MANAGEMENT ACCOUNTING (2)

Chapter (16) Allocation of Joint Costs

Lecture (7)
 Allocation
Methods

Net Constant
Physical Sales Value at
Realizable Gross Margin
Measures Split Off
Value (NRV) NRV
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
Used in case Used in case Used in case of Used in case of
no further no further further further
processing processing processing processing 2
Question (3) : Allocation of Joint Costs using the Constant Gross Margin NRV
Method
Carmen Corporation processes a single material into three separate products A, B, and
C. During September, the joint costs of processing were $300,000. Production and
sales value information for the month were as follows:
Units Final Sales
Product Separable Costs
Produced Value per Unit
A 10,000 $25 $125,000
B 15,000 30 250,000
C 12,500 24 125,000
Required:
Determine the amount of joint cost allocated to each product if the constant gross-margin percentage NRV method
is used
Step (1) Constant Gross Margin

Final Sales Value of Total Production

10,000 x 25 + 15,000 x 30 + 12,500 x 24
during the accounting period
$ 1000,000
Deduct:
 Separable Costs 125,000 + 250,000 + 125,000 = 500,000
 Joint Costs 300,000
$800,000
Gross Margin $200,000
Gross Margin Percentage
20% 3
Final Sales Value of Total A B C
Production during the 250,000 450,000 300,000
accounting period (15,000 x 30) (12,500 x 24)
(10,000 x 25)

Deduct: 0.2 x 250,000 0.2 x 450,000 0.2 x 300,000

 Gross Margin
(50,000) (90,000) (60,000)
Total Production Costs 200,000 360,000 240,000
Deduct: Separable Costs 125,000 250,000 125,000
Joint costs should be
allocated 75,000 110,000 115,000

$300,000 Joint costs

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 A B C Total
Revenues
250,000 450,000 300,000 1,000,000
Less: Cost of goods
sold

 Joint Costs (75,000) (110,000) (115,000) (300,000)

 Separable Costs
(125,000) (250,000) (125,000) (500,000)
(200,000) (360,000) (240,000) (800,000)
Gross Margin
50,000 90,000 60,000 200,000
Gross Margin
Percentage 20% 20% 20% 20%

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 Net Realizable Value Method
Overview
all costs incurred beyond the splitoff point
that are assignable to each of the now-
identifiable specific products Final Product

Milk Powder
Joint Product: outputs of a joint production
Byproducts:outputs of a joint production process that yields two or more products
process that have low sales values with a high sales value compared to the
compare to the sales values of the other sales values of any other outputs
outputs
 Accounting for By Products

Production Sales
Method Method
Where the byproduct is Where the byproduct is not
considered as a normal product recorded at all until is sold
recorded at cost as part of
inventory until sold
When sold it is recorded at When sold it is recorded at
sales value as a reduction sales value but this time as an
from the overall costs i.e. additional sales (revenue) to
treated as ending inventory the original sales. 7
Question (1) : Accounting for byproduct
The Carolina Company prepares lumber for companies who manufacture furniture. The
main product is finished lumber with a byproduct of wood shavings. The byproduct is
sold to plywood manufacturers. For July, the manufacturing process incurred $332,000
in total costs. Eighty thousand board feet of lumber were produced and sold along with
6,800 pounds of shavings. The finished lumber sold for $6.00 per board foot and the
shavings sold for $0.60 a pound. There were no beginning or ending inventories
Production Method Sales Value Method
(Cost Reduction) (Revenue item when
sold)

Sales

Lumber (80,000 x 6) 480,000 (80,000 x 6) 480,000

Shavings (6,800 x 0.6) 4,080

0
Total Sales 480,000 484,080
(-) COGS
process
(-) ………………….costs
332,000 332,000
(-) By product revenue 0
(4,080)
COGS 327,920 332,000
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Gross Margin $152,080 $152,080
 Which Method is better?

Production
Method Sales Method

This method is more This method is allowed

scientifically correct as as the sales value of
it includes the the byproduct is
byproduct on the considered immaterial
balance sheet as an
inventory item until
sold

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Question (2) : Allocation of joint costs (the case of ending inventory)
Joint Costs
Joint costs (costs of 110,000
gallons of raw milk and $400,000
processing to Split off point
Cream Liquid Skim
Beginning inventory 0 0
(gallons)
Production (gallons) 25,000 75,000
Sales (gallons) 20,000 30,000
Ending (gallons) 5,000 45,000
Selling price/gallon $8 $4
Required:
Allocate the $400,000 to both products using the Physical Measure Method and determine the
Gross Profit and Gross Profit Percentage from each product.
Cream Liquid Skim
Physical Measure of Total 25,000 75,000
Production
Weighting 25000/100,000 75,000/100,000

25% 75%
Joint Costs Allocated 400,000 x 25% 400,000 x 75%
$100,000 $300,000

Production cost/gallon 100,000/25,000 300,000/75,000

$4 $4
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 Cream Liquid Skim Total

Revenues 20,000 x $8 30,000 x $4

$280,000
$160,000 $120,000

Less: Cost of
goods sold

($4 x 20,000) (80,000) ($4 x 30,000) (120,000)

($200,000)
Gross margin
$80,000 $0 80,000

Gross Margin
Ratio
50% 0%

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Question (2) : Allocation of joint costs (the case of ending inventory)
Joint Costs
Joint costs (costs of 110,000
gallons of raw milk and $400,000
processing to Split off point
Cream Liquid Skim
Beginning inventory 0 0
(gallons)
Production (gallons) 25,000 75,000
Sales (gallons) 20,000 30,000
Ending (gallons) 5,000 45,000
Selling price/gallon $8 $4
Required:
Allocate the $400,000 to both products using the Sales value at the split off point and determine
the Gross Profit and Gross Profit Percentage from each product.
Cream Liquid Skim
Sales values of Total 25,000 x 8 $200,000 75,000 x 4 $300,000
Production
Weighting 200,000/500,000 300,000/500,000

40% 60%
Joint Costs Allocated 400,000 x 40% 400,000 x 60%
$160,000 $240,000

Production cost/gallon 160,000/25,000 240,000/75,000

$6.4 $3.2
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 Cream Liquid Skim Total

Revenues 20,000 x $8 30,000 x $4

$280,000
$160,000 $120,000

Less: Cost of
goods sold

($6.4 x 20,000) (128,000)($3.2 x 30,000) (96,000)

($224,000)
Gross margin
$32,000 $24,000 56,000

Gross Margin
Ratio
20% 20%

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 End of Lecture (7)
Covered today
• Gross margin NRV method
• Accounting for byproducts
• Methods of Allocating Joint Costs using ending
inventory
– Sales Value at Split off
– Physical Measure

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