Why is cost allocation necessary in a joint process?
You need to calculate joint costs to calculate inventoriable costs. Those costs are attached to inventory and expensed when the product is sold. So you need joint costs to calculate inventory values and the cost of goods sold. This information ends up in your financial reports, too.Mar 26, 2016
What are the reasons for joint product cost allocation?
Reasons for Allocating Joint Costs to Individual Products
For cost reimbursement under contracts where not all the separable products go to a single customer so that allocation of the joint costs is necessary. For settlement of insurance claims involving separable products at or beyond split-off.
Why is allocation of costs important?
Cost allocation provides the management with important data about cost utilization that they can use in making decisions. It shows the cost objects that take up most of the costs and helps determine if the departments or products are profitable enough to justify the costs allocated.
What is allocation of joint costs?
Joint costs arise when an organization produces multiple products and its cost function is not fully separable. Some costs, then, “jointly” produce the products. Cost allocation is the phrase used to describe the procedures by which product costs are constructed in the face of joint costs.
Should we allocate joint costs among joint products?
Two or more products made from a single input are called joint products. The costs of the single input and related manufacturing process costs must be allocated to each of the joint products. The physical quantities method allocates joint costs based on a physical measure of output (e.g., pounds or yards of material).
Why joint costs need to be apportioned to each joint product produced by the company?
The joint costs need to be apportioned between the joint products at the split-off point to obtain the cost of each of the products in order to value closing inventory and cost of sales.
What is joint cost How is joint cost allocated to main product?
The physical measure allocates joint costs to primary products based on a physical characteristic, such as units produced, or pounds or tons produced, barrels produced, or some other physical measure that is appropriate for the volume of output of the primary products.
What are the four purposes of cost allocation?
The four main purposes for allocating costs are to predict the economic effects of planning and control decisions, to motivate managers and employees, to measure the costs of inventory and cost of goods sold, and to justify costs for pricing or reimbursement.
How important is cost allocation while implementing strategies?
Cost allocations are a core component of any IT financial model that aims to express cost in a manner that makes sense to business consumers. It is common to find several strategies in play at once, with strategies evolving over time and becoming more sophisticated when better data becomes available.