Financial Distress Costs
Joint Costs Definition
In accounting, a joint cost is a cost incurred in a joint process. Joint costs may include direct material, direct labor, and overhead costs incurred during a joint production process. A joint process is a production process in which one input yields multiple outputs. It is a process in which seeking to create one type of output product automatically also creates other types of output product.
Joint Process Examples
Joint processes are production processes in which the creation of one product also creates other products. It is a process in which one input yields multiple outputs. Joint production processes are common in the agriculture industry, the food manufacturing industry, and the chemical industry.
For instance, let’s consider a poultry plant. The plant takes live chickens and turns them into chicken parts used for food. The chickens yield chicken breasts, drumsticks, livers, gizzards, and other parts of the chicken that are used for human consumption. They also yield miscellaneous chicken byproducts that are used for hotdogs, jerky sticks, or animal provender.
Similarly, let’s consider an oil refinery. The refinery takes crude oil and refines it into a substance that may be used for auto gasoline, motor oil, heating oil, or kerosene. All of these various outputs come from a single input – crude oil. In both of these examples, a single input yields multiple outputs. These are both examples of joint production processes.
Joint Cost Allocation
Allocate joint costs to the primary output products of the joint process, not the incidental byproducts or scrap. Allocate them using a physical measure or a monetary measure.
The physical measure allocates joint costs to primary products based on a physical characteristic, such as units produced, or pounds or tons produced, barrels produced, or some other physical measure that is appropriate for the volume of output of the primary products. To use this method, simply divide the total production cost by the appropriate measure of output volume to yield the cost per unit of output.
One type of monetary measure of joint cost allocation is the sales value method. Using the sales value method, separate and differentiate the primary products according to sales value. Then divide them into proportions of sales value that add up to 100%. Then multiply the percentage proportions by the total production cost to yield the allocated cost per primary product type.