Page 282 - DCOM202_COST_ACCOUNTING_I

Cost Accounting – I

Notes (c) Net Realizable Value: This method is also called as “Reverse Cost Method.” Under this
method, the estimated profit, selling and distribution expenses and post separation costs
are reduced from the sales value of each joint products.
A ratio is established on the basis of which the total costs before separation point is apportioned.
Subsequent costs are added to arrive at product costs.
Selling Price Method: Under this method, the joint cost is apportioned on the basis of sales value
at the split off point. The logic is that a product should bear the share of the joint cost according
to its sale price. If sales price is higher than that of the other products, more share of joint cost
should be charged to that product and if it is comparatively less than that of other products,
less share of joint cost should be charged to the same. Though logically this method seems to be
sound, in practice, charging higher share of joint cost to the product with higher sales value may
not be justified due to the fact that lesser efforts are required for manufacturing of the same.
Standard Cost Method: Method charges issued materials at a predetermined or estimated
price reflecting a normal or an expected future price. The difference between the actual and
standard cost is recorded in a purchase price variance account. The variance account enables
management to observe the extent to which actual materials costs differ from planned objectives
or predetermined estimates. Materials are charged into production at the standard price, Thereby
eliminating the erratic costing inherent in the actual cost methods.

14.2 Costing of Joint Products

Costing for joint products implies the assignment of a portion of the joint cost to each of the
joint product. Unless the joint costs are properly and reasonably apportioned to different joint
products produced, the cost of joint products will vary considerably and this will affect valuation
of inventory, pricing of products and profit or loss on sale of different products. Therefore, the
basic problem in respect of joint products is that of apportioning the joint cost. Various authors
have suggested various methods of joint products.
The brief description of these methods is as follows:
(i) Average Unit Cost Method: Average Unit cost is the most simple method. The total costs
are assessed, yielding an average unit cost with one net profit for the total operation. This
method can be applied where processes are common and inseparable for the joint products
and where the resultant products can be expressed in same common unit.
This means that all joint products have the same unit cost and, therefore, if price fixing
is based on cost of various products which may be of different grades or quality will be
sold at the same unit price, resulting in a customer’s price advantage in grades. Moreover,
where the end products cannot be expressed in some common unit, this method breaks
down.
(ii) Physical Unit Method: Under this method, a physical base such as raw materials weight,
linear measure volume etc., is applied in apportion pre-separation point costs to joint
products. This method presupposes that each joint product is equally valuable, which is
probably not the case in practice.

(iii) Survey Method: Under this method, all the important factors such as volume, selling
price, technical aspects, marketing process etc., affecting costs are ascertained by means of
extensive survey. point’s values or percentages are given to individual products according
to their relative importance and costs are apportioned on the basis of total points. These
ratios should be revised from time to time depending upon the factors affecting production
and sales.

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