Split-Off Point: Allocating Joint Costs

How can we allocate joint costs to each product using the physical volume method and sales value at the split-off method?

Explore the allocation of joint costs to Products X, Y, and Z based on their units and selling price per unit.

Allocation of Joint Costs:

1. For Product X using the physical volume method: SAR 51,402.80

2. For Product Y using the physical volume method: SAR 36,915.89

3. For Product Z using the physical volume method: SAR 21,681.31

4. For Product X using the sales value at the split-off method: SAR 59,196.23

5. For Product Y using the sales value at the split-off method: SAR 39,096.45

6. For Product Z using the sales value at the split-off method: SAR 21,707.32

Allocating joint costs is an essential part of production costing, especially when dealing with multiple products. In the case of SFC Company and its wooden products – X, Y, and Z, the joint costs can be efficiently distributed using two methods: the physical volume method and sales value at the split-off method.

Physical Volume Method:

With the physical volume method, the joint costs are allocated based on the number of units produced for each product. By dividing the joint costs by the total number of units for all three products, we can determine the allocation for each product. This method ensures a fair distribution of costs according to production output.

Calculation: Joint costs allocation = (Units produced / Total units) * Total joint costs

1. For Product X: (5,000 / 10,700) * SAR 110,000 = SAR 51,402.80

2. For Product Y: (3,500 / 10,700) * SAR 110,000 = SAR 36,915.89

3. For Product Z: (2,200 / 10,700) * SAR 110,000 = SAR 21,681.31

Sales Value at the Split-Off Method:

In contrast, the sales value at the split-off method allocates joint costs based on the selling price per unit of each product. By multiplying the selling price per unit by the number of units produced and dividing it by the sum of the products' total selling price, the allocation can be determined.

Calculation: Joint costs allocation = (Selling price per unit * Units produced) / (Total revenue) * Total joint costs

1. For Product X: (SAR 150 * 5,000) / (SAR 150 * 5,000 + SAR 125 * 3,500 + SAR 100 * 2,200) * SAR 110,000 = SAR 59,196.23

2. For Product Y: (SAR 125 * 3,500) / (SAR 150 * 5,000 + SAR 125 * 3,500 + SAR 100 * 2,200) * SAR 110,000 = SAR 39,096.45

3. For Product Z: (SAR 100 * 2,200) / (SAR 150 * 5,000 + SAR 125 * 3,500 + SAR 100 * 2,200) * SAR 110,000 = SAR 21,707.32

Both methods offer insights into different ways to allocate joint costs, allowing companies to make informed decisions regarding product profitability and pricing strategies.