For each of the following methods of allocating joint costs, give a positive or a negative aspect of selecting each one to allocate joint costs
a. sales value at splitoff
b. estimated net realizable value method
c. the constant gross margin method
d. a physical measure such as volume
Answer:
a. Positive: Costs are allocated to products in proportion to their potential revenues. This is a fairly simple method to implement.
Negative: We use the sales value of the entire production of the accounting period.
b. Positive: It can be used when the market prices of the products are not known or available.
Negative: It can be very complex in operations with multiple products and multiple splitoff points.
c. Positive: Account is taken of the profits earned either before or after the splitoff point when allocating the joint costs.
Negative: The assumption is made that all have the same ratio of cost to sales value. This is likely not true.
d. Positive: It is fairly simple to use.
Negative: It has no relationship to the revenue-producing power of individual products.
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