Allocating joint costs to products using a value basis method is based on their relative:

Índice Show

Related Courses
The splitoff method in cost accounting
Other joint costing methods in cost accounting

May 24, 2022 May 24, 2022/ Steven Bragg

The relative sales value method is a technique used to allocate joint costs based on the prices at which products will be sold. For example, a production process incurs $100 of costs in order to create two products, one of which (Product A) will sell for $400 and the other (Product B) for $100. Under this method, 80% of the $100 joint cost is assigned to Product A. The calculation is:

$100 joint cost x ($400 ÷ ($400+$100)) = $80

The remaining 20% of the $100 joint cost is assigned to Product B. The calculation is:

$100 joint cost x ($100 ÷ ($400+$100)) = $20

The resulting cost allocation equitably spreads costs across products, resulting in roughly the same margins for each product. However, product margins may still vary, depending on the costs incurred by each product after the allocation point.

Cost Accounting Fundamentals

May 24, 2022/ Steven Bragg/

{"appState":{"pageLoadApiCallsStatus":true},"articleState":{"article":{"headers":{"creationTime":"2016-03-26T14:45:15+00:00","modifiedTime":"2016-03-26T14:45:15+00:00","timestamp":"2022-06-22T19:22:50+00:00"},"data":{"breadcrumbs":[{"name":"Business, Careers, & Money","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34224"},"slug":"business-careers-money","categoryId":34224},{"name":"Business","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34225"},"slug":"business","categoryId":34225},{"name":"Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34226"},"slug":"accounting","categoryId":34226},{"name":"General Accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"},"slug":"general-accounting","categoryId":34230}],"title":"Methods of Joint Cost Allocation in Cost Accounting","strippedTitle":"methods of joint cost allocation in cost accounting","slug":"methods-of-joint-cost-allocation-in-cost-accounting","canonicalUrl":"","seo":{"metaDescription":"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. ","noIndex":0,"noFollow":0},"content":"<p>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.</p>\n<h2 id=\"tab1\" >The splitoff method in cost accounting</h2>\n<p>The <i>splitoff</i> 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:</p>\n<ul class=\"level-one\">\n <li><p class=\"first-para\">The method relates the benefit of production (revenue of sales value at splitoff) to the related expenses.</p>\n </li>\n <li><p class=\"first-para\">No information on separable costs is required.</p>\n </li>\n <li><p class=\"first-para\">The sales value at splitoff may be the best comparison of the products. At that point, you’re making an apples-to-apples comparison.</p>\n </li>\n</ul>\n<p>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.</p>\n<h2 id=\"tab2\" >Other joint costing methods in cost accounting</h2>\n<p>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.</p>\n<p>The next best method may be the <i>net realizable value</i> (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.</p>\n<p>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.</p>\n<p>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.</p>\n<p>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.</p>\n<p>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.</p>\n<p class=\"Tip\">Many manufacturers make a big array of products. Two classic examples are automobiles and computer printers. Each manufacturer in each industry offers many makes and models in order to reach slightly different buyers, usually through different price points. Some products are “high volume/low margin,” while others are “low volume/high margin.”</p>\n<p>Here’s a food analogy, you can make money selling 3,000 $1 hamburgers per day or 100 $30 filet mignon dinners per night. Same sales revenue.</p>","description":"<p>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.