Joint Cost – result of an event that results in
more than one product or service
simultaneously.
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Joint costs are incurred prior to the
splitoff.
The focus is accumulating costs
incurred on the joint products.
Joint costs are the costs of a production
process that yields multiple products
simultaneously.
Joint costs are allocated for reporting to
tax authorities.
Litigation may be a reason that joint
costs are allocated to individual
products.
Joint costs are allocated to main
products, but not to by-products.
Allocating joint costs based upon a
physical measure ignores the revenuegenerating ability of individual products.
Physical Measure and Monetary
Allocation
Joint costs are allocated to joint
products to obtain a cost per unit for
financial statement purposes.
Joint cost allocation is useful for
product costing.
Joint costs are useful for determining
inventory cost for accounting purposes.
Separable Cost – all costs incurred beyond the
splitoff point that are assignable to one or more
individual products.
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Separable costs are incurred beyond
the splitoff point that are assignable to
each of the specific products identified
at the splitoff point.
Separable costs include manufacturing,
marketing, distribution, and other costs.
Joint Costing – costs are assigned to individual
products as disassembly of the product occurs
and a single production process yields two or
more products.
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Focus on allocating costs to individual
products at the splitoff point.
Splitoff Point – is the juncture in a joint
production process when two or more products
became separately identifiable.
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At or beyond the splitoff point, decisions
relating to the sale or further processing
of each identifiable product can be made
independently of decisions about the
other products.
Main Products and Byproducts – when a
single manufacturing process yields two
products, one of which has a relatively high
sales value compared to the other.
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Differentiated by the amount of total
sales value.
Byproduct increases in sales values due
to a new application.
Main product becomes technologically
obsolete.
Byproduct loses its market due to a new
invention.
Product classifications may change over
time.
Joint Products – when a joint production
process yields two or more products with high
total sales values.
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The juncture in a joint production
process when two products become
separable is the splitoff point.
If the value of a joint product drops
significantly, it could also be viewed as a
byproduct.
Physical Measures – allocate using tangible
attributes of the products, such as pounds,
gallons, barrels, etc.
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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.
Market-Based Measures – allocate using
market-derived data (dollars)
Methods of allocating costs using market-based
data:
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Sales value at splitoff method
Estimated net realizable value method
The constant gross-margin percentage
method
Sales Value at Splitoff Method - Uses the
sales value of the entire production of the
accounting period to calculate allocation
percentage, ignores inventories.
Net Realizable Value Method - Allocates joint
costs to joint products on the basis of relative
NRV of total production of the joint products.
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NRV = Final Sales Value – Separable
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.
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Joint Costs are calculated as a residual
amount
Method Selection:
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If selling price at splitoff is available,
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If selling price at splitoff is not available,
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use the NRV Method
Physical-Measures Method or
the Constant Gross-Margin
Method could be used
Joint Costs are sunk
Separable Costs need to be evaluated
for relevance individually
Byproducts – products with a relatively low
sales value.
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Main product - When one product has a high
total sales value compared with the total sales
value of other products of the process. Ex.
timber processed into lumber
Joint product - When a joint production process
yields two or more products with high total sales
value compared with the total sales value of
other products. Ex. crude oil processed into
gasoline and kerosene
Byproduct - Products of a joint production
process that have low total sales value
compared with the total sales value of the main
product or joint products. Ex. woodchips created
when timber processed into lumber
Two methods for accounting for byproducts
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The products of a joint production
process that have low total sales values
compared with the total sales value of
the main product are called byproducts.
Production Method
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recognizes byproduct inventory
as it is created, and sales and
costs at the time of sale
Sales Method
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Despite this, some firms choose not to
allocate joint costs at all!
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
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Not all products yielded from joint product
processing have some positive value to the firm.
If simplicity is the primary consideration,
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use the Sales Value at Splitoff
Method
Outputs with a negative sales value are added to
a joint production cost and allocated to joint or
main products.
recognizes no byproduct
inventory, and recognizes only
sales at the time of sales:
byproduct costs are not tracked
separately
Reason to allocate joint cost:
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rate regulation requirements, if
applicable
cost of goods sold computations
insurance settlement cost information
requirements
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.
The net realizable value approach is used to
account for scrap and by-products when the net
realizable value is significant.
Monetary allocation measures recognize the
revenue generating ability of each product in a
joint process.
Joint Process - a single process in which one
product cannot be manufactured without
producing others.
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Joint Products
Byproducts
Scrap
Two incidental products of a joint process are
byproduct and scrap.
If a company obtains two salable products from
the refining of one ore, the refining process
should be accounted for as a joint process.
3 monetary measures used to allocate Joint
Cost to Products are:
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sales value at split-off
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net realizable value at split-off
• approximated net realizable value at
split-off
Under the realized value approach, no value is
recognized for by-products or scrap until they
are actually sold.
Categories of Joint Process Outputs:
1. Outputs with a positive sales value.
2. Outputs with a zero sales value.
Not-for-profit entities are required to allocate
joint costs among fund-raising, program, and
administrative functions.
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.
Net realizable value is considered to be the best
measure of the expected contribution of each
product to the coverage of joint costs.
The net realizable value approach requires that
the net realizable value of by-products and scrap
be treated as a reduction in joint costs allocated
to primary products.
If incremental revenues beyond split-off exceed
incremental costs, a product should be
processed further.
If incremental revenues beyond split-off are less
than incremental costs, a product should be sold
at the split-off point.
Net realizable value equals product sales
revenue at split-off minus any costs necessary to
prepare and dispose of the product.
Reasons to 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