- For inventory costing, and cost of goods sold computations for financial accounting purposes.
Example: Cost of goods sold and ending inventory valuation is necessary for reports to shareholders and for the inland revenue service.
- For internal costing and cost of goods sold computations for internal reporting purposes.
Example: These computations are necessary for division profitability analysis.
- Reimbursement under contracts.
Example: A firm produces multiple products or services–and uses the same resources and facilities to produce the products or services. But not all the firm’s products are under the contract. The firm must allocate the cost of these shared facilities or resources to reflect the portion used by the product under the contract.
- Insurance settlement computations.
Example: Where a business with multiple products or services claim losses under an insurance policy and wants to calculate the loss. The insurance company and the insured must agree on the value of the loss.
- Rate regulation. When companies are subject to rate regulation, the allocation of joint costs can be a significant factor in determining the regulated rates.
Example: Crude oil and natural gas are produced out of a common well.