</p>\n<h2 id=\"tab1\" >The splitoff method in cost accounting</h2>\n<p>The <i>splitoff</i> 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:</p>\n<ul class=\"level-one\">\n <li><p class=\"first-para\">The method relates the benefit of production (revenue of sales value at splitoff) to the related expenses.</p>\n </li>\n <li><p class=\"first-para\">No information on separable costs is required.</p>\n </li>\n <li><p class=\"first-para\">The sales value at splitoff may be the best comparison of the products. At that point, you’re making an apples-to-apples comparison.</p>\n </li>\n</ul>\n<p>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.</p>\n<h2 id=\"tab2\" >Other joint costing methods in cost accounting</h2>\n<p>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.</p>\n<p>The next best method may be the <i>net realizable value</i> (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.</p>\n<p>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.</p>\n<p>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.</p>\n<p>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.</p>\n<p>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.</p>\n<p class=\"Tip\">Many manufacturers make a big array of products. Two classic examples are automobiles and computer printers. Each manufacturer in each industry offers many makes and models in order to reach slightly different buyers, usually through different price points. Some products are “high volume/low margin,” while others are “low volume/high margin.”</p>\n<p>Here’s a food analogy, you can make money selling 3,000 $1 hamburgers per day or 100 $30 filet mignon dinners per night. Same sales revenue.</p>","blurb":"","authors":[{"authorId":9050,"name":"Kenneth Boyd","slug":"kenneth-boyd","description":"Ken Boyd, a former CPA, has more than 37 years of experience in accounting, education, and financial services. He is the owner of Accounting Accidentally (<a href=\"https://www.accountingaccidentally.com/\" target=\"_blank\" rel=\"noopener\">www.accountingaccidentally.com</a>), which provides written and video content on accounting, personal finance, and entrepreneurship topics. His YouTube channel (<a href=\"https://www.youtube.com/user/kenboydstl\" target=\"_blank\" rel=\"noopener\">kenboydstl</a>) has hundreds of videos on accounting and finance.\r\n\r\nIn recent years, Boyd has served as an adjunct professor of accounting at the Cook School of Business at St. Louis University. He has written hundreds of articles for QuickBooks, Investopedia, and a number of other publications.","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/9050"}}],"primaryCategoryTaxonomy":{"categoryId":34230,"title":"General Accounting","slug":"general-accounting","_links":{"self":"https://dummies-api.dummies.com/v2/categories/34230"}},"secondaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"tertiaryCategoryTaxonomy":{"categoryId":0,"title":null,"slug":null,"_links":null},"trendingArticles":null,"inThisArticle":[{"label":"The splitoff method in cost accounting","target":"#tab1"},{"label":"Other joint costing methods in cost accounting","target":"#tab2"}],"relatedArticles":{"fromBook":[{"articleId":208104,"title":"Cost Accounting For Dummies Cheat Sheet","slug":"cost-accounting-for-dummies-cheat-sheet","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/208104"}},{"articleId":171024,"title":"Must Know Formulas for Cost Accounting","slug":"must-know-formulas-for-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171024"}},{"articleId":171020,"title":"Important Terms and Principles Cost Accountants Should Know","slug":"important-terms-and-principles-cost-accountants-should-know","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171020"}},{"articleId":171019,"title":"Avoiding Pitfalls on Cost Accounting Exams","slug":"avoiding-pitfalls-on-cost-accounting-exams","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/171019"}},{"articleId":166828,"title":"Accrual Accounting in Cost Accounting","slug":"accrual-accounting-in-cost-accounting","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/166828"}}],"fromCategory":[{"articleId":277438,"title":"Financial