Joint Cost Allocation Case Study
The first generally accepted objective of joint costs allocation is profit maximization (Hilton et al., 2004; Horngren et al., 2011). The approach adopted by these authors is:
1. List the product combinations that may be obtained from the common process.
2. Estimate the respective selling prices of each product.
3. Estimate the separable costs of to make the products marketable.
4. Determine the product combination with the maximum profit.
With the estimation of separable costs, Noreen et al. (2010) point out managers have the requisite information to decide if it would be more profitable to sell the joint product right after the split-off point or to continue the production process. Only the separable costs and the potential …show more content…
It is necessary that a cost-based analysis can be provided in the case of damage, and more generally in any commercial litigation.
3.1.3 Joint Costs Allocation Methods
Generally, cost allocation decisions are directed based on a causality or benefits-received because the other possible criteria, fairness and the ability to bear, are either difficult to obtain or pose cross-subsidisation problem across the resources’ users (Bailey, 2009). Besides, joint costs have the particularity that they cannot be analysed in terms of causality to the individual product as they are produced simultaneously (Horngren et al., 2011; Drury, 2004). The allocation should therefore be based on the benefits-received criterion (Drury, 2004).
As we mentioned earlier, joint costs are costs incurred when two or more products are yield from the same manufacturing process and with the same raw materials. Depending on the relative importance of their sale value, jointly produced products are categorized as joint product, by-product or scrap. Joint costs allocation methods differ for each of these categories; authors like Horngren et al. (2011) or Vanderbeck (2010) explain that there are two main logical distributions of joint costs for joint