CHAPTER 6
Cost Allocation:
Joint Products and Byproducts
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
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
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
Joint Cost Terminology
Byproducts – outputs of a joint production
process that have low sales values compare
to the sales values of the other outputs
Examples of Joint Cost Situations
Joint Process Overview
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
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
Joint Cost Allocation Methods
Market-Based – allocate using market-
derived data (dollars):
1. Sales value at split-off
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
Sales Value at Splitoff Method
Uses the sales value of the entire production
of the accounting period to calculate
allocation percentage
Ignores inventories
Joint Cost Illustration Data
Joint Cost Illustration Overview
Sales Value at Splitoff Illustration
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
Net Realizable Value Method Overview
Net Realizable Value Method Illustrated
Net Realizable Value Method Illustrated
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
Constant Gross Margin NRV Illustrated
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
Physical Measures Illustration
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
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
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
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
Byproducts Illustration Overview
Comparative Income Statements for
Accounting for Byproducts
