Cost Allocation:
Joint Products and Byproducts
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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
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Joint Cost Terminology
Categories of Joint Process Outputs:
1. Outputs with a positive sales value
2. 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
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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
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Joint Cost Terminology
Byproducts – outputs of a joint production process
that have low sales values compare to the sales values
of the other outputs
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Examples of Joint Cost Situations
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Joint Process Overview
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
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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
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Joint Cost Allocation Methods
Market-Based – allocate using market-derived data
(dollars):
1. Sales value at splitoff
2. Net Realizable Value (NRV)
3. Constant Gross-Margin percentage NRV
Physical Measures – allocate using tangible
attributes of the products, such as pounds, gallons,
barrels, etc
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Sales Value at Splitoff Method
Uses the sales value of the entire production of the
accounting period to calculate allocation percentage
Ignores inventories
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Joint Cost Illustration Data
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Joint Cost Illustration Overview
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Sales Value at Splitoff Illustration
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Physical Measures Illustration
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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
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Net Realizable Value Method
Overview
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Net Realizable Value Method
Illustrated
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Net Realizable Value Method
Illustrated
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Constant Gross Margin NRV Method
Allocates joint costs to joint products in an way that
the overall gross-margin percentage is identical for
the individual products
Joint Costs are calculated as a residual amount
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Constant Gross Margin NRV Illustrated
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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
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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
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Sell-or-Process Further Flowchart
Final
Joint Product #1 Product
#1
Further Processing Dept 1
Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2
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Suppose Dow Chemical Company produces
two chemical products, X and Y, as
a result of a particular joint process.
The joint processing cost is $100,000.
Both products are sold to the petroleum
industry to be used as ingredients of gasoline.
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1 million liters of X at a
selling price of $.09 = $90,000
500,000 liters of Y at a
selling price of $.06 = $30,000
Total sales value at
split-off is $120,000
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Suppose the 500,000 liters of Y can be
processed further and sold to the
plastics industry as product YA.
The additional processing cost would
be $.08 per liter for manufacturing
and distribution, a total of $40,000.
The net sales price of YA would be
$.16 per liter, a total of $80,000.
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Sell at Process
Split-off Further and
as Y Sell as YA Difference
Revenues $30,000 $80,000 $50,000
Separable costs
beyond split-off
@ $.08 – 40,000 40,000
Income effects $30,000 $40,000 $10,000
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