Final answer:
To calculate joint cost allocation at the split off point, you can use either the sales value at split off point method or the physical output method. The sales value method allocates costs based on the relative sales value of each product, similar to the Net Realizable Value method, while the physical output method allocates costs based on the quantity of each product.
Step-by-step explanation:
How to Calculate Joint Cost Allocation at Split Off :
To calculate joint cost allocation at split off using the sales value at split off point method, you first need to determine the total sales value of each product at the split-off point. The total joint cost is then allocated to each product based on their relative sales value. This method is similar to the Net Realizable Value (NRV) method, where the estimated final sales value of each product, minus any additional processing costs beyond the split-off point, is used to allocate joint costs. Alternatively, using the physical output method, the joint costs are allocated according to the ratio of the quantity of each product at split off to the total quantity of all products. It is essential to note that while the sales value method considers the value of the goods, the physical output method solely relies on the quantity.
Following these steps will help determine how joint costs should be divided among products:
- Determine the cost structure for the firm, considering total fixed costs and variable costs to calculate total cost, average variable cost, average total cost, and marginal cost.
- Identify the relative sales value or physical units of each product at the split-off point.
- Allocate the joint costs to products based on their proportional sales value or quantity.
It is important for a firm to correctly allocate joint costs to accurately assess the profitability of each product.