Summary
Highlights
This video is the second in a series on joint and byproduct costing, focusing on the physical measures method. It will cover the basic idea, a practical example, advantages, disadvantages, and suitability of the method. Joint products are produced simultaneously from a single process, and costs cannot be traced to individual products until the split-off point. After this point, further processing costs can be traced. A key issue is allocating joint costs to these products.
The physical measures method allocates joint costs based solely on output quantity. The underlying assumption is that all products passing through the same process receive similar benefits, thus incurring similar costs per unit.
An example demonstrates allocating $400,000 in joint costs to three products (A, B, C) with outputs of 15,000, 20,000, and 5,000 units, respectively. First, adjust for byproduct net realizable value. Then, calculate the proportion of total output for each product (Product A: 37.5%, Product B: 50%, Product C: 12.5%). These proportions are used to allocate the total joint costs, resulting in $150,000 for A, $200,000 for B, and $50,000 for C. The joint cost per unit for each product is calculated to be $10, consistent with the method's assumption of uniform benefit.
A profitability analysis shows that while the overall process is profitable, Product B breaks even, yielding zero net profit. A concern arises because Product B's joint cost per unit ($10) exceeds its sales value at the split-off point ($8), necessitating an inventory write-down if not further processed. This highlights a major problem with the physical measures method.
The main advantage of the physical measures method is its simplicity. However, it has two major disadvantages: outputs must be measured in the same units (e.g., all in kilograms or liters), and there's no relationship between allocated cost and sales revenue, potentially leading to allocated costs exceeding sales revenue and requiring write-downs. This method is suitable only when outputs are measured in the same way and have similar selling prices.