630 wk3 db1 res | Business & Finance homework help

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Describe the three methods used to allocate joint costs.

Companies that produce more than one product will usually have joint costs.  According to Schneider (2017), “ the costs of materials and processing up until individual products are identifiable are referred to as joint costs” (p. 180).  There are three methods associated with allocating these types of costs; physical measures of output, relative sales value (RSV) and net realizable value (NRV).  Each method is based on outputs and the split-off point of individual products.  The simplest method is the physical measures of output are determined by the measurable physical features of each product to include; weight length volume etc., while the RSV method depends on the proportion of the products total sales value at the split-off point (Schneider, 2017).  The physical measures of output is commonly used for a company that produces a several stock keeping unit (SKU), while RSV might be used by a jewelry store that sells a variety of precious stones and medals that each have their own value.  On the other side of the spectrum is NRV, which is a product’s maximum net amount, which can be received from the sale of that product with a short period of time (McKeown, 1972).  The concept occurs when a when the costs of the product is subtracted from the market value.   

What are the advantages/disadvantages of each allocation method?

Each particular method has its pros and cons. For instance an advantage of the physical measures of output is its simplicity.  However, what makes the method so simple can also be a disadvantage when dealing with products that differing physical features. 

RSV is helpful as it provides the capability to regulate costs to ensure proper reporting of capital and asset losses, this can aid in managerial decision-making.  However, this method depends on the availability of sales value.  If not immediately available or not exact it can cause a business to defer to another method to determine the costs at the spilt-off point (Schneider, 2017).  Because of this the NRV can has the advantage of helping with the void that could occur with RSV, but a con of this concept is that there are occasions were the product’s NRV is negative causing the inability for joint costs to be allocated to the product. 

Which method would you recommend?

As we can see there is no perfect method and the one used is really dependent on the products being produced.  Therefore my recommendation on which method to used would be based on the business and what product is being produced.  Also in some cases the product would allow the methods to be interchangeable.  Therefore if one method is not benefiting the company it can switch to another that is more suitable.

References:

McKeown, J. C. (1972). Additivity of Net Realizable Values. Accounting Review47(3), 527–532. Retrieved from http://search.ebscohost.com.proxy-library.ashford.edu/login.aspx?direct=true&db=bsh&AN=4503171&site=eds-live&scope=site (Links to an external site.)

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

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Joint cost is referred to cost that is collected during the processing phase, but doesn’t produce an identifiable product. There are three allocation methods can be used when allocating joint cost. These methods are: physical measure of output, retaliative sales value and bet realizable value (Schneider, 2017). 

Physical measure of outputs is allocated by a unit of measurement and this can be either units, length, volume, weight, etc. It can be any unique identifier that is used to measure that substance. This method is very simplistic from an accounting standpoint, but one concern is difference units of measurement could cause issues in the future. Dependent on the chemical makeup of the product will determine what unit of measurement is used. It could be difficult and cause confusion when trying to convert each item to a simple unit of measurement. 

The relative sales value method takes product sales divided by total sales and multiplies by the joint cost. The goal is to allocate by the total sales at the split-off point. A positive attribute of this method is that if the allocation is done by a sales figure than the allocation will be extremely accurate because sales can be tied back to the product sold, but on the other hand there might be a lag in sales therefore that allocation method couldn’t be done until sales are completed. 

Lastly, net realizable value’s goal is to use approximations of the sales value to allocate the joint cost. NRV is calculated by taking revenues and subtract out the separable cost. This method allows to better trace a cost back to original product, but there are instances where the NRV is negative. If this were to happen no allocation can happen for that cost. This could slow down accounting procedure and take up unneeded space in capital. 

Personally I recommend using the physical measurement as the allocation method due to it’s simplicity and the data is easily accessible. For the most part an industry will use simple units of measurement because they will be producing like products. By using this method there is no lag time waiting for sales numbers to comes through or projecting sales. The number of units is available immediately after production. 

Schneider, A. (2017). Managerial Accounting: Decision making for the service and manufacturing sectors (2nd ed.) [Electronic version]. Retrieved from https://content.ashford.edu/

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