1. Chapter 16
Joint Costs

2. Joint Products Joint Costs Separable Split-Off Product Point Costs
Separate
Processing
Final
Sale
Oil
Common
Production
Process
Joint
Input
Final
Sale
Gasoline
Separate
Processing
Final
Sale
Chemicals
Separable
Product
Costs
Split-Off
Point

3. Examples of Joint Cost Situations

4. 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

5. Joint Cost Allocation Methods
Market-Based – allocate using market-derived data (dollars):
Sales value at split-off
Net Realizable Value (NRV)
Constant Gross-Margin percentage NRV
Physical Measures – allocate using tangible attributes of the products, such as pounds, gallons, barrels, etc

6. An Example
Farmer’s Dairy purchases raw milk from individual farms and processes it until the split-off point, when two products – cream and liquid skim – emerge. These two products are sold to an independent company, which markets and distributes them to supermarkets
In May 2009, Farmer’s Dairy processes 110,000 gallons of raw milk. During processing, 10,000 gallons are lost due to evaporation, yielding 25,000 gallons of cream and 75,000 gallons of liquid skim.
Summary data follows:

7. Joint Cost - Base Data For Example

8. Joint Process Overview

9. Sales Value at Splitoff Method
Uses the sales value of the entire production of the accounting period to calculate the amount of allocation
Ignores inventories

10. Sales Value at Split-off Computation

11. Physical-Measure Method
Allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the split-off point of total production of the products
Let’s use number of gallons produced as the measure to allocate joint costs

12. Physical Measure Method Computation

13. Further Processing – Additional Data
Assume the same data as the base case except that both cream and liquid skim can be processed further
Cream is processed into Buttercream: 25,000 gallons of cream are further processed into 20,000 gallons of buttercream at additional processing costs of $280,000. Buttercream sells for $25 per gallon
Liquid Skim is processed into Condensed Milk: 75,000 gallons of liquid skim are further processed to yield 50,000 gallons of condensed milk at additional processing costs of $520,000. Condensed milk sells for $22 per gallon
Sales during May were 12,000 gallons of buttercream and 45,000 gallons of condensed milk.

14. Data for Further Processing

15. Further Processing Overview

16. Net Realizable Value (NRV) Method
Allocates joint costs to joint products on the basis of the relative NRV of total production of the joint products
NRV = Final Sales Value – Separable Costs

17. Net Realizable Value Computation

18. Constant Gross Margin NRV Method
Allocates joint costs to joint products in a way that forces the overall gross-margin percentage to be identical for the individual products
It is also based on total production
Joint Costs are calculated as a residual amount

19. Constant Gross Margin NRV Computation

20. Sell-or-Process Further Decisions
In Sell-or-Process Further decisions, joint costs are irrelevant since they are “sunk” costs at the decision point
Decision should be based on whether the incremental revenue due to further processing is greater/less than the separable costs for the same

21. Sell or Process Further?