Joint Cost Allocation: Market Value, Volume, Profit & Weighting Methods

Joint Cost Allocation Methods

Joint costs are costs of a production process that yields multiple products (co-products). Here's a breakdown of common allocation methods:

Criterion: Market Value

This method allocates joint costs based on the relative sales value of each co-product. Here's how it works:

1. Calculate Total Sales Value:
   • List each co-product (e.g., A, B, C).
   • Determine the sales value per unit (e.g., per kg).
   • Determine the quantity of each co-product produced (e.g., in kg).
   • Multiply the sales value per unit by the quantity to find the total sales value for each co-product.
2. Distribute Total Joint Costs:
   • Calculate the total sales value of all co-products.
   • For each co-product, divide its total sales value by the total sales value of all co-products.
   • Multiply this percentage by the total joint costs to allocate a portion of the joint costs to each co-product.
3. Calculate Cost Per Unit:
   • Divide the allocated joint cost for each co-product by the quantity produced to find the cost per unit (e.g., cost per kg).
4. Calculate Gross Profit:
   • Subtract the allocated joint cost from the total sales value for each co-product.
5. Calculate Gross Margin:
   • Divide the gross profit by the total sales value for each co-product.

Criterion: Volume Produced

This method allocates joint costs based on the relative volume of each co-product produced.

1. Calculate Total Volume:
   • List each co-product (e.g., A, B, C).
   • Determine the volume produced for each co-product (e.g., in kg).
   • Calculate the total volume of all co-products.
2. Distribute Total Joint Costs:
   • For each co-product, divide its volume by the total volume of all co-products.
   • Multiply this percentage by the total joint costs to allocate a portion of the joint costs to each co-product.
3. Calculate Cost Per Unit:
   • Divide the allocated joint cost for each co-product by the quantity produced to find the cost per unit (e.g., cost per kg).

Criterion: Equality of Gross Profit

This method allocates joint costs to achieve an equal gross profit per unit across all co-products.

1. Calculate Total Gross Profit:
   • Calculate the total revenue from all co-products (sum of total sales value).
   • Subtract the total joint costs from the total revenue to find the total gross profit.
2. Calculate Unit Profit:
   • Calculate the total volume of all co-products.
   • Divide the total gross profit by the total volume to find the unit profit.
3. Calculate Cost Per Unit:
   • For each co-product, subtract the unit profit from the selling price to find the cost per unit.

Criterion: Method of Weighting

This method allocates joint costs based on a predetermined weight assigned to each co-product.

1. Calculate Weighted Totals:
   • List each co-product (e.g., A, B, C).
   • Assign a weight to each co-product.
   • Determine the quantity of each co-product produced (e.g., in kg).
   • Multiply the weight by the quantity for each co-product to find the weighted total.
2. Distribute Total Joint Costs:
   • Calculate the total of all weighted totals.
   • For each co-product, divide its weighted total by the total of all weighted totals.
   • Multiply this percentage by the total joint costs to allocate a portion of the joint costs to each co-product.
3. Calculate Cost Per Unit:
   • Divide the allocated joint cost for each co-product by the quantity produced to find the cost per unit (e.g., cost per kg).