What is a Joint Cost? Definition Meaning Example

When we undergo the apportionment of joint cost for accounting purpose, we will see that there are different methods available for determining it. Thus a proper accounting procedure is followed to distribute such expenses equitably among all the joint products so obtained. These separable product costs are identifiable with the individual product and generally need no allocation. To the point of split-off or the point where these products emerge as individual units, the cost of the products forms a homogeneous whole.

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Joint Products: Definition

They could allocate all of the joint costs to shipping goods costs or advertising costs. If the estimated profit on sales is 50% on Sugar, 40% on Molasses and 34.27% on Jaggery, apportion the joint cost using reverse cost method. However, there is no formal logic for adopting a particular method of apportionment. An organization can opt for any of the methods available, depending upon the business type, uniformity of products, etc.

The estimation of the individual cost (usually direct cost) involved in the manufacturing or extraction of joint products is a complicated task. Since the expense over raw material, labour and processing of such products are incurred as a collective cost. Consequential costs are the indirect overhead costs that arise from a joint production activity in which a variety of products result from one process. For example, in the case of assembly line manufacturing, many machines and work stations are used to complete multiple products produced on a single assembly line.

Joint costs are incurred at the outset, even if each product possesses some value when it emerges from the process. Under the contribution margin method, the joint cost apportionment is done through marginal costing technique where the contribution can be understood as the surplus of sales over the variable cost. Joint production activities are those that involve processing different products together with costly processes, rather than using independent methods to process each product. The chief characteristic of the joint product costing is that the cost of these different products results in an indivisible sum for all products, rather than in individual amounts for each product. A joint cost is incurred before the point at which separately identifiable products emerge from the same process.

It is a process in which seeking to create one type of output product automatically also creates other types of output product. It is the cost accountant’s job to trace these costs back to a certain product or process (cost object) during production. Almost all manufacturers incur joint costs at some level the manufacturing process. Joint cost allocation presents certain challenges, such as choosing the appropriate method for your products or services, avoiding irrelevant costs, and updating cost information. When selecting a method, you need to consider the nature of your products or services, the availability and reliability of data, the purpose and use of cost information, and the impact on behavior and incentives.

Finally, analyze the cost information and utilize it to back up your pricing and marketing decisions. Joint cost allocation can be used to support pricing and marketing decisions in a variety of ways. For instance, a petroleum refinery may use the net realizable value method to allocate joint costs based on the market prices and separable costs of each product. This information can then be used to set prices that cover costs and achieve a target return on investment, as well as allocate advertising and promotion expenses to the products with the highest profit potential and customer demand. Similarly, a furniture manufacturer may use the physical measure method to allocate joint costs based on the volume of wood used for each product. This information can be used to compare the profitability and performance of each product line, as well as determine whether to discontinue or expand any product line based on the contribution margin and market demand.

Moreover, the variable cost is determined with the help of units sold, and the fixed cost is ascertained through the contribution margin ratio. The articles and research support materials available on this site are educational and are not intended to be investment or tax advice. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Physical relationships that necessitate simultaneous production serve as a link between numerous products. An increase in one product’s output will increase the quantity of the other products, or vice versa, but not necessarily in the same proportion.

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The chickens yield chicken breasts, drumsticks, livers, gizzards, and other parts of the chicken that are used for human consumption. They also yield miscellaneous chicken byproducts that are used for hotdogs, jerky sticks, or animal provender. The refinery takes crude oil and refines it into a substance that may be used for auto gasoline, motor oil, heating oil, or kerosene. Joint costs may include direct material, direct labor, and overhead costs incurred during a joint production process. A joint process is a production process in which one input yields multiple outputs.

Disadvantages Of Joint Cost Allocation

This is more realistic and relevant, but it may not be applicable if the products or services are not sold at the split-off point or have different selling prices in different markets. The net realizable value method allocates joint costs based on the net realizable value of each product or service, which is the sales value minus any separable costs incurred after the split-off point. This method is consistent with the matching principle and income statement presentation, but it may require more information and estimation than the other methods. It is the cost accountant’s job to trace these costs back to a certain product or process (cost object) during production.

• Joint cost allocation is a method of assigning the common costs of producing multiple products or services that share the same inputs or processes.
• You should not that after split point, there may arise one good being main and other one being minor (i.e., by-product) in that order.
• Joint processes are production processes in which the creation of one product also creates other products.
• Consequential costs are the indirect overhead costs that arise from a joint production activity in which a variety of products result from one process.
• These separable product costs are identifiable with the individual product and generally need no allocation.

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Joint cost

You can also allocate your marketing budget and resources to promote the products or services that have the highest demand and profitability. Joint processes are production processes in which the creation of one product also creates other products. Joint production processes are common in the agriculture industry, the food manufacturing industry, and the chemical industry. The plant takes live chickens and turns them into chicken parts used for food.

Otherwise after that stage, each product consumes its own resources separately. You should not that after split point, there may arise one good being main and other one being minor (i.e., by-product) in that order. A cashew nuts processing unit produces two varieties of cashew nuts, premium and regular, at a joint cost of ₹75000, out of which ₹25000 is the fixed cost. The quantity produced is 100Kg and 150Kg; and sold at ₹750 and ₹600 per Kg, respectively. A joint cost is the cost of two or more products processed in one batch.

The joint product cost results from the creation of two or more different products from a single cost factor. Joint cost is economic resources used or consumed in the process of producing two or more products at the same time. A good example of such products is petroleum products such as paraffin, petrol, diesel and gas.

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If the total value of the joint product is significant, then additional analytical detail can improve decision making by management. If the company is issuing GAAP based financial statements, on the other hand, the joint costs must be allocated to the products or departments benefiting from the costs either on a physical basis or a value basis. Most of the time a physical basis is used to allocate joint costs because it is less subjective than the value basis. The cost of this single input and the related manufacturing process costs are called joint costs.

Finally, a pharmaceutical company may use the sales value method to allocate joint costs based on the selling prices of each product at the split-off point. This information can be used to determine the break-even point and margin of safety for each product, as well as design its pricing and marketing mix based on the elasticity and competition of each product. Joint cost allocation is a method of assigning the common costs of producing multiple products or services that share the same inputs or processes. For example, a dairy farm may incur joint costs for milking, pasteurizing, and packaging milk, cream, cheese, and yogurt.