Page 281 - DCOM202_COST_ACCOUNTING_I

Unit 14: Equivalent Production in Process Costing

Notes
Example: For example, the production of coke, for which coal is the original raw material.
In addition to coke as its major product, the process produces sulfate of ammonia, light oil, crude
tar and gas. The greater quantity of gas is not sold but is used to fire the coke ovens and the
boilers in the power plant. The cokeovens are the split-off point for cost assignments. The cost of
each product consists of a pro rata share of the joint cost plus any separable or subsequent costs
incurred in order to put the products into saleable condition.
Average Unit Cost Method: Under this method, the joint cost is apportioned to the joint products
by computing the average unit cost of the product units. The average unit cost is computed by
dividing the total manufacturing cost by the total number of units produced of all products.
This method is useful where all the products produced are uniform with each other in all the
respects.
This method will not be useful if the production units are not similar with each other.
Physical Unit Method: Under this method, the joint costs are allocated or apportioned to joint
products on the basis of relative physical units of output of each joint product till split-off occurs.
These physical units refer to weight or measure such as pounds, tonnes, gallons, bales, volume
etc. This method is suitable where the joint products will be measurable in the same units. This
method cannot be applied when joint products consist of different types of units like liquids and
solids.

Survey Method: Survey Method is also termed as “Points Value Method.” In this method,
joint costs are allocated on the basis of percentage or points value is assigned to each products
according to their relative importance. This method is also taken into various relevant factors
such as volume, mixtures, selling price, technical engineering and marketing processes. The ratio
of joint costs can be calculated by physical quantities of each products are multiplied with the
weight age points.
Contribution Margin Method: This method is also called as “Gross Margin Method.” According
to this method joint costs are allocated or apportioned as fixed cost and variable cost incurred
at the point of separation. Joint fixed costs are apportioned on the basis of contribution of each
product whereas variable portion of joint costs are apportioned according to the volume of units
produced.
Standard Cost Method: Under this method, joint costs are apportioned on the basis of standard
costs. For this, standard costs are determined in advance for aU joint products based on past
experience, technical aspects, operational efficiency and cost factors of each products, etc.
Weighted Average Method: Under this method, weights are assigned to each unit based upon size
of the units, difference in type of labor employed, material consumption, market share, efforts
of labor required and so on. The joint cost is apportioned on the basis of the weights assigned
to each product. This method is highly useful if the weights assigned are on objective basis. If
subjective element creeps in, the method may not give accurate results.
Market Value Method: This method is also termed as “Relative Sales Value Method.” According
to this method, the number of units of each product manufactured is multiplied by the product’s
selling price to obtain the sales value of production. The portion of total joint costs allocated to
each product is equal to the ratio of the sales value of each product’s total market value. Here,
there are various kinds of market value methods:
(a) Market Value at Separation Point: Under this method, the market value of the joint
products at the split off point is ascertained on the basis of dividing joint cost. Weightage
is also given to the quantities of each product:

(b) Market Value after Further Processing: In this method, joint cost are apportioned according
to the ratio of final selling price of each product.

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