Posted in Finance, Accounting and Economics Terms, Total Reads: 1789
Definition: Joint Costs
Joint Costs are the costs incurred while producing two or more products and where the allocation of costs to the produced products is not possible. It is the total operation costs incurred before split-off point (stage of the common production process where joint products are separated).
The total production costs of multiple products comprises of both joint costs and individual product costs. Though individual product costs are identifiable with respective to the product, the same is not true with joint costs and hence joint costs requires allocation or assignment of costs to individual products. Different methods are used to allocate costs incurred in such conditions which are broadly classified as
Engineering Method (Net Realizable Value Method)
Non-Engineering methods (Sales Value Method)
In Engineering method, cost allocation is done based on their relative physical measure like weight, volume etc.
In Non-Engineering method, cost allocation is done based on the sales and market share of the product (Higher the market share/sales, higher the costs assigned)
Consider production of Petrol. While processing/refining crude oil (Petroleum), apart from Petrol, products like Diesel, Gasoline, Kerosene, Asphalt, Lubricating oils, Petrochemicals etc. are produced.
Joint costs is incurred in producing these products and it’s impossible to allocate costs incurred to individual products but separate costs may be calculated after split-off point (stage after which different refining processes are to be followed to obtain a particular product). Here, joint costs are allocated based upon the proportion of their quantity and sales value.
Below diagram gives a brief explanation in terms of Joint Costs, Split-off point and Separable costs.