Cost Allocation: Joint Products
and Byproducts
Chapter 16
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Learning Objective 1
Identify the splitoff point(s)
in a joint-cost situation.
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Joint-Cost Basics
Joint costs
Joint products
Byproduct
Splitoff point
Separable costs
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Joint-Cost Basics
Raw milk
Cream
Liquid
Skim
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Joint-Cost Basics
Coal
Gas
Benzyl
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Tar
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Learning Objective 2
Distinguish joint products
from byproducts.
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Joint Products and Byproducts
Main Products
Joint Products
Byproducts
High
Low
Sales Value
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Learning Objective 3
Explain why joint costs should be
allocated to individual products.
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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
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Learning Objective 4
Allocate joint costs using
four different methods.
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Approaches to Allocating
Joint Costs
Two basic ways to allocate
joint costs to products are:
Approach 1:
Market based
Approach 2:
Physical measure
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Approach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
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Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
10,500 units of B at a
selling price of $30 = $315,000
11,500 units of C at a
selling price of $20 = $230,00
Joint processing
cost is $200,000
Splitoff point
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Allocating Joint Costs Example
Sales Value
Allocation of
Joint Cost
100 ÷ 645
315 ÷ 645
230 ÷ 645
A
$100,000
B
$315,000
C
$230,000
Total
$645,000
31,008
Gross margin $ 68,992
97,674
71,318
$217,326
$158,682
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200,000
$445,000
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Sales Value at Splitoff
Method Example
Assume all of the units produced
of B and C were sold.
2,500 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?
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Sales Value at Splitoff
Method Example
Product A Revenues: 7,500 units × $10.00
Cost of goods sold:
Joint product costs
$31,008
Less ending inventory
$31,008 × 25%
7,752
Gross margin
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$75,000
23,256
$51,744
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Sales Value at Splitoff
Method Example
Product A:
($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:
($315,000 – $97,674) ÷ $315,000 = 69%
Product C:
($230,000 – $71,318) ÷ $230,000 = 69%
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Estimated Net Realizable Value
(NRV) Method Example
Assume that Oklahoma Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:
B1:
C1:
10,000 × $12.00 10,500 × $33.00 11,500 × $21.00
= $120,000
= $346,500
= $241,500
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Estimated Net Realizable Value
(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000
B1: $46,500
C1: $51,500
What is the estimated net realizable value of each
product at the splitoff point?
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Estimated Net Realizable Value
(NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000
Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocated
to each product?
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Estimated Net Realizable Value
(NRV) Method Example
To A1:
85 ÷ 575 × $200,000 = $29,565
To B1:
300 ÷ 575 × $200,000 = $104,348
To C1:
190 ÷ 575 × $200,000 = $66,087
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Estimated Net Realizable Value
(NRV) Method Example
A1
B1
C1
Total
Allocated
joint costs
$ 29,565
104,348
66,087
$200,000
Separable
costs
$ 35,000
46,500
51,500
$133,000
Inventory
costs
$ 64,565
150,848
117,587
$333,000
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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.
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Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
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Constant Gross-Margin
Percentage NRV Method
What is the expected final sales value of total
production during the accounting period?
Product A1:
$120,000
Product B1:
346,500
Product C1:
241,500
Total
$708,000
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Constant Gross-Margin
Percentage NRV Method
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value
$708,000
Deduct joint and separable costs
333,000
Gross margin
$375,000
Gross margin percentage:
$375,000 ÷ $708,000 = 52.966%
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Constant Gross-Margin
Percentage NRV Method
Step 2:
Deduct the gross margin.
Sales
Gross
Cost of
Value
Margin Goods sold
Product A1: $120,000 $ 63,559 $ 56,441
Product B1: 346,500 183,527 162,973
Product C1: 241,500 127,913 113,587
Total
$708,000 $375,000 $333,000
($1 rounding)
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Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs
allocated
Product A1: $ 56,441 $ 35,000 $ 21,441
Product B1: 162,973
46,500 116,473
Product C1: 113,587
51,500
62,087
Total
$333,000 $133,000 $200,000
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Approach 2: 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
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Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
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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.
