Question

List three reasons why we allocate joint costs to individual products or services. Give an example of when the particular cost allocation reason would come into use.

Answer 1

Reasons for Allocating Joint Costs to Individual Products

For cost reimbursement under contracts where not all the separable products go to a single customer so that allocation of the joint costs is necessary. For settlement of insurance claims involving separable products at or beyond split-off.

Reasons for Allocating Joint Costs to Individual Products:-

1-To value inventory and COGS for external reports

2-To value inventory and COGS for internal reports (including profitability analysis and performance evaluation)

3-For cost reimbursement under contracts where not all the separable products go to a single customer so that allocation of the joint costs is necessary.

4-For settlement of insurance claims involving separable products at or beyond split-off.

5-For rate regulation when one or more jointly produced products or services are subject to rate regulation based on cost. E.g. services using telephone lines