1. Joint-Process Costing9
Joint-Process Costing

2. Joint Product Processes
A number of products are produced from a single raw material input.
Product 1
Single Input
Product 2
Product 3

3. Joint Product Processes
Concept: in some industries, a number of products are produced from a single raw material input.
Key terms:
Joint products – products resulting from a process with a common input.
Split-off point – the stage of processing where joint products are separated.
Joint costs – costs of processing joint products prior to the split-off point.
Final product – ready for sale without further processing.
Intermediate product – requires further processing before sale.

4. Joint Product Processes
Consider the following example of an oil refinery.
We will assume only two products, gasoline and oil.

5. Joint Product Processes
Oil
Gasoline
Intermediate products
Final
Sale
Separate
Processing
Separate Processing Costs
Final products
Joint
Costs
Common
Production
Process
Joint
Input
Split-Off
Point

6. Learning Objective 1

7. The Decision Challenge: Which Joint Products to Produce
Identify final products possible from the joint process.
Forecast the sales price of each final product.
Estimate costs to further process joint products into final products.
The usual objective in the production of joint products is to maximize profits.
Choose the set of products with the overall maximum profit.

8. Learning Objective 2

9. Decision to Sell Products at Split Off or Process Them Further
Joint product costs incurred prior to the split-off point are sunk costs — not affected by a decision to process further after the split-off point.
A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs.
Value is added only if the incremental value from processing exceeds the incremental processing costs.

10. Decision to Sell Products at Split Off or Process Them Further
Sawmill, Inc. cuts logs from which unfinished lumber and wood chips are the joint products.
Unfinished lumber is sold “as is” or processed further into finished lumber.
Wood chips can also be sold “as is” for landscaping or processed further into 4 × 8 composition boards.

11. Decision to Sell Products at Split Off or Process Them Further
Data about Sawmill’s joint products includes:

12. Decision to Sell Products at Split Off or Process Them Further

13. Decision to Sell Products at Split Off or Process Them Further
Should we process the lumber
further and sell the wood chips “as is?”

14. Learning Objective 3

15. Reasons for Allocating Joint Costs
To measure performance based on earnings
To value inventory for financial statements
To estimate casualty losses
To determine and respond to rate regulation
To specify and resolve contractual interests and obligations

16. Learning Objective 4

17. Joint Cost Allocation Methods
Joint costs are allocated based on a proportional measure (weight, volume, etc.) of the joint products at the split-off point.
Physical measure method
Monetary measure method
Joint costs are allocated based on the relative values of the products at the split-off point.

18. Allocating Joint Costs
Allocation
Allocation
If we allocate the joint costs of raising an animal to the two products based on weight, which product would receive the largest cost allocation?
Hamburger, because there is more of it.

19. Allocating Joint Costs
Allocation
Allocation
If we allocate the joint costs of raising the animal to the two products based on sales value, would the steak receive a greater portion of the cost allocation?
Yes, steak has a higher sales value than hamburger.

20. Joint Cost Allocation Methods
Let’s look at an example illustrating the joint cost allocation methods.

21. Monetary Measure Method Net Realizable Value
If products require further processing beyond the split-off point before they are marketable, it may be necessary to estimate the net realizable value (NRV) at the split-off point.
NRV
Final
Sales
Value
Added Processing Costs – =

22. Monetary Measure Method Net Realizable Value
Intermediate products
Final products
Joint
costs
Separate
processing
Oil
Final
sale
Common
production
process
Separate processing costs
Joint
input
Gasoline
Separate
processing
Final
sale
Split-off
point
Separate processing costs

23. Monetary Measure Method Net Realizable Value
Joint conversion cost = $225,000
Separate
processing
Sales
value $500,000
Oil
Common
production
process
Separate Processing Costs $200,000
Joint material
cost = $275,000
Separate
processing
Sales
value $1,200,000
Gasoline
Split-off
point
Separate processing costs $500,000

24. Monetary Measure Method Net Realizable Value

25. Monetary Measure Method Net Realizable Value

26. Monetary Measure Method Net Realizable Value

27. Monetary Measure Method Net Realizable Value

28. Monetary Measure Method Net Realizable Value

29. Monetary Measure Method Net Realizable Value
The net realizable value method results in equal gross margin percentages for all products.

