Summary
Highlights
This video is the third in a series on joint and by-product costing, focusing on the sales value at split-off point method. The video will review the basic concepts, explain the key ideas of the method, provide a practical example, and discuss its advantages and disadvantages.
Joint and by-products originate from a single manufacturing process that uses raw materials, labor, and overheads. Unlike single-product processes, this process yields multiple products simultaneously. Products are indistinguishable until the 'split-off point', after which they become separately identifiable and may incur further processing costs.
The sales value at split-off point method allocates joint costs based on the total sales value of each joint product at the split-off point. It's crucial to use the total sales value (units produced multiplied by selling price) and not just the per-unit selling price. The underlying assumption is that higher selling prices indicate higher costs, meaning products with a higher total sales value at split-off will be allocated a larger portion of the joint costs.
An example demonstrates allocating 400,000 Rand in joint costs among three products (A, B, and C). The first step is to deduct the net realizable value of any by-products, scrap, and waste from the total joint costs. We then use the output units and sales value per unit at the split-off point for each product to calculate the total sales value at split-off for each product.
The total sales value at split-off for each product is calculated (e.g., Product A: 15,000 units * R15/unit = R225,000). These individual sales values are then used to determine the proportion of the total sales value (R500,000) that each product represents. These percentages (Product A: 45%, Product B: 32%, Product C: 23%) are then applied to the total joint costs (R400,000) to allocate the costs to each product (e.g., Product A: R400,000 * 45% = R180,000). Finally, the joint cost per unit is calculated by dividing the allocated joint cost by the number of units produced (Product A: R180,000 / 15,000 units = R12/unit).
This method addresses issues found in physical measures, such as being usable with outputs measured in different units and ensuring inventory is correctly valued without write-downs. However, disadvantages include the sales value at split-off not always being readily available (e.g., no market for intermediary products) and the potentially invalid assumption of a direct relationship between cost and sales price.
The sales value at split-off point method is suitable when the sales value at the split-off point is available, and the assumption of a logical and true relationship between sales price and cost holds. The video concludes by inviting viewers to the next video, which will cover the net realizable value method.