Often in a production process joint product arises. Joint products are classified as main products when all of them are of significant value. Costs of a process up to the split off point are joint costs which are shared by the joint products. It is a decision problem how to allocate costs of joint products. Given below is a joint products situation:
Thus split off point cost is $ 450,000. Split off point is that where the joint products result.
Generally three approaches are followed for apportionment of joint costs.
- on the basis of units
- on the basis of selling price
- on the basis of sales value
Often the intermediate products at the split off point need to be processed further to get a selling price. So cost apportionment remains a problem. Eventually, it becomes necessary to arrive at the selling price or sales value deducting separate process cost and normal profit thereof.
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