Methods Used To Allocate Joint Costs

SOLUTION:The four methods to allocate the joint costs are as follows:Physical Unit Method: Some common physical measure is used to describe the "quantity" of each product produced. This may be weight, volume. The joint costs are then allocated in proportion to the chosen physical measure. The disadvantage of this method is that it ignores the fact that not all costs are directly linked to physical quantities. The advantage of this approach is that it is simple to understand and easy to use. Market Based Method: These methods are further classified into two heads:Sales Value at split off point method: If a market price can be established for the (intermediate) products at the splitoff point, the joint costs can be allocated proportional to the value of the products. These values are obtained simply by multiplying the prices with the quantities that the joint process yields. It is easy to calculate and costs are allocated to the individual product’s revenue. The disadvantage is that the market price for few industries changes rapidly. Sales price at split-off might not be available as additional processing is required for sale. Net Realizable Value: It concentrates