Sometimes, it happens that during the same production activity, more than one product get created. Under this case, we have to cost each product separately in order to charge the right amount from customer to earn the profit. This is quite common in oil refining company where during the same production activity, diesel, petrol, propane and kerosene gets created. As you know crude oil is extracted by drilling the oil field and then refining involves a huge cost. Here we have to apportion these cost into various products.
Apportionment/ Allocation of Joint Cost
There are various methods for allocating the joint cost of the products. Some of them are as follows:Joint
NRV (Net realisable value) – in this method, we identify the selling price of each product and then deduct any cost, we have to incur to make the sale. Over the basis of NRV, we allocate the joint cost to each product for costing purposes.
Physical Quantity – All the products are weighted separately and then the joint cost is divided among the products over the basis of physical quantity.
Sales price – Management account may use the sale price of each product to allocate the joint cost of the product.