cost allocation: joint products and byproducts

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster

Cost Allocation: Joint Products

and Byproducts

Horngren, Foster & Datar

Modified by Charles Bailey


Learning Objective 1

Identify the splitoff point(s)

in a joint-cost situation.


Joint-Cost Basics

Joint productsJoint costs

Separable costs

Splitoff pointByproduct


Joint-Cost Basics

Raw milk

Cream Liquid Skim


Joint-Cost Basics

Coal

Gas Benzyl Tar



Distinguish joint products

from byproducts.


Joint Products and Byproducts

Sales Value

High Low

Main ProductsJoint Products Byproducts



Explain why joint costs should be

allocated to individual products.


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



Allocate joint costs using

four different methods.


Approaches to AllocatingJoint Costs

Approach 2:Physical measure

Approach 1:Market based

Two basic ways to allocatejoint costs to products are:


Approach 1: Market-based Data

Sales value at splitoff method

Estimated net realizable value (NRV) method

Constant gross-margin percentage NRV method

We will not cover:


Allocating Joint Costs Example

10,000 units of A at aselling price of $10 = $100,000

10,500 units of B at aselling price of $30 = $315,000

11,500 units of C at aselling price of $20 = $230,00

Joint processingcost is $200,000

Splitoff point


Allocating Joint Costs Example

A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318

200,000Gross margin $ 68,992 $217,326 $158,682 $445,000


Sales Value at SplitoffMethod Example

Assume all of the units producedof B and C were sold.

2,500 units of A (25%)remain in inventory.

What is the gross marginpercentage of each product?



Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:

Joint product costs $31,008Less ending inventory

$31,008 × 25% 7,752 23,256Gross margin $51,744



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%


Estimated Net Realizable Value(NRV) Method Example

Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.

The new sales values after further processing are:

A1:10,000 × $12.00

= $120,000

B1:10,500 × $33.00

= $346,500

C1:11,500 × $21.00

= $241,500



Additional processing (separable) costs are as follows:

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of eachproduct at the splitoff point?



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 allocatedto each product?



To A1:85 ÷ 575 × $200,000 = $29,565

To B1:300 ÷ 575 × $200,000 = $104,348

To C1:190 ÷ 575 × $200,000 = $66,087



Allocated Separable Inventory joint costs costs costs

A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000


Approach 2: PhysicalMeasure Method Example

$200,000 joint cost

20,000pounds A

48,000pounds B

12,000pounds C

Product A$50,000

Product B$120,000

Product C$30,000

(20/60)*$200K



Explain why the sales value at

splitoff method is preferred

when allocating joint costs.


Choosing a Method

Why is the sales value at splitoff method widely used?

It measures the valueof the joint product

immediately.

It does not anticipatesubsequent management

decisions.

It uses ameaningful basis.

It is simple.


Choosing a Method

The purpose of the joint-cost allocation isimportant in choosing the allocation method.

The physical-measure method is a moreappropriate method to use in rate regulation.



Joint costs

are irrelevant in

managerial decisions!


Irrelevance of Joint Costsfor Decision Making

Assume that products A, B, and C can be soldat the splitoff point or processed further

into A1, B1, and C1.

Selling Selling Additional Units price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,50011,500 C: $20 C1: $21 $51,500


Irrelevance of Joint Costsfor Decision Making

Should A, B, or C be sold at the splitoffpoint 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)



Accounting for byproducts:

A very brief overview omitting

bookkeeping details.


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).


Joint-Cost Basics

Coaleach ton costs $50

GasNRV=$100

BenzylNRV=$80

Tar (byproduct)NRV=$10

Now the net joint costs to assign to Gas & Benzyl are ($50-10)=$40/ton


The End

cost allocation: joint products and byproducts

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