Accounting: The Effect of Business Transactions","slug":"financial-accounting-the-effect-of-business-transactions","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277438"}},{"articleId":277429,"title":"What Are Accounting Journals?","slug":"what-are-accounting-journals","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277429"}},{"articleId":277423,"title":"How to Read Corporate Annual Reports","slug":"how-to-read-corporate-annual-reports","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277423"}},{"articleId":277418,"title":"Showing the Money: The Statement of Cash Flows","slug":"showing-the-money-the-statement-of-cash-flows","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277418"}},{"articleId":277410,"title":"10 Accounting Career Opportunities","slug":"10-accounting-career-opportunities","categoryList":["business-careers-money","business","accounting","general-accounting"],"_links":{"self":"https://dummies-api.dummies.com/v2/articles/277410"}}]},"hasRelatedBookFromSearch":false,"relatedBook":{"bookId":282119,"slug":"cost-accounting-for-dummies","isbn":"9781119856023","categoryList":["business-careers-money","business","accounting","general-accounting"],"amazon":{"default":"https://www.amazon.com/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","ca":"https://www.amazon.ca/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","indigo_ca":"http://www.tkqlhce.com/click-9208661-13710633?url=https://www.chapters.indigo.ca/en-ca/books/product/1119856027-item.html&cjsku=978111945484","gb":"https://www.amazon.co.uk/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20","de":"https://www.amazon.de/gp/product/1119856027/ref=as_li_tl?ie=UTF8&tag=wiley01-20"},"image":{"src":"https://www.dummies.com/wp-content/uploads/9781119856023-203x255.jpg","width":203,"height":255},"title":"Cost Accounting For Dummies","testBankPinActivationLink":"","bookOutOfPrint":true,"authorsInfo":"<p><p><b><b data-author-id=\"34810\">Kenneth W. Boyd</b></b> has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics.</p>","authors":[{"authorId":34810,"name":"Kenneth W. Boyd","slug":"kenneth-w.-boyd","description":" <p><b>Kenneth W. Boyd</b> has 30 years of experience in accounting and financial services. He is a four-time Dummies book author, a blogger, and a video host on accounting and finance topics. ","hasArticle":false,"_links":{"self":"https://dummies-api.dummies.com/v2/authors/34810"}}],"_links":{"self":"https://dummies-api.dummies.com/v2/books/"}},"collections":[],"articleAds":{"footerAd":"<div class=\"du-ad-region row\" id=\"article_page_adhesion_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_adhesion_ad\" data-refreshed=\"false\" \r\n data-target = \"[{"key":"cat","values":["business-careers-money","business","accounting","general-accounting"]},{"key":"isbn","values":["9781119856023"]}]\" id=\"du-slot-62b36c0a0bb0c\"></div></div>","rightAd":"<div class=\"du-ad-region row\" id=\"article_page_right_ad\"><div class=\"du-ad-unit col-md-12\" data-slot-id=\"article_page_right_ad\" data-refreshed=\"false\" \r\n data-target = \"[{"key":"cat","values":["business-careers-money","business","accounting","general-accounting"]},{"key":"isbn","values":["9781119856023"]}]\" id=\"du-slot-62b36c0a0c285\"></div></div>"},"articleType":{"articleType":"Articles","articleList":null,"content":null,"videoInfo":{"videoId":null,"name":null,"accountId":null,"playerId":null,"thumbnailUrl":null,"description":null,"uploadDate":null}},"sponsorship":{"sponsorshipPage":false,"backgroundImage":{"src":null,"width":0,"height":0},"brandingLine":"","brandingLink":"","brandingLogo":{"src":null,"width":0,"height":0},"sponsorAd":null,"sponsorEbookTitle":null,"sponsorEbookLink":null,"sponsorEbookImage":null},"primaryLearningPath":"Advance","lifeExpectancy":null,"lifeExpectancySetFrom":null,"dummiesForKids":"no","sponsoredContent":"no","adInfo":"","adPairKey":[]},"status":"publish","visibility":"public","articleId":164991},"articleLoadedStatus":"success"},"listState":{"list":{},"objectTitle":"","status":"initial","pageType":null,"objectId":null,"page":1,"sortField":"time","sortOrder":1,"categoriesIds":[],"articleTypes":[],"filterData":{},"filterDataLoadedStatus":"initial","pageSize":10},"adsState":{"pageScripts":{"headers":{"timestamp":"2022-09-09T12:59:08+00:00"},"adsId":0,"data":{"scripts":[{"pages":["all"],"location":"header","script":"\r\n<script src=\"https://cdn.optimizely.com/js/10563184655.js\"></script>","enabled":false},{"pages":["all"],"location":"header","script":"\r\n<script>var _comscore = _comscore || [];_comscore.push({ c1: \"2\", c2: \"15097263\" });(function() {var s = document.createElement(\"script\"), el = document.getElementsByTagName(\"script\")[0]; s.async = true;s.src = (document.location.protocol == \"https:\" ? \"https://sb\" : \"http://b\") + \".scorecardresearch.com/beacon.js\";el.parentNode.insertBefore(s, el);})();</script><noscript><img src=\"https://sb.scorecardresearch.com/p?c1=2&c2=15097263&cv=2.0&cj=1\" /></noscript>\r\n","enabled":true},{"pages":["all"],"location":"footer","script":"\r\n<script type='text/javascript'>\r\n(function(){var g=function(e,h,f,g){\r\nthis.get=function(a){for(var a=a+\"=\",c=document.cookie.split(\";\"),b=0,e=c.length;b<e;b++){for(var d=c[b];\" \"==d.charAt(0);)d=d.substring(1,d.length);if(0==d.indexOf(a))return d.substring(a.length,d.length)}return null};\r\nthis.set=function(a,c){var b=\"\",b=new Date;b.setTime(b.getTime()+6048E5);b=\"; expires=\"+b.toGMTString();document.cookie=a+\"=\"+c+b+\"; path=/; \"};\r\nthis.check=function(){var a=this.get(f);if(a)a=a.split(\":\");else if(100!=e)\"v\"==h&&(e=Math.random()>=e/100?0:100),a=[h,e,0],this.set(f,a.join(\":\"));else return!0;var c=a[1];if(100==c)return!0;switch(a[0]){case \"v\":return!1;case \"r\":return c=a[2]%Math.floor(100/c),a[2]++,this.set(f,a.join(\":\")),!c}return!0};\r\nthis.go=function(){if(this.check()){var a=document.createElement(\"script\");a.type=\"text/javascript\";a.src=g;document.body&&document.body.appendChild(a)}};\r\nthis.start=function(){var t=this;\"complete\"!==document.readyState?window.addEventListener?window.addEventListener(\"load\",function(){t.go()},!1):window.attachEvent&&window.attachEvent(\"onload\",function(){t.go()}):t.go()};};\r\ntry{(new g(100,\"r\",\"QSI_S_ZN_5o5yqpvMVjgDOuN\",\"https://zn5o5yqpvmvjgdoun-wiley.siteintercept.qualtrics.com/SIE/?Q_ZID=ZN_5o5yqpvMVjgDOuN\")).start()}catch(i){}})();\r\n</script><div id='ZN_5o5yqpvMVjgDOuN'></div>\r\n","enabled":false},{"pages":["all"],"location":"header","script":"\r\n<script>\r\n (function(h,o,t,j,a,r){\r\n h.hj=h.hj||function(){(h.hj.q=h.hj.q||[]).push(arguments)};\r\n h._hjSettings={hjid:257151,hjsv:6};\r\n a=o.getElementsByTagName('head')[0];\r\n r=o.createElement('script');r.async=1;\r\n r.src=t+h._hjSettings.hjid+j+h._hjSettings.hjsv;\r\n a.appendChild(r);\r\n })(window,document,'https://static.hotjar.com/c/hotjar-','.js?sv=');\r\n</script>","enabled":false},{"pages":["article"],"location":"header","script":" <script src=\"//get.s-onetag.com/bffe21a1-6bb8-4928-9449-7beadb468dae/tag.min.js\" async defer></script>","enabled":true},{"pages":["homepage"],"location":"header","script":"<meta name=\"facebook-domain-verification\" content=\"irk8y0irxf718trg3uwwuexg6xpva0\" />","enabled":true},{"pages":["homepage","article","category","search"],"location":"footer","script":"\r\n<noscript>\r\n<img height=\"1\" width=\"1\" src=\"https://www.facebook.com/tr?id=256338321977984&ev=PageView&noscript=1\"/>\r\n</noscript>\r\n","enabled":true}]}},"pageScriptsLoadedStatus":"success"},"navigationState":{"navigationCollections":[{"collectionId":287568,"title":"BYOB (Be Your Own Boss)","hasSubCategories":false,"url":"/collection/for-the-entry-level-entrepreneur-287568"},{"collectionId":293237,"title":"Be a Rad Dad","hasSubCategories":false,"url":"/collection/be-the-best-dad-293237"},{"collectionId":294090,"title":"Contemplating the Cosmos","hasSubCategories":false,"url":"/collection/theres-something-about-space-294090"},{"collectionId":287563,"title":"For Those Seeking Peace of