CHAPTER 16
Cost Allocation:
Joint Products and Byproducts
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 now-identifiable specific
products
Joint Cost Terminology
•
Categories of Joint Process Outputs:
1. Outputs with a positive sales value
2. Outputs with a zero sales value
•
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
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
Joint Cost Terminology
• Byproducts
– outputs of a joint production process that have
low sales values compare to the sales values of
the other outputs
Joint Process Flowchart
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
Reasons for Allocating Joint Costs
• Required for GAAP and taxation purposes
• Cost values may be used for evaluation
purposes
–
–
–
–
Cost-based contracting
Insurance settlements
Required by regulators
Litigation
Joint Cost Allocation Methods
•
Physical Measures
– allocate using tangible attributes of the
products, such as pounds, gallons, barrels,
etc.
•
Market-Based Measures – allocate
using market-derived data (dollars):
– Sales value at splitoff
– Net Realizable Value (NRV)
– Constant Gross-Margin percentage NRV
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
Physical-Measure Example
• Consider the following example of two products
arising out of one joint process costing $500
• Assumes 1 gallon of Cream is equal to 1 gallon of
Skim-milk
Gallons
Cream
25
Skim-milk
75
Total
100
Product %
Total Volume
25%
75%
100%
Joint
Joint
Costs
Costs Allocated
$ 500 $ 125
500
375
$ 500
Sales Value at Splitoff Method
• Uses the sales value of the entire
production of the accounting period to
calculate allocation percentage
• Ignores inventories
Sales Value at Splitoff Example
Cream Skim-milk
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
$ 1,300
$
800
$ 2,100
Allocation Based on % of
Total Sales (rounded)
Joint Costs ($500) Allocated:
Joint Cost X Allocation %
Total
61.9%
$
310 $
38.1%
190
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
NRV Example
Cream Skim-milk
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
Total
$ 1,300
$
800
$ 2,100
Less: Separable Costs
900
200
1,100
NRV
400
600
1,000
NRV Weighting:
Product NRV ÷ Total NRV
40%
60%
Joint Costs
500
500
$ 200 $
300
Joint Costs Allocated
NRV Weighting X Joint Costs
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
Constant Gross Margin NRV Method
Example
Cream Skim-milk
Final Sales Value of Production
Cream: 25 gals@ $50/gal
Skim-milk: 75 gals@ $10/gal
Total
Total
$ 1,300
$ 800
$ 2,100
Less: Separable Costs
1,100
NRV
1,000
Joint Costs
500
Gross Profit
$
Gross Profit % of Sales Value (rounded)
23.8%
Cream Skim-milk
Sales Values
500
$ 1,300 $
Total
800 $ 2,100
Less Gross Margin @ 23.8%(rounded)
310
190
500
Total Product Costs
990
610
1600
Less Separable Costs
900
200
1100
90 $
410 $
500
Joint Costs Allocated
$
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,
– Physical-Measures Method or the Constant GrossMargin Method could be used
• Despite this, some firms choose not to allocate joint
costs at all!
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
– Separable Costs need to be evaluated for
relevance individually
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
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