Cost Allocation:
Joint Products and Byproducts
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Joint Cost Terminology
 Joint costs—costs of a single production process that
yields multiple products simultaneously
 Splitoff point—the place in a joint production
process where two or more products become
separately identifiable
 Separable costs—all costs incurred beyond the
splitoff point that are assignable to each of the nowidentifiable specific products
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Joint Cost Terminology

Categories of joint process outputs:
Outputs with a positive sales value
2. Outputs with a zero sales value
1.

Product—any output with a positive sales value, or
an output that enables a firm to avoid incurring
costs

Value can be high or low
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Joint Cost Terminology
 Main product—output of a joint production process
that yields one product with a high sales value
compared to the sales values of the other outputs
 Joint products—outputs of a joint production process
that yields two or more products with a high sales
value compared to the sales values of any other
outputs
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Joint Cost Terminology
 Byproducts—outputs of a joint production process
that have low sales values compare to the sales values
of the other outputs
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Examples of Joint Cost Situations
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Joint Process Overview
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
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Reasons for Allocating Joint Costs
 Required for GAAP and taxation purposes
 Computation of inventoriable costs and cost of goods
sold for financial accounting and tax reporting
 Internal analysis of divisional profitability
 Cost-based contracting
 Insurance settlements
 Required for rate and price regulations
 Litigation
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Joint Cost Allocation Methods

Market-based—allocate using market-derived data
(dollars):
Sales value at splitoff
2. Net realizable value (NRV)
3. Constant gross-margin percentage NRV
1.

Physical measures—allocate using tangible
attributes of the products, such as pounds, gallons,
barrels, and so on
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Sales Value at Splitoff Method
 Uses the sales value of the entire production of the
accounting period to calculate allocation percentage
 Ignores inventories
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Joint Cost Illustration Data
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Joint Cost Illustration Overview
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Sales Value at Splitoff Illustration
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Net Realizable Value Method
 Allocates joint costs to joint products on the basis of
relative NRV of total production of the joint products
 NRV = Final Sales Value – Separable Costs
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Net Realizable Value Method
Overview
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Net Realizable Value Method
Illustrated
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Net Realizable Value Method
Illustrated
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Constant Gross Margin NRV Method
 Allocates joint costs to joint products in a way that the
overall gross-margin percentage is identical for the
individual products.
 Joint costs are calculated as a residual amount.
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Constant Gross Margin NRV Illustrated
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Physical-Measure Method
 Allocates joint costs to joint products on the basis of
the relative weight, volume, or other physical measure
at the splitoff point of total production of the products
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Physical Measures Illustration
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Method Selection
 If selling price at splitoff is available, use the sales
value at splitoff method.
 If selling price at splitoff is not available, use the
NRV method.
 If simplicity is the primary consideration, physicalmeasures method or the constant gross-margin
method could be used.
 Despite this, some firms choose not to allocate joint
costs at all.
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Sell-or-Process Further Decisions
 In sell-or-process further decisions, joint costs are
irrelevant. Joint products have been produced, and a
prospective decision must be made: to sell
immediately or process further and sell later.
 Joint costs are sunk costs.
 Don’t assume all separable costs in joint-cost
allocations are always incremental costs.
 Some separable costs may be fixed costs.
 Separable costs need to be evaluated for relevance
individually .
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Sell-or-Process Further Flowchart
Final
Product
#1
Joint Product #1
Further Processing Dept 1
Single Production
Process
Final
Product
#2
Joint Product #2
Further Processing Dept 2
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Byproducts
 Two methods for accounting for byproducts
 Production method—recognizes byproduct inventory
as it is created, and sales and costs at the time of sale
 Sales method—recognizes no byproduct inventory,
and recognizes only sales at the time of sales:
byproduct costs are not tracked separately
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Byproducts Illustration Overview
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Comparative Income Statements for
Accounting for Byproducts
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