explain each of the two conventional ways of allocating joint costs of products?
There are two conventional methods used for allocating joint costs of products: the sales value at split-off method and the physical quantity method. Let me explain each of them in more detail:
1. Sales Value at Split-Off Method:
The sales value at split-off method allocates joint costs based on the relative sales values of the individual joint products at the split-off point. This method assumes that the value of each product can be determined at the point where it separates from the joint production process. The allocation is based on the market value or selling price of each product.
To calculate the allocation using this method, follow these steps:
1. Determine the total sales value of all joint products at the split-off point.
2. Calculate the individual sales value of each product as a percentage of the total sales value.
3. Allocate the joint costs to each product based on its percentage of the total sales value.
This method is commonly used when the sales values of different products from the joint production process accurately reflect their relative economic worth.
2. Physical Quantity Method:
The physical quantity method of allocating joint costs distributes the costs based on the volume or weight of each individual joint product. This method assumes that the physical quantity of each product can be measured effectively, and that costs are directly related to the quantity produced.
To allocate joint costs using this method, follow these steps:
1. Determine the total physical quantity produced for all joint products.
2. Calculate the individual physical quantity of each product as a percentage of the total quantity.
3. Allocate the joint costs to each product based on its percentage of the total quantity.
This method is commonly used when the physical quantity of each product is a reliable indicator of its contribution to overall costs, regardless of its market value.
It's important to note that both methods have their own advantages and limitations, and the choice between them depends on various factors such as market dynamics, availability of data, and management objectives.