Question

"What's the big fuss about learning three different methods of cost allocation for joint products? The total cost doesn't change, and the real question that needs answering is whether to further process joint products or sell right away. Besides, our firm uses JIT inventory, so there aren't any ending inventories to cost." Required: Comment on these ideas.

Answer 1

There have been different methods of allocating the costs for joint products. These methods helps to us to allocate costs to joint products and allows us to determine the profit (if any) at split off.
The different methods of cost allocation for joint products are :-

• Sales value at split off.
• Estimated net reliable value.
• Constant gross margin percentage NRV method.

The total joint costs remains the same but using different methods of joint cost allocation helps ti allocate costs to joint products differently.
This helps us to determine whether such products are to be sold at split off or furtherr processed. The joint products which gives better profits after further processing should always be further processed and if any product is giving better profits at split of should be sold right away.
The determination of whether the joint products are further process for shoulder right away is done by using different methods of cost allocation.

The method of JIT (just in time) inventory is very helpful for any firm as this is a strategy of the firm to increase efficiency and decrease waste by receiving just in time inventory further reducing the inventory costs.

This method also reduces the inventory owned by a business. Further it eliminates an investment done in inventory which in term reduces the working capital needs of a business.