Chapter 15
Cost Allocation: Joint Products
and Byproducts
Copyright © 2003 Pearson Education Canada Inc.
Slide 15-158
Joint Products in Joint Processes
• Joint costs are costs which yield multiple products
simultaneously
• Split-off point is the juncture in the process when
separate identifiable products emerge
• Separable costs are costs incurred beyond the splitoff point and are assignable to separate products
Split-off
Point
Product A
Separable
Costs A
Product A
Product B
Separable
Costs B
Product B
Joint
Costs
Copyright © 2003 Pearson Education Canada Inc.
Pages 567- 568
Slide 15-159
Joint Products, Byproducts and Scrap
• Joint products have a relatively high sales value and
are not separately identifiable as individual products
until the split-off point
• Main product is the one with the highest sales value
resulting from a process yielding two or more products
• Byproducts have a low sales value relative to sales
value of the main or joint products (s)
• Scrap products have a minimal (often zero) sales value
Main Products
Joint Products
High
Copyright © 2003 Pearson Education Canada Inc.
Byproducts
Sales Value
Low
Pages 567 - 568
Slide 15-160
Why Allocate Joint Costs?
Allocate joint costs to products for:
• inventory costing and cost of goods sold calculations
• cost reimbursement under contracts
• customer profitability analysis
• insurance settlement computations
• rate regulation situations
Copyright © 2003 Pearson Education Canada Inc.
Page 568
Slide 15-161
Sales Value at Splitoff Method
• Allocate joint
costs to
products based
on their relative
value at the
split-off point
Split-off
Point
Cream $200
Raw Milk
$400
Skim $300
Cream
Sales value at split-off
Weighting
Joint costs allocated
Copyright © 2003 Pearson Education Canada Inc.
$200
40%
$160
Skim
Total
$300
60%
$240
$500
100%
$400
Pages 570 - 571
Slide 15-162
Physical Measure Method
• Allocate joint
costs to
products based
on their relative
proportions at
the split-off
point
Split-off
Point
Cream 25 units
Raw Milk
$400
Skim 75 units
Cream
Physical measure
Weighting
Joint costs allocated
Copyright © 2003 Pearson Education Canada Inc.
25
25%
$100
Skim
Total
75
75%
$300
100
100%
$400
Pages 571 - 572
Slide 15-163
Net Realizable Value (NRV) Method
• Allocate joint costs to products based on their estimated
final selling prices less separable processing costs
Cream
Processing
$280
Butter $500
Skim
Processing
$520
Condensed
Milk $1,100
Raw Milk
$400
Split-off
Point
Final sales value
Separable processing costs
Net realizable value
Weighting
Joint cost allocation
Copyright © 2003 Pearson Education Canada Inc.
Cream
$500
280
220
27.5%
$110
Skim
$1,100
520
580
72.5%
$290
Total
$1,600
800
800
100%
$400
Pages 573 - 574
Slide 15-164
Constant Gross Margin % NRV Method
• Allocate joint costs so that the gross margin % for
each product is the same
Butter
Cream
Condensed
Milk
Total final sales value
Joint and separable costs
Gross margin
Gross margin %
Total
$1,600
1,200
$400
25%
Final sales value
Gross margin @ 25%
Imputed total costs
Separable costs
$500
125
375
280
$1,100
275
825
520
$1,600
400
1,200
800
Allocated joint costs
$ 95
$ 305
$400
Copyright © 2003 Pearson Education Canada Inc.
Pages 574 - 575
Slide 15-165
Irrelevance of Joint Costs
• When considering whether to sell a product at the
split-off point or process further, ignore joint costs
Split-off
Point
Cream
Processing
$280
Butter $500
Skim
Processing
$520
Condensed
Milk $1,100
Raw Milk
$400
Cream versus Butter Cream
Relevant revenue
Relevant costs
Incremental operating income
Copyright © 2003 Pearson Education Canada Inc.
Sell @ Split-off
$200
$200
Process Further
$500
280
$320
Pages 578 - 579
Slide 15-166
Main Products and Byproducts
• Main products are products which constitute the
major portion of the total sales value
• Byproducts are products with low sales values
compared to the main products
• Scrap are outputs with minimal sales values
• These classifications can change over time especially
when market prices change dramatically from year to
year
• When allocating joint costs to byproducts either
• recognize at the time production is completed
• recognize at the time of sale
Copyright © 2003 Pearson Education Canada Inc.
Pages 579 - 581
Slide 15-167