Mind","hasSubCategories":false,"url":"/collection/for-those-seeking-peace-of-mind-287563"},{"collectionId":287570,"title":"For the Aspiring Aficionado","hasSubCategories":false,"url":"/collection/for-the-bougielicious-287570"},{"collectionId":291903,"title":"For the Budding Cannabis Enthusiast","hasSubCategories":false,"url":"/collection/for-the-budding-cannabis-enthusiast-291903"},{"collectionId":291934,"title":"For the Exam-Season Crammer","hasSubCategories":false,"url":"/collection/for-the-exam-season-crammer-291934"},{"collectionId":287569,"title":"For the Hopeless Romantic","hasSubCategories":false,"url":"/collection/for-the-hopeless-romantic-287569"},{"collectionId":287567,"title":"For the Unabashed Hippie","hasSubCategories":false,"url":"/collection/for-the-unabashed-hippie-287567"},{"collectionId":292186,"title":"Just DIY It","hasSubCategories":false,"url":"/collection/just-diy-it-292186"}],"navigationCollectionsLoadedStatus":"success","navigationCategories":{"books":{"0":{"data":[{"categoryId":33512,"title":"Technology","hasSubCategories":true,"url":"/category/books/technology-33512"},{"categoryId":33662,"title":"Academics & The Arts","hasSubCategories":true,"url":"/category/books/academics-the-arts-33662"},{"categoryId":33809,"title":"Home, Auto, & Hobbies","hasSubCategories":true,"url":"/category/books/home-auto-hobbies-33809"},{"categoryId":34038,"title":"Body, Mind, & Spirit","hasSubCategories":true,"url":"/category/books/body-mind-spirit-34038"},{"categoryId":34224,"title":"Business, Careers, & Money","hasSubCategories":true,"url":"/category/books/business-careers-money-34224"}],"breadcrumbs":[],"categoryTitle":"Level 0 Category","mainCategoryUrl":"/category/books/level-0-category-0"}},"articles":{"0":{"data":[{"categoryId":33512,"title":"Technology","hasSubCategories":true,"url":"/category/articles/technology-33512"},{"categoryId":33662,"title":"Academics & The Arts","hasSubCategories":true,"url":"/category/articles/academics-the-arts-33662"},{"categoryId":33809,"title":"Home, Auto, & Hobbies","hasSubCategories":true,"url":"/category/articles/home-auto-hobbies-33809"},{"categoryId":34038,"title":"Body, Mind, & Spirit","hasSubCategories":true,"url":"/category/articles/body-mind-spirit-34038"},{"categoryId":34224,"title":"Business, Careers, & Money","hasSubCategories":true,"url":"/category/articles/business-careers-money-34224"}],"breadcrumbs":[],"categoryTitle":"Level 0 Category","mainCategoryUrl":"/category/articles/level-0-category-0"}}},"navigationCategoriesLoadedStatus":"success"},"searchState":{"searchList":[],"searchStatus":"initial","relatedArticlesList":[],"relatedArticlesStatus":"initial"},"routeState":{"name":"Article4","path":"/article/business-careers-money/business/accounting/general-accounting/methods-of-joint-cost-allocation-in-cost-accounting-164991/","hash":"","query":{},"params":{"category1":"business-careers-money","category2":"business","category3":"accounting","category4":"general-accounting","article":"methods-of-joint-cost-allocation-in-cost-accounting-164991"},"fullPath":"/article/business-careers-money/business/accounting/general-accounting/methods-of-joint-cost-allocation-in-cost-accounting-164991/","meta":{"routeType":"article","breadcrumbInfo":{"suffix":"Articles","baseRoute":"/category/articles"},"prerenderWithAsyncData":true},"from":{"name":null,"path":"/","hash":"","query":{},"params":{},"fullPath":"/","meta":{}}},"dropsState":{"submitEmailResponse":false,"status":"initial"},"sfmcState":{"status":"initial"},"profileState":{"auth":{},"userOptions":{},"status":"success"}}

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.

Many manufacturers make a big array of products. Two classic examples are automobiles and computer printers. Each manufacturer in each industry offers many makes and models in order to reach slightly different buyers, usually through different price points. Some products are “high volume/low margin,” while others are “low volume/high margin.”

Here’s a food analogy, you can make money selling 3,000 $1 hamburgers per day or 100 $30 filet mignon dinners per night. Same sales revenue.