In a production process, there are two types of costs, namely joint product costs and joint costs. Just as the name suggests, joint costs are joint costs, while joint product costs are joint product costs. Although they sound almost the same, these two terms have a fundamental difference.
Then, what is the difference between joint cost and joint product cost? How to allocate funds to these two costs? Relax, we will answer it in the article below.
Contents
1 Definition of Joint Cost and its Difference from Joint Product Cost
2 Definition of By-Products and Main Products
3 Then what is the difference between Joint Cost and Joint Product Cost
4 Ways to Allocate Joint Cost Funds
4.1 1. Physical Unit Method
4.2 2. Balanced averaging method
4.3 3. Cost allocation based on relative market value
4.4 4. Separate Selling Value Method
4.5 5. Net realizable value method
4.6 6. Constant Gross Margin Percentage Method
4.7 7. Ratio of Sales to Production
5 Cover
Understanding Joint Costs and the Differences with Joint Product Costs
Joint costs are all costs that arise in order to produce two or more types of products, where the production process is carried out simultaneously.
The process of calculating the cost is limited by the split point, which is the time at which the main product and by-products that are produced simultaneously can be separated.
The resulting product will be able to be sold immediately at this point, but production can also be continued in order to produce more profitable products.
Understanding By-Products and Main Products
Before discussing further about joint product costs, we must first understand the meaning of main products and by-products.
The main product is a product that is made simultaneously with by-products but has more quantity or value than the by-products.
Meanwhile, by-products are products that, although in the manufacturing process, are carried out together with the main product, the selling price tends to be lower.
A simple example is rice milling. The rice milling machine will certainly produce rice, and the rest will produce bran or grain. Well, rice is the main product, and bran or grain is an example of a by-product.
Another example is petroleum refining. There will produce oil and asphalt as the remaining products. Well, the main product is petroleum and asphalt is a by-product.
Then what is the difference between Joint Cost and Joint Product Cost?
It is different with joint costs or joint costs, joint product costs or joint product costs are costs that arise from the beginning of the production process. It includes labor costs, raw material costs, and overhead costs.
These costs will appear during the processing in some types of products. Each product will be distinguished based on the angle of allocation. Shared cost allocations can be traced to a specific product, which means you can trace the flow of those costs through the production process. This is the difference between joint cost and joint product cost, the cost will be allocated to various types of products.
How to Allocate Joint Cost Funds
In accordance with the above understanding, joint costs will indeed be allocated to certain products which will later be recorded in the financial statements.
Well, several methods that you can use to allocate joint cost funds are as follows:
1. Physical Unit Method
In this method, the allocation of joint costs to the resulting product will be based on its physical size. These sizes can be expressed in certain units, such as tons, pounds, planks, gallons, and units of heat.
For example, if product A produces 300 pounds and product B produces 700 pounds, then product A will receive a 30% cost allocation, while the cost allocation for product B is 70%.
In order to get the average unit cost, we can divide the total cost along with the total expenses.
2. Balanced averaging method
In the previous method, only the quantity of goods will be used as a reference in determining the allocation of costs.
Whereas in the production process, there are several other factors that must also be taken into accounts, such as the time required to produce the product, difficulties in the production process, and the different types of labor involved in the production process.
These factors must be taken into account in the balanced average method. Each factor and relative weight will be combined into a single value, which will be known as the weight factor.
3. Cost allocation based on relative market value
This method is claimed to be better than the two types of methods above. The reason is, this method uses the assumption that no costs will arise if all products made generate income and also a sufficient rate of return to cover all costs.
This is in line with the theory that the costs required for raw materials and other joint costs in the process of producing goods are related to the selling value of the product.
4. Separate Selling Value Method
The allocation of costs contained in this method is based on the market value or sales of a product at the point of separation. The higher the market value of a product, the higher the costs allocated to the product.
It will also be possible to allocate costs that are constant. This will occur as long as the selling price at the split point is stable or the fluctuations of each price are balanced.
5. Net realizable value method
The market value at the point of separation is a value that does not necessarily suit customers. For this reason, this method uses a hypothetical selling value obtained by reducing all production costs that can be separated from the market price.
By using this method, you can allocate joint costs more evenly based on each part of the product, from the existing hypothetical selling value.
6. Constant Gross Margin Percentage Method
In this method, all costs contained in the split point will be inputted into overall costs, which means that profits can also be included in these costs. This method will also allocate joint costs in each product which will result in the same gross margin percentage.
7. Sales To Production Ratio
This method will allocate joint cost costs with a weighting factor, where this factor will display the percentage of sales with the percentage of production. Thus, products that have a high selling price will get the largest joint cost allocation.