Joint-Process
Costing
Chapter 9
Joint processes
Process that converts a single input into
multiple outputs
Common
input
Intermediate
product
Intermediate
product
Final
product
Intermediate
product
Final
product
Final
product
Final
product
Joint processes
Split-off point
Input splits into two or more products
Intermediate product
Product that requires more processing before it
can be sold
Final product
Product that is ready for sale
Joint processes
By-product
Minor product resulting from the process
Has some value, can be sold
Scrap
Not really a “product”
Has possible minor value
Recycling
Waste
No value
May incur cost to dispose of it
Joint processes
Joint cost
Cost to operate the process
Further processing cost
Cost incurred beyond the split-off point
Benefits a particular product
Sell as-is or process further?
incremental revenue vs. incremental cost
Allocation of joint costs
Once incurred, joint costs are sunk costs
Why allocate them to resulting products?
Inventory valuation
Contracts
Casualty loss estimation
Etc.
Performance measurement
Only allocated to main products
Allocation of joint costs
Allocation methods
Net realizable value method
Allocated proportionately to products based on
their final sales value minus further processing
costs, if any
Physical measures method
Allocated proportionately based on some physical
measure of the products
Weight, volume, length, etc.
Joint cost allocation example
Himshey Chocolate Company produces
bulk chocolate which can be sold as is, or
processed into bars and “smooches”
Joint costs, including cocoa beans, milk,
sugar, etc. are $1,200,000 to produce
1,000,000 pounds of chocolate
Joint cost allocation example
Output
100,000 pounds of bulk chocolate
600,000 pounds of bars
300,000 pounds of “smooches”
10,000 pounds of cocoa bean shells
Further processing costs and selling prices
Bulk chocolate: $5,000; $150,000
Bars: $60,000; $800,000
Smooches: $45,000; $900,000
Shells: $500; $1,000
Joint cost allocation example
Net realizable value method
Sales revenue
Bulk chocolate
$
150,000 $
Further processing costs
Net realizable value at
split-off
$
Percent of total net
realizable value
Allocation of joint costs
Gross margin
5,000
145,000
$
8.33%
$
100,000
45,000
Bars
800,000
Smooches
$
900,000
60,000
45,000
740,000
$
42.53%
$
510,345
229,655
855,000
$
110,000
$
49.14%
$
589,655
265,345
Total
1,850,000
1,740,000
100.00%
$
$
1,200,000
540,000
Joint cost allocation example
Physical measures method
Pounds of output
Percent of total weight
Allocation of joint costs
Sales revenue
Allocation of joint costs
Bulk chocolate
100,000
10.00%
$
120,000 $
$
150,000
120,000
Further processing costs
Gross margin
$
5,000
25,000
$
$
Bars
Smooches
600,000
300,000
60.00%
30.00%
720,000 $
360,000 $
Total
1,000,000
100.00%
1,200,000
800,000
720,000
$
$
1,850,000
1,200,000
$
110,000
540,000
60,000
20,000
$
$
900,000
360,000
45,000
495,000
Accounting for by-products
Minimal value, so accounting is not
complex
Method 1: Treat NRV of by-product as other
revenue
Method 2: Treat NRV of by-product as a
reduction of the cost of the main products
Allocate the cost reduction on the same basis as
was used to allocate joint costs
Accounting for scrap and waste
Scrap
NRV is usually negative
Disposal cost is usually greater than the sales value
NRV is an overhead cost or part of joint costs
If NRV is positive, treat as by-product
Waste
No sales value
Disposal cost is overhead or part of joint costs