Cost Allocation:
Joint Products
and By-products
Key terms:
– Joint products – two or more outputs
produced simultaneously by a single
manufacturing process using common input
– Split-off point – the stage of processing
where joint products are separated.
– Joint cost – costs of processing two or
more products prior to the split-off point;
common cost
– Byproducts– products that result
incidentally from the joint products
- Separable cost – cost after the split-off
point
Joint Product Cost Allocation
Consider the following
example of an oil
refinery.
We will assume only
two products,
gasoline and oil.
Joint Product Cost Allocation
Joint
Product
Costs
Joint
Input
Oil
Joint
Production
Process
Final
Sale
Separate
Processing Costs
Gasoline
Split-Off
Point
Separate
Processing
Separate
Processing
Separate
Processing Costs
Final
Sale
Joint Products and Byproducts
Main Products
Joint Products
Byproducts
High
Low
Sales Value
By-Products
Joint
Costs
Joint
Input
Joint
Production
Process
Major
Product
Major
Product
By-products
Split-Off
Point
Relatively low
value or quantity
when compared to
major products
Explain why joint costs should be
allocated to individual products.
Why Allocate Joint Costs?
• to compute inventory cost and cost of goods sold
• to determine cost reimbursement under contracts
• for insurance settlement computations
• for rate regulation
• for litigation purposes
Approaches to Allocating
Joint Costs
Two basic ways to allocate
joint costs to products are:
Approach 1:
Physical measure
Approach 2:
Market-based
Allocating Joint
Costs
Approach 1
a. Physical-Units
Method
Approach 2
Joint
Product
Costs
a. Relative- SalesValue Method
b. Net-RealizableValue Method
c. Gross margin
Percent method
Physical-Units
Method
Relative-SalesValue Method
Net-RealizableValue Method
Gross margin
Percent Method
Allocation based on a
physical measure of the
joint products at the
split-off point.
Allocation based on
the relative values
of the products at
the split-off point.
Allocation based on
final sales values less
separable processing
costs.
Allocation based on
a constant gross margin
for all products.
Physical-Units Method
Joint conversion
cost = $225,000
Joint material
cost = $275,000
Oil
240,000 gallons
Gasoline
360,000 gallons
Joint
Production
Process
Split-Off
Point
Physical Measure
Method Example
$200,000 joint cost
20,000
pounds A
48,000
pounds B
12,000
pounds C
Product A
$50,000
Product B
$120,000
Product C
$30,000
Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
Allocating Joint Costs Example
1,000 units of A at a
selling price of P100 = P100,000
1,500 units of B at a
selling price of P300 = P450,000
2,000 units of C at a
selling price of P200 = P400,00
Joint processing
cost is P200,000
Splitoff point
Allocating Joint Costs Example
Sales Value
Allocation of
Joint Cost
100 ÷ 950
450 ÷ 950
400 ÷ 950
A
P100,000
B
P450,000
C
P400,000
Total
P950,000
21,053
Gross margin P 78,947
94,737
84,210
P355,263
P315,790
200,000
P750,000
Sales Value at Splitoff
Method Example
Assume all of the units produced
of B and C were sold.
250 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?
Sales Value at Splitoff
Method Example
Product A Revenues: 750 units × P100
Cost of goods sold:
Joint product costs
P21,053
Less ending inventory
P21,053 × 25%
5,263
Gross margin
P75,000
15,790
P59,210
Sales Value at Splitoff
Method Example
Product A:
(P75,000 – P 15,790) ÷ 75,000 = 79%
Product B:
(P450,000 – P94,737) ÷ P450,000 = 79%
Product C:
(P400,000 – $84,210) ÷ P400,000 = 79%
Estimated Net Realizable Value
(NRV) Method Example
Assume that MBA-TEP Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:
1,000 × P120
= P120,000
B1:
1,500 × P330
= P495,000
C1:
2,000 × $210
= P420,000
Estimated Net Realizable Value
(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: P35,000
B1: P50,000
C1: P55,000
What is the estimated net realizable value of each
product at the splitoff point?
Estimated Net Realizable Value
(NRV) Method Example
Product A1: P120,000 – P35,000 = P85,000
Product B1: P495,000 – P50,000 = P445,000
Product C1: P420,000 – P55,000 = P365,000
How much of the joint cost is allocated
to each product?
Estimated Net Realizable Value
(NRV) Method Example
To A1:
85,000 ÷ 895,000 × P200,000 = P18,994
To B1:
445,000 ÷ 895,000 × P200,000 = P99,441
To C1:
365,000 ÷ 895,000 × P200,000 = P81,564
Estimated Net Realizable Value
(NRV) Method Example
A1
B1
C1
Total
Allocated
joint costs
P 18,994
99,442
81,564
P200,000
Separable
costs
P 35,000
50,000
55,000
P140,000
Inventory
costs
P 53,994
149,442
136,564
P340,000
Constant Gross-Margin
Percentage NRV Method
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.
Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
Constant Gross-Margin
Percentage NRV Method
What is the expected final sales value of total
production during the accounting period?
Product A1:
P 120,000
Product B1:
495,000
Product C1:
420,000
Total
P1,035,000
Constant Gross-Margin
Percentage NRV Method
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value
P1,035,000
Deduct joint and separable costs
340,000
Gross margin
P695,000
Gross margin percentage:
P695,000 ÷ P1,035,000 = 67.15%
Constant Gross-Margin
Percentage NRV Method
Step 2:
Deduct the gross margin.
Sales
Gross
Cost of
Value
Margin Goods sold
Product A1: P120,000 P 80,580 P 39,421
Product B1: 495,000 332,392 162,608
Product C1: 420,000 282,030 137,971
Total
P 1,035,000 P695,000 P340,000
Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs
allocated
Product A1: P 39,421 P 35,000 P 4,421
Product B1: 162,608
50,000 112,608
Product C1: 137,971
55,000
82,971
Total
P340,000 P140,000 P200,000
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value
of the joint product
immediately.
It does not anticipate
subsequent management
decisions.
It uses a
meaningful basis.
It is simple.
Choosing a Method
The purpose of the joint-cost allocation is
important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.
Avoiding Joint Cost Allocation
Some companies refrain from allocating joint
costs and instead carry their inventories
at estimated net realizable value.
Explain why joint costs
are irrelevant in a
sell-or-process-further decision.
Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling
Selling
Additional
Units
price
price
costs
1,000 A: P100
A1: P120
P35,000
1,500 B: P300
B1: P330
P50,000
2,000 C: P200
C1: P210
P55,000
Irrelevance of Joint Costs
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue P20,000
– Incremental cost P35,000 = (P15,000)
Product B: Incremental revenue P45,000
– Incremental cost P50,000 = (P5,000)
Product C: Incremental revenue $20,000
– Incremental cost P55,000= (P35,000)
Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sale method delays recognition of
byproducts until the time of their sale.
End of Report
Thank you