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# BUS 630 week 3 DQ 1 Allocating Joint Costs

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BUS 630 week 3 DQ 1 Allocating Joint Costs
When cost accounting, you want to select a
method to plan and budget for joint costs.
Choosing a method helps you know where you
stand during joint production. You can assess if
your actual joint costs are on track with your
budget. If you’re off track, you can make changes.
The splitoff method in cost accounting
The splitoff point is the point when the costs of two
or more products can be separately identified.
After splitoff, each product incurs separable (or
independent) costs. Allocating joint costs using
sales value at splitoff may be the most effective
method for planning and budgeting for joint costs.
Here are several reasons why:
The method relates the benefit of production
(revenue of sales value at splitoff) to the related
expenses.
No information on separable costs is required.
The sales value at splitoff may be the best
comparison of the products. At that point, you’re
making an apples-to-apples comparison.
Sale value at splitoff isn’t affected by other
production or costs after splitoff. A product’s sales
value after separable costs have been incurred

may be very different. If you spend time and
money after the splitoff point, you charge a higher
price to recover those costs. So it’s fair to say that
the sales value at splitoff method is simple,
compared with the others.
Other joint costing methods in cost accounting
There’s a possibility that sales values aren’t
available at splitoff. The product’s production may
not be far enough along to come up with a price. If
there’s no price, you can’t compute sales value. In
that case, consider a different method.
The next best method may be the net realizable
value (NRV) method. The net realizable value
method allocates joint costs on the basis of the
final sales value less separable costs. Final sales
value is simply the price tag — the price paid by
the customer. That price is paid after all production
costs, whether they are joint costs or separable
costs incurred after splitoff.
The NRV method also does a good job of
matching the benefit received (final sales value)
with the costs incurred (separable costs). The
calculation happens at the end of all production.
Contrast that with sales value at splitoff. The
difference is a matter of timing.
Making a calculation after production ends has
some other benefits. The NRV method accounts
for all separable costs, regardless of how much
higher or lower they are than your plan. NRV also

handles any change to the final sales value (price
tag) due to a change in market conditions. NPV
captures any changes to costs and sale price that
might occur as products are produced separately.
The other methods have their challenges. The
constant gross margin percentage method
assumes that each department has the same level
of profitability. The gross margin percentages and
total costs (as a percentage of sales) are the same
for everything produced. In the real world, different
products produce different levels of profit.
Finally, the physical measure method (allocating
cost by the weight, volume, or some other
measurement of the product) doesn’t relate
revenue to expenses at all. You may find that this
method is the least useful.

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