Question

John is the management accountant of Mix and Match company. Recently John and Gregory, the production manager were engaged in a discussion about joint costs and related issues.

The company produces various types of paints.Gregory commented "John,I really do not see the need for cost allocation. Also , the fact that there are various methods would seem to imply that any allocation would be arbitrary".

You are required to explain the following to Gregory in order to help clarify his concerns:

1) The reasons for Joint cost allocation

2) The Sales value at split-off and Physical value methods.

In your discussion you should relate to the nature of the business of Mix and Match company using appropriate examples.

Answer 1

Joint allocation method is very important for those production process in which by using one raw material is used to produce mutiple product ,for example if company engaged in process of refining crude oil many multilple products like diesel,petrol, fossil fuel are produce , so comapnies like these must use joint allocation product because of following reason ;

1) Helpful in deciding the correct market price of the company .

2) Joint allocation helps the comapny to control the cost of indivual products as it helps to setting the cost of indivual products seperately

3) As multiple product are produce from single raw material demand of these product may have different demand, some product may have more demand than others , so joint allocation method help comapny to allocate more cost to product have more demand in market than others

4) Some time companies may receive special contarct for product , so joint allocation help company to give cost detail of that product to customer if demanded by them

5) Joint allocation help company to decide correct product cost value for financial reporting purpose

Expalnation of methods

1) Sale value method : According to this method joint cost is allocate in the ratio of estimate sale value of all multiple product , explain as follows with example

Product A B C

Estimated sale value $10000 $20000 $30000

Total joint cost for the product is $600000

sol; Now according to sale value split off method joint cost of $600000 is to be divide in ratio of 1;2;3 so now cost allocation will be as follows

Product A B C Total

joint cost 600000*1/6 600000*2/6 600000*3/6

$100000 $200000 $300000 $600000

2) Physical value method: According to this method joint is to be allocate in ratio of number of units produce of various product , which is explain as follows

Product A B C

units produce . 4000 5000 1000

Total joint cost for the product is $1000000

sol; Now according to Physical unit method , joint cost must be allocate in the ratio of units produce which is 4:5:1, so cost allocation will as follows

  

Product A B C Total

join cost 1000000*4/10 1000000*5/10 1000000*1/10

$400000 $500000 $100000 $1000000