Joint cost is the cost that incurs during the production of multiple products at the same time. The production requires similar raw material, but result in multiple products type which calls joint products. We will not be able to separate the joint cost until the split-off point.
At the split-point, we have option to sell both products or processes further for more revenue.
The poultry farm, the company will take the chicken and turn them into many outputs such as drumstick, wing, breast, thigh, and so on. All of the outputs have arrived from the same direct costs which are the chicken, workers, and other overheads. The company needs to allocate all the costs to each product type in order to set the price and calculate its profitability and prepare a proper business plan.
Joint Cost allocation
Cost of product A = (Quantity of product A /Quantity of the total product) * Total Cost
This method is applicable to the output that can be separated from each other, the final products have a similar state with the standard of measurement. This method will measure the products at the split-off point base on their quantity or weight. We assume that all products have a similar cost per unit of measurement.
Cost of product A = (Sale value of product A/Total sale of all product) * Total Cost
This method will use the sale value of each product as the basis for cost allocation. With this method, we will get the same contribution margin for all products.
Cost of product A = (NRV of product A/Total NRV of all products) * Total Cost
NRV = Sale value – Cost of future process
The net realizable value method will take into account both sale and the additional cost require to complete the product. It is similar to sale value but with additional cost.