Cost Allocation: Joint Products and Byproducts

16 - 1©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Allocation: Joint Productsand Byproducts

Chapter 16


Learning Objective 1

Identify the splitoff point(s)in a joint-cost situation.


Joint-Cost Basics

Joint productsJoint costs

Separable costs

Splitoff pointByproduct


Joint-Cost Basics

Raw milk

Cream Liquid Skim


Joint-Cost Basics

Coal

Gas Benzyl Tar



Distinguish joint productsfrom byproducts.


Joint Products and Byproducts

Sales Value

High Low

Main ProductsJoint Products Byproducts



Explain why joint costs should beallocated to individual products.


Why Allocate Joint Costs?

• to compute inventory cost and cost of goods sold• to determine cost reimbursement under contracts • for insurance settlement computations• for rate regulation• for litigation purposes



Allocate joint costs usingfour different methods.


Approaches to AllocatingJoint Costs

Approach 2:Physical measure

Approach 1:Market based

Two basic ways to allocatejoint costs to products are:


Approach 1: Market-based Data

Sales value at splitoff methodEstimated net realizable value (NRV) method

Constant gross-margin percentage NRV method


Allocating Joint Costs Example

10,000 units of A at aselling price of $10 = $100,000

10,500 units of B at aselling price of $30 = $315,000

11,500 units of C at aselling price of $20 = $230,00

Joint processingcost is $200,000

Splitoff point


Allocating Joint Costs Example

A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318

200,000Gross margin $ 68,992 $217,326 $158,682 $445,000


Sales Value at SplitoffMethod Example

Assume all of the units producedof B and C were sold.

2,500 units of A (25%)remain in inventory.

What is the gross marginpercentage of each product?



Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:

Joint product costs $31,008Less ending inventory

$31,008 × 25% 7,752 23,256Gross margin $51,744



Product A:($75,000 – $ 23,256) ÷ $75,000 = 69%

Product B:($315,000 – $97,674) ÷ $315,000 = 69%

Product C:($230,000 – $71,318) ÷ $230,000 = 69%


Estimated Net Realizable Value(NRV) Method Example

Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.The new sales values after further processing are:

A1:10,000 × $12.00

= $120,000

B1:10,500 × $33.00

= $346,500

C1:11,500 × $21.00

= $241,500



Additional processing (separable) costs are as follows:

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of eachproduct at the splitoff point?



Product A1: $120,000 – $35,000 = $85,000Product B1: $346,500 – $46,500 = $300,000Product C1: $241,500 – $51,500 = $190,000

How much of the joint cost is allocatedto each product?



To A1:85 ÷ 575 × $200,000 = $29,565

To B1:300 ÷ 575 × $200,000 = $104,348

To C1:190 ÷ 575 × $200,000 = $66,087



Allocated Separable Inventory joint costs costs costs

A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000


Constant Gross-MarginPercentage NRV Method

This method entails three steps:Step 1:

Compute the overall gross-margin percentage.Step 2:

Use the overall gross-margin percentageand deduct the gross margin from thefinal sales values to obtain the totalcosts that each product should bear.



Step 3:Deduct the expected separable costs from thetotal costs to obtain the joint-cost allocation.



What is the expected final sales value of totalproduction during the accounting period?

Product A1: $120,000Product B1: 346,500Product C1: 241,500Total $708,000



Step 1:Compute the overall gross-margin percentage.Expected final sales value $708,000Deduct joint and separable costs 333,000Gross margin $375,000

Gross margin percentage:$375,000 ÷ $708,000 = 52.966%

Cost Allocation: Joint Products and Byproducts

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