Question

Describe the three methods used to allocate joint costs. What are the advantages/disadvantages of each allocation method? Which method would you recommend? Why? Support your position with evidence from the text or external sources.​

Answer 1

Here we have three join cost allocation methods in general practice.
1. Physical measurement method
Under this method, joint costs are allocated based on physical quantity of the product such as weight or volume.
Formula, Cost allocated to joint product = {Quantity of the product / Quantity of total production} x Total joint cost
This method is most suitable where the production quantity is measurable physically. However, the same method is not practical if the quantity of product is not available.
2. Relative Sales Value Method
Joint costs are allocated based on estimated sales value of the joint product relative to the sales value of total joint production.Formula is as follows,
Cost allocated to the Joint product = { Sales value of the product / Sales value of total production } x total joint costs
If the physical quantity of product is not reflect its value, then this method is most suitable.
3. Net Realizable Value (NRV) method.
Allocation of joint costs based on NRV of the product in proportion to the NRV of the total production. Formula is,
Cost allocated to the Joint product = { NRV of the product / NRV of total production } x total joint costs
NRV= Estimated Sales value - Estimated cost for further processing to sell.
This method is most suitable if the product is processed to make it marketable after the joint process.
NRV method is most commonly used method in general business practice.