Chapter 9 Joint Product and By-Product Costing Key Topics: –Joint processes and common costs Main products and byproducts –Allocation methods –Choosing a method –Using joint cost allocation information Decisions to process further Choosing a method Uses of joint costing information

Joint Processes and Common Costs Jointly produce more than one product Joint (common) costs cannot be traced to individual products Joint production ends at the split-off point Individual products might or might not be processed beyond the split-off point

Main Products and Byproducts

Allocation Methods Physical output Sales at split-off point Net realizable value Constant gross margin NRV

Physical Output Method Allocate joint costs in proportion to the physical output for each main product Examples of physical measures: meters, pounds, gallons All main products must be expressed in the same physical measure

Sales at Split-Off Method Allocate joint costs in proportion to the sales value for each main product at the point where joint production ends Not always possible to measure sales value at the split-off point

Net Realizable Value Method Allocate joint costs in proportion to the net realizable value for each main product, taking into account the final selling price and separable costs Same as the sales value at split-off method if there is no additional production beyond the split-off point

Constant Gross Margin NRV Method Allocate joint costs so that the gross margin for all main products is the same –First, calculate combined gross margin for all main products –Second, calculate joint cost allocation that will result in the same gross margin for all main products, taking into account the final selling price and separable costs

Allocating Joint Costs

Decisions About Processing Further

Choosing a Method Major Goal Avoid distortion of individual main product values

Uses of Joint Cost Information Financial statements Income tax returns Government regulatory reports Other external reports

Physical quantities Sales value at split-off point Sales prices if processed further Separable costs Joint costs are irrelevant for many types of decisions Estimations (Uncertainties) in Allocations