When joint products are being produced, the costs incurred up to the point where the individual products can be identified are called joint costs. This point is called the split-off point, and that is the point where the individual joint productsí costs can be evaluated separately. The two steps involved in costing joint products are to figure the product cost for each joint product after the split-off point, and to allocate the joint costs to all of the joint products.
There are several methods used to allocate joint costs. The physical units allocation method apportions the same amount of joint cost to each unit of joint products. The joint costs are spread equally to each joint product unit produced. This method is best applied when the joint products all have approximately the same value, and the per unit costs after the split-off point are similar.
The sales value allocation method of allocating joint costs does so in proportion to the amount of sales revenue generated by each joint product. Each productís sales revenue is computed by multiplying the sales price by the number of units produced. Joint costs are allocated to each joint product based on that productís share of the total sales value.
The gross profit allocation method is also called the gross margin method or the constant contribution percentage method. This method allocates joint costs in such a way that each joint product provides the same percentage of gross profit. This means that joint costs are allocated to result in each joint product having the same percentage of gross profit as the entire group of joint products.
The net realizable value at split-off method allocates joint costs to each joint product in proportion to that joint productís net realizable value at time of split-off. Net realizable value is defined as the sales value at the split-off point less any selling and distribution costs. In cases where a readily determinable market value at split-off exists, estimated selling and distribution costs are deducted from the market value to arrive at net realizable value at split-off.
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