Cost Allocation:

Joint Products and Byproducts

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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

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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

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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

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Joint Cost Terminology
Byproducts – outputs of a joint production process
that have low sales values compare to the sales values
of the other outputs

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Examples of Joint Cost Situations

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Joint Process Overview
Steam:
An Output with Zero Sales Value

Joint Product #1

Single Production
Process

Joint Product #2

Byproduct

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Reasons for Allocating Joint Costs
Required for GAAP and taxation purposes
Cost values may be used for evaluation purposes
Cost-based Contracting
Insurance Settlements
Required by regulators
Litigation

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Joint Cost Allocation Methods
 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 Measures – allocate using tangible
attributes of the products, such as pounds, gallons,
barrels, etc

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Sales Value at Splitoff Method
Uses the sales value of the entire production of the
accounting period to calculate allocation percentage
Ignores inventories

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Joint Cost Illustration Data

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Joint Cost Illustration Overview

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Sales Value at Splitoff Illustration

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Physical Measures Illustration

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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

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Net Realizable Value Method
Overview

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Net Realizable Value Method
Illustrated

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Net Realizable Value Method
Illustrated

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Constant Gross Margin NRV Method
Allocates joint costs to joint products in an way that
the overall gross-margin percentage is identical for
the individual products
Joint Costs are calculated as a residual amount

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Constant Gross Margin NRV Illustrated

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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

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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

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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

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 Suppose Dow Chemical Company produces
two chemical products, X and Y, as
a result of a particular joint process.

The joint processing cost is $100,000.

Both products are sold to the petroleum

industry to be used as ingredients of gasoline.

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 1 million liters of X at a
selling price of $.09 = $90,000

500,000 liters of Y at a
selling price of $.06 = $30,000

Total sales value at

split-off is $120,000

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Suppose the 500,000 liters of Y can be
processed further and sold to the
plastics industry as product YA.

The additional processing cost would

be $.08 per liter for manufacturing
and distribution, a total of $40,000.

The net sales price of YA would be

$.16 per liter, a total of $80,000.

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 Sell at Process
Split-off Further and
as Y Sell as YA Difference

Revenues $30,000 $80,000 $50,000

Separable costs
beyond split-off
@ $.08 – 40,000 40,000
Income effects $30,000 $40,000 $10,000

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