Cost Control Training

Bandung, 21- 23 November 2006

PRODUK & BIAYA BERSAMA

 Joint Cost Terminology
• Joint Costs – costs of a single production
process that yields multiple products
simultaneously
• Splitoff Point – the place in a joint production
process where two or more products become
separately identifiable
• Separable Costs – all costs incurred beyond the
splitoff point that are assignable to each of the
now-identifiable specific products
 Joint Cost Terminology
• Categories of Joint Process Outputs:
1. Outputs with a positive sales value
2. Outputs with a zero sales value
• Product – any output with a positive
sales value, or an output that enables a
firm to avoid incurring costs
– Value can be high or low
 Joint Cost Terminology
• Main Product – output of a joint production
process that yields one product with a high
sales value compared to the sales values
of the other outputs
• 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
 Joint Cost Terminology
• Byproducts – outputs of a joint production
process that have low sales values
compare to the sales values of the other
outputs
Joint Process Flowchart
Steam:
An Output with Zero Sales Value

Joint Product #1

Single Production
Process

Joint Product #2

Byproduct
Reasons for Allocating Joint Costs
• Required for SPAK and taxation purposes
• Cost values may be used for evaluation
purposes
• Cost-based contracting
• Insurance settlements
• Required by regulators
• Litigation
 Joint Cost Allocation Methods
• Physical Measures – allocate using
tangible attributes of the products, such
as pounds, gallons, barrels, etc.
• Market-Based – allocate using market-
derived data (dollars):
1. Sales value at splitoff
2. Net Realizable Value (NRV)
3. Constant Gross-Margin percentage NRV
 Physical-Measure Method
• Allocates joint costs to joint products on
the basis of the relative weight, volume, or
other physical measure at the splitoff point
of total production of the products
 Physical-Measure Example
• Consider the following example of two products
arising out of one joint process costing $500
• Assumes 1 gallon of Cream is equal to 1 gallon
of Skim-milk

Joint
Product % Joint Costs
Gallons
o+D17f Total VolumeCosts Allocated
Cream 25 25% $ 500 $ 125
Skim-milk 75 75% 500 375
Total 100 100% $ 500
 Sales Value at Splitoff Method
• Uses the sales value of the entire
production of the accounting period to
calculate allocation percentage
• Ignores inventories
Sales Value at Splitoff Example

Cream Skim-milk Total

Final Sales Value of Production
Cream: 25 gals@ $50/gal $ 1,300
Skim-milk: 75 gals@ $10/gal $ 800
Total $ 2,100
Allocation Based on % of
Total Sales (rounded) 61.9% 38.1%

Joint Costs ($500) Allocated:

Joint Cost X Allocation % $ 310 $ 190
 Net Realizable Value Method
• Allocates joint costs to joint products on
the basis of relative NRV of total
production of the joint products
• NRV = Final Sales Value – Separable
Costs
 NRV Example
Cream Skim-milk Total
Final Sales Value of Production
Cream: 25 gals@ $50/gal $ 1,300
Skim-milk: 75 gals@ $10/gal $ 800
Total $ 2,100
Less: Separable Costs 900 200 1,100
NRV 400 600 1,000
NRV Weighting:
Product NRV ÷ Total NRV 40% 60%
Joint Costs 500 500
Joint Costs Allocated
NRV Weighting X Joint Costs $ 200 $ 300
 Constant Gross Margin NRV
Method
• Allocates joint costs to joint products in a
way that the overall gross-margin
percentage is identical for the individual
products
• Joint Costs are calculated as a residual
amount
Constant Gross Margin NRV
Method Example
Cream Skim-milk Total
Final Sales Value of Production
Cream: 25 gals@ $50/gal $ 1,300
Skim-milk: 75 gals@ $10/gal $ 800
Total $ 2,100
Less: Separable Costs 1,100
NRV 1,000
Joint Costs 500
Gross Profit $ 500
Gross Profit % of Sales Value (rounded) 23.8%
Cream Skim-milk Total
Sales Values $ 1,300 $ 800 $ 2,100
Less Gross Margin @ 23.8%(rounded) 310 190 500
Total Product Costs 990 610 1600
Less Separable Costs 900 200 1100
Joint Costs Allocated $ 90 $ 410 $ 500
 Method Selection
• If selling price at splitoff is available, use the
Sales Value at Splitoff Method
• If selling price at splitoff is not available, use the
NRV Method
• If simplicity is the primary consideration,
Physical-Measures Method or the Constant
Gross-Margin Method could be used
• Despite this, some firms choose not to allocate
joint costs at all
 Sell-or-Process Further Decisions
• In Sell-or-Process Further decisions, joint
costs are irrelevant. Joint products have
been produced, and a prospective
decision must be made: to sell
immediately or process further and sell
later
• Joint Costs are sunk
• Separable Costs need to be evaluated for
relevance individually
 Sell-or-Process Further Flowchart

Final
Joint Product #1 Product
#1
Further Processing Dept 1

Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2
 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