ACCT2102 Lecture Notes - Lecture 8: Indian Railways, Negative Cost, Gross Margin
ACCT2102: Lecture 8 Joint Product Costing (cost allocation)
Joint cost = cost of a production process that yields multiple products simultaneously.
Separable cost = cost incurred beyond the split-off point that is assignable to each of the specific products
identified at the split-off point.
Split-off point: The point of a joint production process where the individual products become separately
identifiable.
Total cost = Joint cost + Separable cost
Product: Any output with a positive sales value
Joint products: 2 or more products that have relatively high sales value
By-products: Incidental products of the joint process that results from the (desired) processing of another
product. It has a relatively low sales value of the other products (main&joint). Costs are NOT allocated to
By-Products.
Main product: the product with the highest sales value among all other outputs of the joint process.
Intermediate product: product transferred from one subunit to another to reach completed/sale form. !
Why allocate joint costs? 6 reasons.
1. Computation of inventoriable costs and cost of goods sold for financial accounting purposes and reports
for income tax authorities.
2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes.
3. Cost reimbursement under contracts when only a portion of a business's products or services is sold or
delivered under cost-plus contracts.
4. Insurance settlement computations for damage claims made on the basis of cost information of joint
products or byproducts.
5. Rate regulation when one or more of the jointly-produced products or services are subject to price
regulation.
6. Litigation in which costs of joint products are key inputs.
Why is joint cost allocation irrelevant to decision-making for ‘sell or process further’?
The decision to process further should not be influenced by either the size of the total joint costs or by the
portion of the joint costs assigned to particular products. Joint costs are irrelevant for these decisions. The
joint costs are the same whether the products are sold at the split off point or processed further. The only
relevant items for these decisions are the incremental revenue and the incremental costs beyond the splitoff
point.
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Document Summary
Acct2102: lecture 8 joint product costing (cost allocation) Joint cost = cost of a production process that yields multiple products simultaneously. Separable cost = cost incurred beyond the split-off point that is assignable to each of the speci c products identi ed at the split-off point. Split-off point: the point of a joint production process where the individual products become separately identi able. Total cost = joint cost + separable cost. Product: any output with a positive sales value. Joint products: 2 or more products that have relatively high sales value. By-products: incidental products of the joint process that results from the (desired) processing of another product. It has a relatively low sales value of the other products (main&joint). Main product: the product with the highest sales value among all other outputs of the joint process. Intermediate product: product transferred from one subunit to another to reach completed/sale form.