30. Physical Measure Method
The physical measure method may be used when
Output product prices are highly volatile.
Many additional processes occur between the split-off point and the first point of marketability.
Market prices are unavailable for products provided via cost-plus contracts.

31. Physical Measure Method
Joint
costs
Oil
240,000 gallons
Common
production
process
Joint
input
Gasoline
360,000 gallons
Split-off
point

32. Physical Measure Method
Joint conversion cost = $225,000
Oil
240,000 gallons
Common
production
process
Joint material
cost = $275,000
Gasoline
360,000 gallons
Split-off
point

33. Physical Measure Method

34. Physical Measure Method

35. Physical Measure Method
$275,000 joint material cost plus $225,000 joint conversion cost

36. Choosing Among Joint Cost Allocation Methods
Joint costs are truly common costs.
It is impossible to separate the portion of joint costs attributable to one product on a cause and effect basis.
Which joint cost allocation method should we use?
We get a different result with each method.

37. Choosing Among Joint Cost Allocation Methods
That makes the choice of methods somewhat arbitrary.
Regardless of the method we choose, we really need to be careful using allocated costs for decision-making purposes.

38. Choosing Among Joint Cost Allocation Methods
Choose the joint-cost allocation method that maximizes regulated
profits or cost reimbursements.
Do not base product or service production decisions on joint
margins (I.e., after joint-cost allocation) unless the choice is in
response to regulatory opportunities.
Clearly define how to allocate joint costs in contractual agreements
among parties that share outputs and joint costs of joint processes.

39. Learning Objective 5

40. What Are By-Products? They are incidental to a production process.
Their sales value is minimal.
Examples
Lumber production:
wood chips
Fertilizer production:
methane gas
Do not allocate joint costs to by-products

41. Accounting for By-Products
Two commonly used methods of accounting for by-products are . . .
Realized Value Approach By-product NRV is treated as other revenue.
Net Realizable Value Approach By-product NRV is deducted from joint production costs before allocation. 1 2

42. Accounting for By-Products
Joint
costs
Major product
Common
production
process
Joint
input
Major product
Relatively low value or quantity when compared to major products
By-products
Split-off
point

43. Accounting for By-Products
Joint conversion cost = $50,000
Sales
value $100,000
Major product
Common
production
process
Joint material
cost = $50,000
Sales
value $70,000
Major product
By-products
Separate
processing
Sales
value $1,500
Split-off
point
Separate processing costs $400

44. Accounting for By-Products
Major product revenue = $100,000 + $70,000

45. Accounting for By-Products
By-product NRV = $1,500 – $400 = $1,100

46. Accounting for By-Products
Joint production costs = $50,000 material + $50,000 conversion

47. Accounting for By-Products

48. By-Products: Some Complications
The preceding example assumes the by-product has been sold.
If the by-product is unsold . . .
Using method 2, the $1,100 by-product NRV is deducted from finished goods inventory or work-in-process inventory if unfinished.
Using method 1, the $1,100 by-product NRV is placed in a by-product inventory account.

49. Disposal of Scrap or Waste
Waste is a by-product with negative NRV. (Cost of disposal exceeds sales value)
Waste is disposed of at minimum cost.
Waste disposal cost is charged to manufacturing overhead and applied to other products as part of the manufacturing overhead allocation process.

50. Learning Objective 6

51. Allocation of Joint Costs – Other Economic Value Methods
In addition to net realizable value
Relative sales value at split-off
Further processing costs not considered
Constant gross margin percentage
Use total sales value of all products
Compute overall gross margin for process
Set the same gross margin for all products
Allocate joint costs so as to achieve that uniform gross margin

52. End of Chapter 9