The expense incurred by producers when creating more than one product or process is referred to as the joint cost. These costs include labor, materials, and overhead for the joint product's manufacture. Almost every manufacturer uses joint cost allocation to keep input costs under control.
Companies can choose a technique of calculating joint cost allocation because there are various ways available for calculation based on the nature of the business, resources, and kind of products. Among the various types of calculations are:
- Survey method
- Average unit cost method
- Standard cost method
- Reverse cost method
- Sales value method
- Physical units method
- Contribution margin method
Let's go over the formula for calculating the cost of production using the joint cost technique and the average unit cost approach.
The total cost of all jointly created products is divided by the total number of units manufactured in this approach. As a result, the formula is:
Joint Cost = C/U
C = Total cost of joint products, U = Total units produced.
The survey approach is another way to compute the joint cost function. Other elements such as material quality, marketing, and selling price are also taken into account in this strategy. Before arriving at the following formula, both qualitative and quantitative measures are taken into account:
Joint cost = Total Cost/ Total weighted units.
Globe Oil Ltd., a petroleum extradition firm, is a market leader in the petrol, diesel, and crude oil domains. They needed to know the cost of production for each of their products because their base product is the conduit through which all other by-products are exported.
They chose the average unit cost method for its simplicity.
They turned 100 gallons of petroleum into 38 gallons of gasoline, 35 gallons of diesel, and 27 gallons of crude oil. Each unit cost an average of $200.
Using the average unit cost formula, we obtain:
Joint Cost = C/U | 20,000/100 = $200/Unit
- A manufacturer's joint cost is the charge involved in producing two or more items or processes. These items are similar and frequently interconnected.
- These joint products can only be identified once they take on a distinct shape at a given stage in the manufacturing process. This section is known as the split-off point.
- Joint costs are computed to the point at which common expenses for production link their expenses.
- Manufacturers must analyze these expenses in order to determine the best selling price, inventory management, and profitability of individual products.