Methods of apportionment of joint costs to joint products
The following are the methods of apportionment of joint costs.
1. Physical Units Method of apportionment
This method is applied if the joint products are capable of being expressed in the some unit of measurement. Therefore, the basic of apportionment is the physical volume of units found at the point of separation. Moreover, if any loss arising during processing is also apportioned on the same basis.
If the units of measurement of joint products are heterogeneous, this method cannot be applied. This method has the assumption of all the joint products equally desirable and valuable.
2. Average Unit Cost Method of apportionment
This method is applied if all the joint products are common and inseparable. Moreover, the joint products are expressed in some common unit. Hence, total costs are assessed to calculate average unit cost and net profit for the total operation. It leads to same unit cost to all joint products. If high-grade joint products are sold on the basis of average unit cost, the customers will be benefited and vice versa.
The following formula is used to calculate average unit cost.
Average Unit Cost = Joint Costs / Total Number of Units produced
3. Survey Method of apportionment
This method is also known as points value method and weighted average unit cost method. The factors involved in the production and distribution of joint products taken into account before apportioning joint costs. Hence, this method is called as survey method. Costs are apportioned on the basis of percentage or points value assigned to the products according to their relative importance.
The assignment of points is arbitrarily by management with the help of departmental heads and technical advisers. Normally, the points are assigned by considering quantities of materials used, time taken, type of labour used, number of labour used, quality of the joint product, changes in the methods of production, selling price and the like.
4. Standard Cost Method of apportionment
Under this method, standard cost for each joint product are fixed. Then, the joint costs are apportioned on the basis of the standards thus fixed. If an organization follows standard costing system, this method discloses the efficiency of the concerned process.
5. Contribution or Gross Margin Method of apportionment
This method helps the management to take a decision whether the concerned joint products have been further processed or not. The management decision depends upon the contribution margin of the concerned product.
6. Joint Cost Method of apportionment
In a manufacturing process, two or more main products as well as a number of minor by-products are produced. The joint cost is apportioned between the main products and by-products on a suitable basis. There is no distinction between the joint products and by-products under this method. Accordingly, all the by-products are treated as joint products while apportioning joint cost between the joint products and byproducts.
7. Market Value Method of apportionment
Under this method, joint costs are apportioned on the basis of market value of joint products. The apportioning ratio is calculated on the basis of selling price of individual products. This method has two characteristics. They are all joint products yield same rate of profit margin and cost of each of the joint products being based on selling price. Market value may mean any one of the following.
1. Market — Value at Separation Point
The market value of the joint products at the separation point is ascertained and total cost is ascertained in the ratio of these values. If product A and B are produced in a process, the values at separate point may be Rs.150 and Rs.200 respectively. Then, the joint cost of 3/7 will be apportioned to product A and 4/7 will be apportioned to product B. Due weight age may be given to the number of units produced. This method is useful if further processing costs will be disproportionate. But, the finding of market value at this stage is very difficult.
2. Market Value after Further Processing
This method is very easy. The reason is that the finding of market value is readily available after further processing of joint products. Further processing cost is deducted from the sales value in order to calculate the ratio in which the joint costs are to be apportioned.
3. Net Realizable Value or Reverse Cost Method
Under this method, the estimated not profit, direct selling and distribution expenses and further processing cost after the point of separation are deducted from the selling prices of the finished products. A ratio is calculated on the basis of which the joint costs before the point of separation is apportioned. Subsequent costs are added to arrive at product costs.