Cost Allocation: Joint Products
and Byproducts
Chapter 16
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Learning Objective 1
Identify the splitoff point(s)
in a joint-cost situation.
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Joint-Cost Basics
Joint costs
Joint products
Byproduct
Splitoff point
Separable costs
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Joint-Cost Basics
Raw milk
Cream
Liquid
Skim
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Joint-Cost Basics
Coal
Gas
Benzyl
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Tar
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Learning Objective 2
Distinguish joint products
from byproducts.
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Joint Products and Byproducts
Main Products
Joint Products
Byproducts
High
Low
Sales Value
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Learning Objective 3
Explain why joint costs should be
allocated to individual products.
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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
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Learning Objective 4
Allocate joint costs using
four different methods.
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Approaches to Allocating
Joint Costs
Two basic ways to allocate
joint costs to products are:
Approach 1:
Market based
Approach 2:
Physical measure
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Approach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
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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
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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
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200,000
$445,000
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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?
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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
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$75,000
23,256
$51,744
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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%
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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
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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?
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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?
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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
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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
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Constant Gross-Margin
Percentage NRV Method
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.
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Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
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Constant Gross-Margin
Percentage NRV Method
What is the expected final sales value of total
production during the accounting period?
Product A1:
$120,000
Product B1:
346,500
Product C1:
241,500
Total
$708,000
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Constant Gross-Margin
Percentage NRV Method
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value
$708,000
Deduct joint and separable costs
333,000
Gross margin
$375,000
Gross margin percentage:
$375,000 ÷ $708,000 = 52.966%
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