74 9.2 Other methods of allocating joint costs
The text does a decent job of explaining the physical and sales value at split off method, where sales value is sales value at split off. Sometimes there is no sales value at split off or only product can be sold at split off and other must be processed further.
There are 2 other methods that will be described in a video and posted here. They are all somewhat arbitrary (as are the physical and sales value at split off methods and but defensible. They are briefly summarized below.
This video below briefly explains the two methods and provides an example.
2 Other Methods, Description
1) Net Realizable Value Method.
This method takes the final sales value for each product and deducts from that all the processing costs that incurred for that product, added after the split off point. Hence the term Net Realizable Value, final sales value less the added costs of getting the product to that state. This is done for each product. If some of the products are not processed beyond the split off point, further, their net realizable value is the value at split off.
Then, joint costs are allocated on the basis each products’ relative share of the combined net realizable value.
2) Constant Gross Margin method
This method adds up the combined sales revenue of all the products and deducts all costs (joint plus all added processing costs) to arrive at a combined gross margin (what is left over) for the entire operation. The total gross margin is divided into the total combined sales revenue to arrive at a gross margin percentage for the entire operation.
Then, the gross margin percentage is applied to the sales revenue of each product. That amount is deducted from the product’s sales revenue to arrive at the total product cost for each product (Total sales for each product – (Total sales for each product * overall gross margin percentage) = total product costs for that product). Deduct from the total costs of each product the added processing costs for each product (post split off) to arrive at the allocated joint costs.
