1. Hilton • Maher • Selto

2. Joint-Process Costing9
Joint-Process Costing

3. One that is ready for sale without further processing SPLIT-OFF POINT
COMMON INPUT
JOINT COSTS
Costs to operate
joint processes
Simultaneously
converts a common
input into several
outcomes
JOINT PROCESS
Final
Product A
Final
Product B
FINAL PRODUCT
One that is ready for sale without further processing
SPLIT-OFF
POINT
Point at which joint-products appear

4. COMMON INPUT
JOINT COSTS
Costs to operate
joint processes
Simultaneously
converts a common
input into several
outcomes
JOINT PROCESS
Final
Product A
Final
Product B
Intermediate
Product A
Intermediate
Product B
INTERMEDIATE PRODUCT
A product that requires further processing before it is salable to the public.

5. Estimating Profit From Joint Products
There are four basic steps in estimating profit from joint products.
1. Identify all alternative sets and quantities of final products possible from the joint process
2. Forecast the sales price of each product
3. Estimate the costs (if any) required to further process joint products into salable products.
4. Choose the set of products with the overall maximum profit.

6. Sell Intermediate Products Or Process Them Further?
Net realizable value is the measure of a product’s contribution to profit after the split-off point.
What is the potential additional revenue after further processing?
What are the additional costs of further processing?
Net realizable value (NRV)
= Sales value - further processing costs after split off

7. Sell Intermediate Products Or Process Them Further?
Exh.
9-2
Sell Intermediate Products Or Process Them Further?
National Wood Products has a sawmill in Georgia. The mill has a monthly capacity of 4,700 mbf (1,000 board feet). For a month of production, the mill acquires logs and cuts them into two grades of lumber (1,000 mbf of Grade A Standard and 3,000 mbf of Grade B Standard) at a cost of $1,400, The Grade A Standard can be further processed into Grade A Special lumber at an additional cost of $100,000. Forecasted Sales Price information is as follows:

8. Sell Intermediate Products Or Process Them Further?
National Wood Products has a decision to make. They can choose Option 1 and produce 1,000mbf of Grade A Standard and 3,000 mbf of Grade B Standard. Alternatively, Option 2 allows them to produce 1,000 mbf of Grade A Special and 3,000 mbf of Grade B Standard.
Which option should National Wood Products choose?
Note: The decision hinges on making an accurate determination of which option provides the highest Net Realizable Value.

9. Sell Intermediate Products Or Process Them Further?
Exh.
9-4
Sell Intermediate Products Or Process Them Further?
Net realizable value (NRV)
= Sales value - further processing costs after split off
Option 2 obviously has the higher NRV and is the option of choice.

10. Maximizing The Profit Of Joint Product Processes
Computing the NPV of each set of products provides a comparison of each product’s sales revenues to cost after split-off
What is RELEVANT?
Allocation of the sawmill’s $1,400,000 joint processing costs
Revenues from processing beyond the split-off and any expenditures for additional processing NO
YES

11. Reasons for Allocating Joint Costs
While it may be difficult to be precise in allocating joint (common) costs to different products, use of different allocation methods can be very important to management decisions.
Performance Measurement
Casualty Loss Estimation
Determining and Responding to Rate Regulation
Specifying and Resolving Contractual Interests and Obligations.

12. Distinguishing between Main and By-Products
MAIN PRODUCT
a joint output that
generates a significant
portion of of the net
realizable value
BY-PRODUCTS
outputs from a joint
process that are minor in quantity and/or NRV when compared to the main products
Do not allocate joint costs to by-products

13. Net Realizable Value Method
Can the main
product be sold
at split-off without
further processing?
Is further processing
required?
Use market value
or sales price for
allocation
Estimate the NRV at
split-off by deducting
estimated added-
processing costs
from sales value
Allocates joint
costs based
on the NRV of
each main
product
at split-off

14. Net Realizable Value Method
Exh.
9-5
Net Realizable Value Method
Allocation
follows the
proportions
of net
realizable
values

15. Net Realizable Value Method: Gross Margins
Exh.
9-6
Net Realizable Value Method: Gross Margins
Expected
gross
margins
at split-off
The NRV
method
preserves
the relative
profitability
of joint
products

16. Physical Measures Method
Energy
Content
Example: BTU
content
Allocation is based on a physical measure of the joint products at split-off point
Volume
Example:
Gallons
Example:
Pounds
Weight

17. Physical Measures Method
When is the physical measures method used?
Output prices
are highly
volatile or
unpredictable
Significant
processing
occurs between
the split-off
point and the
first sales
opportunity
The market
does not set
product
prices

18. Physical Measures Method
Exh.
9-7
Physical Measures Method
The $1,400,000 of joint process costs can also be allocated based on Million Board Feet (MBF) of lumber produced.

19. Physical Measures Method: Gross Margins
Exh.
9-8
Physical Measures Method: Gross Margins
This method does not allocate costs proportional to economic values. This method allocates a relatively low proportion of joint costs to Grade A lumber.

20. Choosing Among Joint Cost Allocation Methods
The mere fact that joint costs are common between different products means . . .
Impossible to use cause-effect basis
Therefore, any attempt at allocating those “joint” costs, by definition, . . .
. . . Can be arbitrary

21. Choosing Among Joint Cost Allocation Methods
Choose the joint-cost allocation method that maximizes regulated
profits or cost reimbursements
Do not base product or service production decisions on gross
margins (I.e., after joint-cost allocation) unless the choice is in
responses to regulatory opportunities
Clearly define how to allocate joint costs in contractual agreements
among parties that share outputs and joint costs of joint processes

22. Basics of Accounting for By-Products
By-products are minor products and alternative methods are not
likely to have a material effect on the financial statements for
either internal or external reporting
Whether to sell the by-product at split-off or process them further usually depends on the highest NRV obtainable like a
major product
Two
standard
methods
Consider
by-product
NRV as other
revenue
Deduct by-product
NRV from costs
of main product

23. Basics of Accounting for By-Products
Method 1: The NRV of the by-product treated as other revenue
Used because
by-product
NRVs are
small and
effects on
income
are
immaterial

24. Basics of Accounting for By-Products
Method 2: Deduct net realizable value related to the sale of the by-products from the cost of the main product

25. Basics of Accounting for By-Products
Method 2: Deduct net realizable value related to the sale of the by-products from the cost of the main product
If all the main products produced in the period have not been sold, the NRV of by-products should be prorated to the main product inventories and cost of goods sold.

26. Disposal of Scrap And Waste
By-Product
Scrap and Waste
Sales value
exceeds cost of further
processing
Cost of further
processing exceeds sales value
Sold as by-product
Dispose of
legally at minimum cost
Look for new
products or

27. END OF CHAPTER 9