1. Cost Allocation: Joint Products and Byproducts
CHAPTER 16
Cost Allocation:
Joint Products and Byproducts

2. 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

3. Joint Cost Terminology
Categories of Joint Process Outputs:
Outputs with a positive sales value
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

4. 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

5. Joint Cost Terminology
Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs

6. Joint Process Flowchart

7. 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

8. Joint Cost Allocation Methods
Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc.
Market-Based – allocate using market-derived data (dollars):
Sales value at splitoff
Net Realizable Value (NRV)
Constant Gross-Margin percentage NRV

9. 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

10. 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

11. Sales Value at Splitoff Method
Uses the sales value of the entire production of the accounting period to calculate allocation percentage
Ignores inventories

12. Sales Value at Splitoff Example

13. 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

14. NRV Example

15. 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

16. Constant Gross Margin NRV Method Example

17. 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 Gross-Margin Method could be used
Despite this, some firms choose not to allocate joint costs at all

18. 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

19. Sell-or-Process Further Flowchart

20. 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