a particular product.

This method is generally avoided as it has a problem of losing the product from the market by charging wrong price, by adopting the wrong method of cost accounting

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