UNITRON CORPORATION CASE STUDY ANALYSIS

Case Problem: “Joint Cost Dilemma”

Joint Cost: Joint Costs are the costs incurred while producing two or more products and where
the allocation of costs to the produced products is not possible. It is the total operation costs
incurred before split-off point (stage of the common production process where joint products are
separated).
The total production costs of multiple products comprise of both joint costs and individual product
costs. Though individual product costs are identifiable with respective to the product, the same is
not true with joint costs and hence joint costs requires allocation or assignment of costs to
individual products. Different methods are used to allocate costs incurred in such conditions which
are broadly classified as
 Engineering Method (Net Realizable Value Method)
 Non-Engineering Methods (Sales Value Method)

In Engineering method, cost allocation is done based on their relative physical measure like
weight, volume etc.
In Non-Engineering method, cost allocation is done based on the sales and market share of the
product (Higher the market share/sales, higher the costs assigned)

Example
Consider production of Petrol. While processing/refining crude oil (Petroleum), apart from Petrol,
products like Diesel, Gasoline, Kerosene, Asphalt, Lubricating oils, Petrochemicals etc. are
produced.
Joint costs are incurred in producing these products and it’s impossible to allocate costs incurred
to individual products but separate costs may be calculated after split-off point (stage after which
different refining processes are to be followed to obtain a particular product). Here, joint costs are
allocated based upon the proportion of their quantity and sales value.

SEPARATE COSTS
PETROL
JOINT COST SPLIT-OFF POINT
DIESEL
PROCESSING CRUDE OIL REFINED PETROLEUM
KEROSENE
GASOLINE

Net Realizable Value Method: The amount a company should expect to receive once it sells or
dispose of an Asset, minus costs that stem from its sale or disposal.
Example: ABC ltd. is rid of an outdated computer and expect to sell them at $10000 to a local
buyer but it must pay $500 to ship and another $50 to complete a paper work. Therefore, computer
Net Realizable Value is – (10000 – 500 – 50) = $9450.
NRV is a common way to assist asset worth in inventory account. Many company used it to
determine that how much their account receivable be expected to become cash. Therefore, goods
don’t get over or under valued.

The relative sales value method is a technique used to allocate joint costs based on the prices at
which products will be sold. For example, a production process incurs $100 of costs in order to
create two products, one of which (Product A) will sell for $400 and the other (Product B) for
$100.

Under this method, 80% of the $100 joint cost is assigned to Product A. The calculation is:
$100 joint cost x ($400 ÷ ($400+$100)) = $80

The remaining 20% of the $100 joint cost is assigned to Product B. The calculation is:
$100 joint cost x ($100 ÷ ($400+$100)) = $20

The resulting cost allocation equitably spreads costs across products, resulting in roughly the same
margins for each product. However, product margins may still vary, depending on the costs
incurred by each product after the allocation point.