# Joint costs

Joint costs are those that are part of a single process that gives rise to several products. That is, when there is a series of inputs with which different items are manufactured simultaneously. An example is that of the oil industry that sells gasoline and kerosene. These goods are called joint products. It may be that some of them receive an additional individualized treatment, called an autonomous process, to obtain other goods.

It should be noted that there are also joint costs when raw materials of different qualities are acquired through a single purchase operation.

Joint costs allow the company to save on its production processes. This is known as economy of scope.

## Difference between joint and common costs

The main difference between joint and common costs is that in the first case the production of a single good cannot be stopped without also stopping that of the others. That is, the goods must always be obtained at the same time.

On the other hand, the common costs are divisible and the production of one of the articles can be stopped without suspending that of the others. We see this, for example, in the wood industry with the chairs, furniture or desks that it offers.

## Methods for allocating joint costs

There are, in general, three methods for allocating joint costs:

• Units produced method: It is based on the quantity obtained from each merchandise. This method is suitable if the final sales prices are similar. Otherwise, distortions are generated. The formula is:
• Market value method at the point of separation : It takes as a reference the sale price from the moment the products can be differentiated from each other. For example, when gasoline and kerosene are ready to be delivered to a distributor. This moment is called the point of separation. The formula is:
• Net realizable value method: The price of the merchandise is considered at the final point of sale. The formula is:

## Joint cost allocation example

Let’s see an example to apply the explained methods. Suppose the joint costs of a process are \$ 50,000. With this, 10,000 units of product A and 15,000 of B.

So, using the units produced method, we first calculate the average cost, dividing 50,000 by the total quantity of merchandise.

50,000 / (10,000 + 15,000) = 50,000 / 25,000 = 2

Then we multiply the result by the number of copies of each article:

Costs assigned to A = 2 * 10,000 = 20,000

Costs assigned to B = 2 * 15,000 = 30,000

To apply the market value method at the break point let’s add some data. Let us assume that from the moment that the products can be differentiated, the price of A is US \$ 2.5 and that of B, US \$ 3. Then, we calculate the income that each merchandise would generate.

Market value of A:

2.5 * 10,000 = 25,000

Market value of B:

3 * 15,000 = 45,000

Total value = US \$ 70,000

Then we distribute the costs based on the value of each group of items.

Costs assigned to A: (25,000 / 70,000) * 50,000 = US \$ 17,857.14

Costs assigned to B: (45,000 / 70,000) * 50,000 = US \$ 32,142.86

To use the third method, let A’s additional costs be \$ 1,000 and B’s \$ 3,000. In addition, the final price of A is US \$ 3 and that of B, US \$ 3.5.

Net realizable value of A:

(3 * 10,000) -1,000 = 29,000

Net realizable value of B:

(3.5 * 15,000) -3,000 = 49,500

Total realizable value: 29,000 + 49,500 = 78,500

Finally, we divide the costs in proportion to the net realizable value of each item.

Costs assigned to A: (29,000 / 78,500) * 50,000 = US \$ 18,471.34

Costs assigned to B: (49,500 / 78,500) * 50,000 = US \$ 31,528.66