1. The Islamic University –Gaza
Cost Allocation: Joint Products and Byproducts
Dr. Hisham Madi

2. Choosing an allocation Method
If selling price at splitoff is available, the sales value at splitoff method is preferred even if further processing is done. Reasons include:
Measurement of the value of the joint products at the splitoff point.
Sales value at splitoff is the best measure of the benefits received as a result of joint processing relative to all other methods of allocating joint costs.
It is a meaningful basis for allocating joint costs because generating revenues is the reason why a company incurs joint costs in the first place.

3. Choosing an allocation Method
No anticipation of subsequent management decisions.
The sales value at splitoff method does not require information on the processing steps after splitoff if there is further processing
Availability of a common basis to allocate joint costs to products
Simplicity. The sales value at splitoff method is simple.

4. Choosing an allocation Method
When selling prices of all products at the splitoff point are unavailable, the NRV method is commonly used because it attempts to approximate sales value at splitoff by subtracting from selling prices separable costs incurred after the splitoff point

5. Not Allocating Joint Costs
Some companies choose to not allocate joint costs to products. The usual rationale given by these firms is the complexity of their production or extraction processes and the difficulty of gathering sufficient data for carrying out the allocations correctly.

6. Irrelevance of Joint Costs for Decision Making
Sell-or-Process-Further Decisions
Consider Farmers’ Dairy’s decision to either sell the joint products, cream and liquid skim, at the splitoff point or to further process them into buttercream and condensed milk.
The decision to incur additional costs for further processing should be based on the incremental operating income attainable beyond the splitoff point

7. Irrelevance of Joint Costs for Decision Making

8. Irrelevance of Joint Costs for Decision Making
Do not assume all separable costs in joint-cost allocations are always incremental costs

9. Accounting for Byproducts
Example 3: The Westlake Corporation processes timber into fine-grade lumber and wood chips that are used as mulch in gardens and lawns. Information about these products follows:
Fine-Grade lumber (the main product)—sells for $6 per board foot (b.f.)
Wood chips (the byproduct)—sells for $1 per cubic foot (c.f.) Data for July 2012 are as follows:

10. Accounting for Byproducts

11. Accounting for Byproducts
Production Method: Byproducts Recognized at Time
Production Is Completed
This method recognizes the byproduct in the financial statements—the 4,000 cubic feet of wood chips—in the month it is produced, July The NRV from the byproduct produced is offset against the costs of the main product

12. Accounting for Byproducts

13. Accounting for Byproducts

14. Accounting for Byproducts
Sales Method: Byproducts Recognized at Time of Sale
This method makes no journal entries for byproducts until they are sold.
Revenues of the byproduct are reported as a revenue item in the income statement at the time of sale.
These revenues are either grouped with other sales, included as other income, or are deducted from cost of goods sold

15. Accounting for Byproducts