In this article we will discuss about the objectives for allocation of joint costs.
Joint costs create the following problems in Accounting:
(1) If joint costs are shared between more than one product. On what basis should they be shared out (apportioned)? And why do they have to be shared out?
(2) How should joint costs be kept under control?
(3) How should Management Accountants handle joint cost when they present information for decision making? For example, information about break-even point or for deciding whether to produce extra units of a product?
The main objectives for allocation of joint costs are given below:
(a) In a system of absorption costing, production cost must be charged to product costs. When more than one product share some common production costs, a basis for sharing out these costs must be devised.
(b) Another reason for sharing out joint costs is so that management can judge the profitability of a product. This is something that a ‘pure’ marginal costing system cannot properly do.
(c) For cost control and decision making.
(d) For valuation of stock of finished goods and work-in-progress.
(e) To meet cost audit regulations.
(f) For correct determination of costs and cost justification in case of price control.
(g) To fix selling prices.
(h) For determining the impact of change of product mix and output variations.
(i) For bidding cost plus contracts.
Sharing out joint costs, therefore, has both advantages and disadvantages for profit measurement:
(i) The advantages are in providing more information to assess the profitability of individual products.
(ii) The disadvantages are that individual product profitability will vary according to the basis chosen for apportioning the joint costs.