Question

what is meant by the term "Joint Costs". How could "Joint Costs" be allocated to the different department?

Answer 1

In accounting, a joint cost refers to the manufacturing costs that are incurred from producing or buying or two products at the same time. It takes common inputs such as direct labor, direct material, and overhead costs during a joint process of production but simultaneously produces multiple products known as joint-products. In cost accounting terms, joint costs have the same cost object. The various methods to allocate the joint cost to the different department are as follows:

1) Physical measurement method: Joint costs are allocated to the different department based on produced units or physical quantity such as volume, weight, or length of each product relative to total production. The formula used is:

(Quantity of the Product / Quantity of Total Production) * Total Joint Costs

2) Relative sales value method: This method allocates joint costs on the basis of estimated value of sales a given joint product relative to the value of sales on total joint production. The formula used is:

(Sale Value of the Product / Sales Value of Total Production) * Total Joint Costs

3) Net realizable value (NRV) method: This method allocates joint costs on the basis of net realizable value. The formula used is:

(NRV the Product / NRV of Total Production) * Total Joint Costs