Difficulties / Problems in Costing by Products and
Joint Products:
By products and joint products are difficult to
cost because a true
joint cost is indivisible. For example, an ore might
contain both lead and Zink. In the raw state, these minerals are joint
products, and until they are separated by reduction of the ore, the cost of
finding mining, and processing is a joint cost; neither lead nor Zink can be
produced without the other prior to the
split-off
point.
The cost
accumulated to the
split-off
point must be born by the difference between
the selling price and the cost to complete and sale each mineral after the
split-off
point.
joint costs are frequently confused with
common costs.
However, there is a significant difference between the two: a
joint cost is
indivisible and
common
costs are divisible.
Common costs are
allocable among products or service. Because each of the products or
services could have been obtained separately. Therefore, any shared costs of
obtaining them can be allocated on the basis of relative usage of common
facilities. For example, the cost of fuel or power may be allocated to
products on the basis of production volumes or metered usage. The
indivisibility characteristics of a
joint cost is not always easy to
comprehend, since in some cases a
joint cost can be divided among
joint
products in accordance with a
common cost causing characteristic. However
the result of such a division is of limited use to
management for decision
making.
Because of the indivisibility of a
joint cost,
cost allocation and apportionment procedures used for establishing the unit
cost of a product are far from perfect and are, indeed, quite arbitrary. The
costing of
joint
products and
by products highlights the problem of
assigning costs to products whose origin, use of equipment, share of
raw materials,
share of labor costs, and share of other facilities cannot truly be
determined. Whatever methods of allocation are employed, the total profit or
loss figure is not affected--provided there are no beginning or ending
inventories--by allocation costs to the
joint
products or
by products, since
these costs are recombined in the final
income statement. However, a
joint cost is ordinarily allocated to the products on some acceptable basis to
determine product costs needed for inventory carrying costs. For this
reason, there is an effect on periodic income, because different amounts may
be allocated to inventories of the numerous
joint
products or
by products
under various allocation methods. In addition, product costs may be required
for such special purposes as justifying selling prices before governmental
regularity bodies. However, the validity of splitting a
joint cost to
determine fair regulated prices for
joint
products has been questioned by
both accountants and economists.
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