Definition: Joint costs are costs that are incurred from buying or producing two products at the same time. In cost accounting terms, joint costs have the same cost object.
What Does Join Cost Mean?
Manufacturers incur many costs in the production process. It is the cost accountant’s job to trace these costs back to a certain product or process (cost object) during production. Some costs cannot be traced back to a single cost object. Some costs benefit more than one product or process in the manufacturing process. These costs are called joint costs. Almost all manufacturers incur joint costs at some level the manufacturing process.
Take shipping costs for example. Often times manufacturers will ship a product to customers with advertisements or catalogs in the package. The shipping cost benefits both the product as well as the advertising campaign. Even though the cost of shipping the catalog might be insignificant compared to the cost of shipping the product, the cost is still shared between the two departments.
Managers can choose to split these joint costs up however they want to. They could allocate all of the joint costs to shipping goods costs or advertising costs. It doesn’t matter how managers choose to allocate the costs internally.
If the company is issuing GAAP based financial statements, on the other hand, the joint costs must be allocated to the products or departments benefiting from the costs either on a physical basis or a value basis. Most of the time a physical basis is used to allocate joint costs because it is less subjective than the value basis.