Cost Allocation: Joint Products
and Byproducts
Horngren, Foster & Datar
Modified by Charles Bailey
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify the splitoff point(s)
in a joint-cost situation.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Joint costs
Joint products
Byproduct
Splitoff point
Separable costs
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Raw milk
Cream
Liquid
Skim
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coal
Gas
Benzyl
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Tar
Learning Objective 2
Distinguish joint products
from byproducts.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint Products and Byproducts
Main Products
Joint Products
Byproducts
High
Low
Sales Value
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Explain why joint costs should be
allocated to individual products.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
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
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Allocate joint costs using
four different methods.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approaches to Allocating
Joint Costs
Two basic ways to allocate
joint costs to products are:
Approach 1:
Market based
Approach 2:
Physical measure
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 1: Market-based
Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
We will not cover:
Constant gross-margin percentage NRV method
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
10,500 units of B at a
selling price of $30 = $315,000
11,500 units of C at a
selling price of $20 = $230,00
Joint processing
cost is $200,000
Splitoff point
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
Sales Value
Allocation of
Joint Cost
100 ÷ 645
315 ÷ 645
230 ÷ 645
A
$100,000
B
$315,000
C
$230,000
Total
$645,000
31,008
Gross margin $ 68,992
97,674
71,318
$217,326
$158,682
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
200,000
$445,000
Sales Value at Splitoff
Method Example
Assume all of the units produced
of B and C were sold.
2,500 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at Splitoff
Method Example
Product A Revenues: 7,500 units × $10.00
Cost of goods sold:
Joint product costs
$31,008
Less ending inventory
$31,008 × 25%
7,752
Gross margin
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
$75,000
23,256
$51,744
Sales Value at Splitoff
Method Example
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%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
Assume that Oklahoma Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:
B1:
C1:
10,000 × $12.00 10,500 × $33.00 11,500 × $21.00
= $120,000
= $346,500
= $241,500
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000
B1: $46,500
C1: $51,500
What is the estimated net realizable value of each
product at the splitoff point?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000
Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocated
to each product?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
To A1:
85 ÷ 575 × $200,000 = $29,565
To B1:
300 ÷ 575 × $200,000 = $104,348
To C1:
190 ÷ 575 × $200,000 = $66,087
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value
(NRV) Method Example
A1
B1
C1
Total
Allocated
joint costs
$ 29,565
104,348
66,087
$200,000
Separable
costs
$ 35,000
46,500
51,500
$133,000
Inventory
costs
$ 64,565
150,848
117,587
$333,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 2: Physical
Measure Method Example
$200,000 joint cost
20,000
pounds A
48,000
pounds B
12,000
pounds C
(20/60)*$200K
Product A
$50,000
Product B
$120,000
Product C
$30,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value
of the joint product
immediately.
It does not anticipate
subsequent management
decisions.
It uses a
meaningful basis.
It is simple.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
The purpose of the joint-cost allocation is
important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Joint costs
are irrelevant in
managerial decisions!
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling
Selling
Additional
Units
price
price
costs
10,000
A: $10
A1: $12
$35,000
10,500
B: $30
B1: $33
$46,500
11,500
C: $20
C1: $21
$51,500
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costs
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000
– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500
– Incremental cost $46,500 = ($15,000)
Product C: Incremental revenue $11,500
– Incremental cost $51,500 = ($40,000)
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Accounting for byproducts:
A very brief overview omitting
bookkeeping details.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
The net sales value of a by product reduces
the joint costs to be assigned to the joint or
main product(s).
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coal
each ton costs $50
Gas
NRV=$100
Benzyl
NRV=$80
Tar (byproduct)
NRV=$10
Now the net joint costs to assign to Gas &
Benzyl are ($50-10)=$40/ton
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
The End
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster