When two or more products of relatively high value emerge simultaneously from a single process, they are called joint products. The process that gives rise to these products is called a joint process and the costs involved are referred to as joint product costs. Joint products are not separately identifiable as individual products until their split off point. Split-off point is the point at which joint products become separate entities or are individually identifiable.
Allocation of joint costs involves assigning the costs of the joint process to the products emerging at the split off point. Any costs beyond the split off point are referred to as separable costs.
Methods Used to Allocate Joint Costs
- Physical/Unit Measure
- Constant gross margin rate
- Net realizable value.
- Physical Measure/Unit
Joint costs are allocated to the joint products according to the ratio of physical measurement of the outputs at the split off point.
- Constant Gross Margin Rate
This method assumes that each product contributes an equal percentage of gross profit for every shilling of sales. It works back from gross margin to the joint costs allocation. It involves the following steps:
- Calculate the overall rate of gross margin for al the products
- Multiply the computed overall rate by the sales of every product to obtain the gross margin of the product.
- Deduct the gross margin from the sales value of the product to determine the total costs for each product.
- Deduct separable costs from the total costs to obtain joint costs allocated.
- Net Realizable Value
Under this method, joint costs are allocated according to the net realizable*
Net Realizable Value = Ultimate Sales Value – Separable Costs.
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