Joint product cost apportionment using physical unit method: introduction; steps; advantages and disadvantages and examples

1.1 Introduction

There are THREE main methods which can be used to apportion the costs. These methods are, namely;

i). Physical unit Basis.

ii). Sales Value Basis.

iii). Sales Value Less Post Separation Cost Basis.

This article only focuses on the physical unit basis or method.

1.2 General Step by Step Guidelines for Apportioning cost using physical method

STEPS 1: Identification of the separation parameter.

Identify the most suitable physical metric or measuring indicator which can easily be used to demarcate the two or “n” number of the joint products. For example, volume, mass, rate of usage of raw materials by each product etc. Sometimes referred to as weights (W).

STEP 2: Compute the total cost for each product using the physical unit basis model/formula

This goal can be achieved by

STEP 3: Determination of sales value

Since the aim of the whole process of separation of those products is to determine the profits associated with that particular product, then sales value is computed at this stage. With the specific selling price for each product, then determine the sales value as supposedly.

STEP 4: Determine the profit for each product.

After determining the sales value for each product, subtract the apportioned cost for that particular product from the corresponding sales value for each product.

Formula: Profit=Sales-Apportioned Cost for each product. This objective can be achieved by use of profit statement.

1.2.1 Example

New York City fruit producers co. ltd deals with the production of THREE fruit juices, namely, Feelanga Fair juice, Feelanga Good juice and Feelanga Best juice. In the month of June, the company incurred a total cost of $240,000 to produce 1,200 litres of the three juices.

Required

Using physical Unit Basis methods of cost apportionment, determine the profitability level of each juice category

Solution

Metric used to separate is number of litres

Advantages of physical unit method in joint product costing

The following are some of the advantages of using physical unit method of valuing joint products;

1. Less data is needed to compute the value of importance. This is because only joint cost and physical distribution information of is required.
2. Suitable method for products which can be physically measured such as litres, kilograms and kilometers, weight, volume etc.
3. Simple to apply-Physical Measure of output is easy to be utilized by any manufacturer.
4. Applicable in a market environment with volatile market prices. If the market prices are sensitive to forces of demand and supply, then sales value method is inappropriate and therefore we use the physical unit method.
5. Suitable in a case of significant processing occurs between the split-off point and the first point of marketing the final product. This approach is common especially where the forces of demand and supply do not apply.

Disadvantages of physical unit method in joint product costing

The following are some of the disadvantages of using physical unit method of valuing joint products;

1. Not suitable where the units produced are not uniform. Where output cannot be expressed in terms of the same physical unit measurement such as litres or kilograms is not applicable.
2. No correlation between the physical measurement and revenue generation of the product. That is, the method does not factor in the ability of the product to generate sales. In other words, the method does not consider the profitability level associated to each product.
3. Illogical method-this method assumes that all units produced are equally desirable and valuable. This is not true for sometimes there are rejects being realized.