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Why joint cost should be allocated to individual products?

Why joint cost should be allocated to individual products?

1. Joint costs are the total of the raw material, labor, and overhead costs incurred up to the initial split-off point. a. Joint costs can be allocated to the final product only in some arbitrary manner because such costs cannot be traced directly to the products they benefit.

What are joint costs allocated for?

Joint cost allocation, a methodology for allocating the costs of fundraising activities when conducted together with program or management activities, is one tool that organizations can use to allocate as program expenses the portion of fundraising activities that are attributable to program accomplishment.

Why is cost allocation useful?

Benefits of Cost Allocation Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough to justify the costs allocated.

Are joint allocations useful?

Allocating joint costs does not help management, since the resulting information is based on essentially arbitrary allocations. Consequently, the best allocation method does not have to be especially accurate, but it should be easy to calculate, and be readily defensible if it is reviewed by an auditor.

Should joint costs be allocated among joint products?

Joint costs should not be allocated among joint products for decision-making purposes. If joint costs are allocated among the joint products, then managers may think they are avoidable costs of the end products.

What methods can be used to allocate joint costs to individual products?

The four acceptable joint cost allocation methods are given below:

  • Market or sales value method.
  • Quantitative or physical unit method.
  • Average unit cost method.
  • Weighted average method.

How are costs allocated?

The basis for allocating costs may include headcount, revenue, units produced, direct labor hours or dollars, machine hours, activity hours, and square footage. Companies will often implement a cost allocation methodology as a means to control costs.

What are the joint cost allocation methods for by-product?

What are four purposes of cost allocation?

The four main purposes for allocating costs are to predict the economic effects of planning and control decisions, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.

What is the meaning of allocated cost?

Cost allocation is the distribution of one cost across multiple entities, business units, or cost centers. An example is when health insurance premiums are paid by the main corporate office but allocated to different branches or departments.

Are allocated fixed costs relevant to decision-making?

For these decisions, common allocated fixed costs are rarely relevant. Buying the product from a supplier may make manufacturing and/or warehouse space available for an alternative, profitable use. The potential profits are opportunity costs that are added to the costs of manufacturing the product in-house.

What methods can be used to allocate joint costs to main products?

Three methods of allocating joint product costs are the physical units method, the market value method, and the net realizable method. The constant gross margin percentage method is also used to allocate joint cost.

Why joint cost allocation is not always a good idea?

The joint cost allocation using above methods is mostly not perfect, but is considered an arbitrary allocation. The information derived from such arbitrary allocation is therefore rarely helpful to the management.

Why do we need to assign joint costs to products?

In most of the cases, the organizations need to assign or allocate joint costs to individual products for various purposes such as computing cost of inventory, cost of goods manufactured and cost of goods sold.

Which method is used to allocate joint production cost?

This method uses some physical measurement units (such as volume, weight etc.) to allocate joint production cost. 3. Average unit cost method The average unit cost method, as the name implies, uses average unit cost to allocate the cost before split-off point.

What are the characteristics of true joint costs?

A true joint cost has a characteristic of indivisibility. The methods used to apportion or allocate a joint cost are therefore arbitrary and not perfect. The four acceptable joint cost allocation methods are given below: