Question

The best method of joint cost allocation is the physical units method because it recognizes the relative value of each product produced.

True

False

Answer 1

False, the best method to allocate joint is Net realizable value method.

When cost accounting, separable costs are incurred after you pass the splitoff point. In many cases, the product won’t be sellable at splitoff, because the product isn’t finished yet.

Say you make two types of leather purses. Both purses go through the same production process. Each product incurs a portion of the joint costs of production. But the process doesn’t end there. In this case, you’d expect to have costs after splitoff. You need to add straps and metal accessories to complete the product for sale.

Because many products require production after splitoff, it’s important that you review the net realizable value (NRV) method.

The net realizable value method allocates joint costs on the basis of the final sales value less separable costs. Final sales value is simply the price tag — the price paid by the customer. That price is paid after all production costs, whether they are joint costs or separable costs incurred after splitoff.

What you realize on a sale is usually your profit. You see this term used many times in business. But in this case, realizable value means sale price less separable costs. That doesn’t equal profit. You have to subtract joint costs from the subtotal to get profit. It’s not a perfect comparison, but it’s close.