Chapter 9
Joint Product and By-Product
Costing
Key Topics:
– Joint processes and common costs
• Main products and byproducts
– Allocation methods
– Choosing a method
– Using joint cost allocation information
• Decisions to process further
• Choosing a method
• Uses of joint costing information
Joint Processes and
Common Costs
• Jointly produce more than one product
• Joint (common) costs cannot be traced
to individual products
• Joint production ends at the split-off
point
• Individual products might or might not be
processed beyond the split-off point
Main Products and
Byproducts
Allocation Methods
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•
•
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Physical output
Sales at split-off point
Net realizable value
Constant gross margin NRV
Physical Output Method
• Allocate joint costs in proportion to
the physical output for each main
product
• Examples of physical measures:
meters, pounds, gallons
• All main products must be
expressed in the same physical
measure
Sales at Split-Off Method
• Allocate joint costs in proportion to the
sales value for each main product at the
point where joint production ends
• Not always possible to measure sales
value at the split-off point
Net Realizable Value Method
• Allocate joint costs in proportion to the
net realizable value for each main
product, taking into account the final
selling price and separable costs
• Same as the sales value at split-off
method if there is no additional
production beyond the split-off point
Constant Gross Margin NRV
Method
• Allocate joint costs so that the gross
margin for all main products is the same
– First, calculate combined gross
margin for all main products
– Second, calculate joint cost
allocation that will result in the same
gross margin for all main products,
taking into account the final selling
price and separable costs
Allocating Joint Costs
The Paint Palette Company produces two products:
premium and regular paint. Joint costs are $10,000
per batch of 1,000 gallons, 30% premium and 70%
regular. If Paint Pallet sold the products at split-off, it
would receive $10.00 per gallon for premium and
$5.00 per gallon for regular.
When the paint is processed further, the separable
cost per gallon for premium is $4.00 and for regular is
$1.00. Price per gallon after further processing for
premium is $20.00 per gallon and for regular is
$10.00 per gallon.
Allocating Joint Costs
•Allocate the joint costs using the
following methods:
–Physical units
–Sales at split off
–NRV
–Constant gross margin
Decisions About Processing
Further
Regular paint can be processed further into a
paint that dries extremely quickly. The new
selling price is $22 per gallon and separable costs
increase to $12 per gallon.
• What is the contribution of the new product?
• Should regular paint be processed further?
Choosing a Method
Major Goal
Avoid distortion of individual main
product values
Uses of Joint Cost Information
• Financial statements
• Income tax returns
• Government regulatory reports
• Other external reports
Estimations (Uncertainties) in
Allocations
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•
•
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Physical quantities
Sales value at split-off point
Sales prices if processed further
Separable costs
• Joint costs are irrelevant for many types
of decisions