Get to know the vital terms of Logistics and Supply Chain Management.
Joint costs are indirect costs incurred by producing two or more products together in the same process. These costs are shared among several products and cannot be traced specifically to a particular product or service. These are common because each product within the product variety gets an equivalent share of the cost. Usually, joint costs are incurred by manufacturers or producers producing multiple items together.
Common costs arise when there are two or more different products that can be produced from one single process. The expenses incurred usually go to all products that are manufactured, and as a result, it is almost impossible to assign common costs to a product.
Joint costs characteristically exist in such industries as oil refining or meat processing. Crude oil refinement, for instance, produces gasoline, diesel, and a variety of other products from the same raw material and process. Thus joint costs are defined to be those costs incurred up to the point where the products can be identified separately.
Since joint costs are distributed among many products, it becomes a significant problem to allocate them fairly among the items. It is essential to have allocation methods to distribute the cost fairly among various products.
The costs can be allocated based on the sales value of the individual products in the market. Under this method, the higher the sales values of the items, the more would be their fair share of joint cost.
Costs are shared on the physical basis of weight or volume units by products manufactured together.
Joint costs are one major concern for any manufacturer producing many different items in one production. Cost allocation in such cases requires some appropriate method for making the distribution fairly consistent with the benefits achieved by each of the products. It helps in keeping business accounts balanced and effectively managing costs.