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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.
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Avoiding Joint Cost Allocation
Some companies refrain from allocating joint
costs and instead carry their inventories
at estimated net realizable value.
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Learning Objective 6
Explain why joint costs
are irrelevant in a
sell-or-process-further decision.
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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
10,000
A: $10
A1: $12
$35,000
10,500
B: $30
B1: $33
$46,500
11,500
C: $20
C1: $21
$51,500
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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 $20,000
– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500
– Incremental cost $46,500 = ($15,000)
Product C: Incremental revenue $11,500
– Incremental cost $51,500 = ($40,000)
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Learning Objective 7
Account for byproducts
using two different methods.
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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.
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Accounting for Byproducts
Example
Main Products Byproducts
(Yards)
(Yards)
Production
1,000
400
Sales
800
300
Ending inventory
200
100
Sales price
$13/yard
$1.00/yard
No beginning finished goods inventory
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Accounting for Byproducts
Example
Joint production costs for joint
(main) products and byproducts:
Material
$2,000
Manufacturing labor
3,000
Manufacturing overhead
4,000
Total production cost
$9,000
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Accounting for Byproducts
Method A
Method A: The production method
What is the value of ending inventory
of joint (main) products?
$9,000 total production cost
– $400 net realizable value of the byproduct
= $8,600 net production cost for the joint products
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Accounting for Byproducts
Method A
200 ÷ 1,000 × $8,600 = $1,720 is the value
assigned to the 200 yards in ending inventory.
What is the cost of goods sold?
Joint production costs
Less byproduct revenue
Less main product inventory
Cost of goods sold
$9,000
400
1,720
$6,880
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Accounting for Byproducts
Method A
Income Statement (Method A)
Revenues: (800 yards × $13) $10,400
Cost of goods sold
6,880
Gross margin
$ 3,520
What is the gross margin percentage?
$3,520 ÷ $10,400 = 33.85%
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Accounting for Byproducts
Method A
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $8,600 = $1,720
Byproduct: 100 × $1.00 = $100
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Journal Entries Method A
Work in Process
2,000
Accounts Payable
2,000
To record direct materials purchased and used
in production
Work in Process
7,000
Various Accounts
7,000
To record conversion costs in the joint process
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Journal Entries Method A
Byproduct Inventory
400
Finished Goods
8,600
Work in Process
9,000
To record cost of goods completed
Cost of Goods Sold
6,880
Finished Goods
6,880
To record the cost of the main product sold
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Journal Entries Method A
Cash or Accounts Receivable 10,400
Revenues
10,400
To record the sale of the main product
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Accounting for Byproducts
Method B
Method B: The sale method
What is the value of ending inventory of
joint (main) products?
200 ÷ 1,000 × $9,000 = $1,800
No value is assigned to the 400 yards of
byproducts at the time of production.
The $300 resulting from the sale of
byproducts is reported as revenues.
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Accounting for Byproducts
Method B
Income Statement (Method B)
Revenues: Main product (800 × $13)
Byproducts sold
Total revenues
Cost of goods sold:
Joint production costs
9,000
Less main product inventory 1,800
Gross margin
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$10,400
300
$10,700
$ 7,200
$ 3,200
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Accounting for Byproducts
Method B
What is the gross margin percentage?
$3,200 ÷ $10,700 = 29.91%
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $9,000 = $1,800
By-product: -0-
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Journal Entries Method B
Work in Process
2,000
Accounts Payable
2,000
To record direct materials purchased and used
in production
Work in Process
7,000
Various Accounts
7,000
To record conversion costs in the joint process
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Journal Entries Method B
Finished Goods
9,000
Work in Process
9,000
To record cost of goods completed
Cost of Goods Sold
7,200
Finished Goods
7,200
To record the cost of the main product sold
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Journal Entries Method B
Cash or Accounts Receivable 10,400
Revenues
10,400
To record the sale of the main product
Cash or Accounts Receivable
300
Revenues
300
To record the sale of the byproduct
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End of Chapter 16
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