Cost Allocation Joint by Products

Chapter 16
Cost Allocation:
Joint Products and Byproducts
Copyright © 2018, 2016, 2015 Pearson Education, Ltd. All Rights Reserved.
Learning Objectives
16.1 Identify the split off point in a joint-cost situation and distinguish joint
products from byproducts
16.2 Explain why joint costs are allocated to individual products
16.3 Allocate joint costs using four methods
16.4 Identify situations where the sales value at split off method is preferred
when allocating joint costs
16.5 Account for byproducts using two methods
Terminology
• 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.
• Byproducts—outputs of a joint production process that have low sales values
compared to the sales values of the other outputs.
Terminology
• Joint costs—the costs of a production process that yields multiple products

simultaneously.
• Split off point—the juncture in a joint production process when two or more
products become separately identifiable.
• Separable costs—all costs (manufacturing, marketing, distribution, and so on)
incurred beyond the split off point that are assignable to each of the specific
products identified at the split off point.
Examples of Joint Cost Situations (Exhibit 16-1)
Purpose of Allocating Joint Costs
• Computation of inventoriable costs and cost of goods sold for financial
accounting and tax reporting.
• Regulating the rates or prices of one or more of the jointly produced
products or services.
.
Two Approaches to Allocating Joint Costs
1. Physical measures—allocate using tangible attributes of the products, such
as weight, quantity, or volume of the joint products
2. Market-based—allocate using market-derived data (dollars):

1. Sales value at splitoff method
2. Net realizable value (NRV) method
3. Constant gross-margin percentage method
Example
Assume Johnson Seafood produces tuna filets and canned tuna
for distribution to restaurants and supermarkets:
Point 1 Point 2 Selling

Joint costs are incurred Split-off Point Price
2,000 lbs Tuna Filets $2.20/lb
14,000 lbs
Unprocessed Tuna 8,000 lbs Canned Tuna $1.65/lb
$16,000
4,000 lbs By-products, Scrap,

and Waste
7-8
Physical-Measure Method
The physical-measure method allocates joint costs to joint products produced
during the accounting period on the basis of a comparable physical measure,
such as the relative weight, quantity, or volume at the split off point.
Much less desirable than sales value at splitoff method : since physical
measure has no relationship to the product’s revenue – generating abilities
The Physical Measure Method
Physical Allocation
Measure of Joint Cost per
Product (lbs.) Proportion Cost Pound
Tuna filets 2,000 20% $ 3,200 $ 1.60
Canned tuna 8,000 80% 12,800 $ 1.60
Total 10,000 100% $ 16,000
7-10
Sales Value at Split off Method
• The sales value at split off method allocates joint costs to joint products
produced during the accounting period on the basis of the relative total sales
value at the split off point.
• This method uses the sales value of the entire production of the accounting
period, not just the quantity sold.
• The sales value at split off method follows the benefits-received criterion of
cost allocation.
Sales Value at Split-off Point Method
Price per unit is the price at the split-off point
Units Price Sales Alloc. Of Cost per

Product (in lbs.) per unit Value Proportion Joint Cost Pound
Tuna filets 2,000 $2.20 $4,400 25% $ 4,000 $ 2.00

Canned tuna 8,000 $1.65 $13,200 75% 12,000 $ 1.50
Total 10,000 $17,600 100% $ 16,000
7-12
Net Realizable Value (NRV) Method
• Allocates joint costs to joint products produced during the accounting period
on the basis of relative NRV.
• NRV = Final Sales Value – Separable Costs.
• Used when joint products cannot be sold at split-off
• In many cases, products are processed beyond the split off point to bring
them to a marketable form or to increase their value above their selling price
at the split off point
Example
Assume Johnson Seafood in the above example also
produces cat food from the raw, unprocessed tuna
Point 1 Point 2 Point 3
Joint costs are incurred Split-off Point Addt'l Processing
2,000 lbs Tuna Filets

@ $2.20/lb
14,000 lbs
Unprocessed Tuna 8,000 lbs Canned Tuna
$16,000 @$1.65/lb
Processing Cost
3,000 lbs Cat Food 3,000 lbs Cat Food
$850 @$1.75/lb
1,000 lbs By-products, Scrap,
and Waste
7-14
The Net Realizable Value (NRV) Method
Sales Additional
Product Pounds Price Value Processing
Tuna filets 2000 $2.20 $4,400 $0.00
Canned tuna 8000 $1.65 $13,200 $0.00
Cat food 3000 $1.75 $5,250 $850.00
Total 13,000 $22,850 $850.00
Percent Allocated Total Cost per

Product NRV of NRV Cost Cost Pound
Tuna filets $4,400 20% $3,200 $3,200 $1.60
Canned tuna $13,200 60% $9,600 $9,600 $1.20
Cat food $4,400 20% $3,200 $4,050 $1.35
Total $22,000 100% $16,000 $16,850
7-15
Constant Gross Margin Percentage Method:
Three Steps
• The constant gross margin percentage NRV method can be broken down
into three steps:
1. Compute the overall gross margin percentage
2. Compute the total production costs for each product
3. Compute the allocated joint costs.
Constant Gross Margin Percentage Method :
Step 1 and 2
Step 3
To cross check
Joint Cost Illustration (Exhibit 16-2)
Selling price $8 per galon
Physical-Measure Method (Exhibit 16-4)
Sales Value at Split off (Exhibit 16-3)
Example 2 (Exhibit 16-5)
Net Realizable Value Method (Exhibit 16-6)
Constant Gross Margin Method (Exhibit 16-7)
Choosing An Allocation Method
• If selling price at split off is available, the sales value at split off method is
preferred even if further processing is done. Reasons include:
– Best measure of benefits received
– Independent of further processing decisions
– Common allocation basis (revenue)
– Simplicity
• If selling prices are not available, the NRV method is the best alternative.
• Despite this, some firms choose not to allocate joint costs at all.
Accounting for 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 (Exhibit 16-8)
Main product
Selling price $6 per board foot
Byproducts
Selling price $1 per cubic foot
Comparative Income Statements (partial) for
Accounting for Byproducts (Exhibit 16-9)
Selecting the Method to Account for Byproducts
• The production method is consistent with the matching principle and is
the preferred method.
• The production method recognizes the byproduct inventory in the
accounting period in which it is produced and simultaneously reduces
the cost of manufacturing the main or joint products,
→better matching the revenues and expenses from selling the main
product.
• Sales method is simpler and is often used in practice, primarily
because the dollar amounts of byproducts are immaterial.
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Chapter 16

• Joint products—outputs of a joint production process that yields two or more

• Joint costs—the costs of a production process that yields multiple products

2. Market-based—allocate using market-derived data (dollars):

Point 1 Point 2 Selling

4,000 lbs By-products, Scrap,

Price per unit is the price at the split-off point

Units Price Sales Alloc. Of Cost per

Tuna filets 2,000 $2.20 $4,400 25% $ 4,000 $ 2.00

2,000 lbs Tuna Filets

Total 13,000 $22,850 $850.00

Percent Allocated Total Cost per

Selling price $8 per galon

Selling price $4 per galon

Selling price $25 per galon

Selling price $22 per galon

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