1. Cost Allocation: Joint Products and Byproducts
Chapter 16

2. Identify the split-off point(s) in a joint-cost situation.
Learning Objective 1
Identify the split-off point(s)
in a joint-cost situation.

3. Joint-Cost Basics (E.g. 1)
Split-off point
Joint costs are costs
Incurred in
producing the raw milk
Raw milk
Separable costs are costs
incurred in producing these
separately identifiable products
Cream
Liquid Skim

4. Joint-Cost Basics (E.g. 2)
Coal
Gas
Benzyl
Tar

5. Distinguish joint products
Learning Objective 2
Distinguish joint products
from byproducts.

6. Joint Products and Byproducts
Main Product = 1
Joint Products ≥ 2
Byproducts
High
Low
Sales Value

7. Explain why joint costs should be allocated to individual products.
Learning Objective 3
Explain why joint costs should be
allocated to individual products.

8. 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

9. Allocate joint costs using four different methods.
Learning Objective 4
Allocate joint costs using
four different methods.

10. Approaches to Allocating Joint Costs
Two (2) basic ways to allocate
joint costs to products are:
Approach 1:
Market based
Approach 2:
Physical measure

11. Approach 1: Market-based Data – 3 methods
(1) - Sales value at split-off method
(2) - Estimated net realizable value (NRV) method
(3) - Constant gross-margin percentage NRV method

12. (1) Sales Value at Split-off Method Example
10,000 units of A at a
selling price of $10 = $100,000
Joint processing
cost is $200,000
10,500 units of B at a
selling price of $30 = $315,000
11,500 units of C at a
selling price of $20 = $230,00
Splitoff point

13. (1) Sales Value at Split-off Method Example
A B C Total
Sales Value $100,000 $315,000 $230,000 $645,000
Allocation of
Joint Cost
100 ÷ ,008
315 ÷ ,674
230 ÷ ,318
200,000
Gross margin $ 68,992 $217,326 $158,682 $445,000

14. (1) Sales Value at Split-off Method Example
Assume all of the units produced
of B and C were sold.
2,500 units of A (25%)
remain in inventory.
What is the gross margin of product A ?
What is the gross margin percentage of each product?

15. (1) Sales Value at Split-off Method Example
Product A Revenues: 7,500 units × $ $75,000
Cost of goods sold:
Joint product costs $31,008
Less ending inventory
$31,008 × 25% , ,256
Gross margin $51,744

16. (1) Sales Value at Split-off Method Example
Product A:
($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:
($315,000 – $97,674) ÷ $315,000 = 69%
Product C:
($230,000 – $71,318) ÷ $230,000 = 69%

17. (2) Estimated Net Realizable Value (NRV) Method Example
Assume that Oklahoma Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:
10,000 × $12.00
= $120,000
B1:
10,500 × $33.00
= $346,500
C1:
11,500 × $21.00
= $241,500

18. (2) Estimated Net Realizable Value (NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000
B1: $46,500
C1: $51,500
What is the estimated net realizable value of each
product at the splitoff point?

19. (2) Estimated Net Realizable Value (NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000
Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocated
to each product?

20. (2) Estimated Net Realizable Value (NRV) Method Example
To A1:
85 ÷ 575 × $200,000 = $29,565
To B1:
300 ÷ 575 × $200,000 = $104,348
To C1:
190 ÷ 575 × $200,000 = $66,087

21. (2) Estimated Net Realizable Value (NRV) Method Example
Allocated Separable Inventory
joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565
B , , ,848
C , , ,587
Total $200,000 $133,000 $333,000

22. (3) Constant Gross-Margin Percentage NRV Method
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.

23. (3) Constant Gross-Margin Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.

24. (3) Constant Gross-Margin Percentage NRV Method
What is the expected final sales value of total
production during the accounting period?
Product A1: $120,000
Product B1: ,500
Product C1: ,500
Total $708,000

25. (3) Constant Gross-Margin Percentage NRV Method
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value $708,000
Deduct joint and separable costs ,000
Gross margin $375,000
Gross margin percentage:
$375,000 ÷ $708,000 = %

26. (3) Constant Gross-Margin Percentage NRV Method
Step 2:
Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods sold
Product A1: $120,000 $ 63,559 $ 56,441
Product B1: 346, , ,973
Product C1: 241, , ,587
Total $708,000 $375,000 $333,000
($1 rounding)

27. (3) Constant Gross-Margin Percentage NRV Method
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs allocated
Product A1: $ 56,441 $ 35,000 $ 21,441
Product B1: 162, , ,473
Product C1: 113, , ,087
Total $333,000 $133,000 $200,000

28. Approach 2: Physical Measure Method Example
$200,000 joint cost
20,000
pounds A
48,000
pounds B
12,000
pounds C
Product A
$50,000
Product B
$120,000
Product C
$30,000

29. Explain why the sales value at splitoff method is preferred
Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.

30. Choosing a Method It measures the value of the joint product
Why is the sales value at split-off method widely used?
It measures the value
of the joint product
immediately.
It does not anticipate
subsequent management
decisions.
It uses a
meaningful basis.
It is simple.

31. Choosing a Method The NRV method should be used when there is
not enough information about individual
selling prices at split-off point.
The physical-measure method is a more
appropriate method to use in rate regulation.

32. Avoiding Joint Cost Allocation
Some companies refrain from allocating joint
costs and instead carry their inventories
at estimated net realizable value.

33. Explain why joint costs sell-or-process-further decision.
Learning Objective 6
Explain why joint costs
are irrelevant in a
sell-or-process-further decision.

34. Irrelevance of Joint Costs for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional
Units price price costs
10,000 A: $10 A1: $12 $35,000
10,500 B: $30 B1: $33 $26,500
11,500 C: $20 C1: $21 $51,500

35. Irrelevance of Joint Costs for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000
– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500
– Incremental cost $26,500 = $5,000
Product C: Incremental revenue $11,500
– Incremental cost $51,500 = ($40,000)

36. Irrelevance of Joint Costs for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000
– Incremental cost $35,000 = ($15,000)
Split-off
Product B: Incremental revenue $31,500
– Incremental cost $26,500 = $5,000
Processed further
Product C: Incremental revenue $11,500
– Incremental cost $51,500 = ($40,000)
Split-off

37. Account for byproducts using two different methods.
Learning Objective 7
Account for byproducts
using two different methods.

38. Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
(Conceptually, this is the correct method)
Method B:
The sale method delays recognition of
byproducts until the time of their sale.
(used when dollar amount of byproducts are immaterial)

39. Accounting for Byproducts Example
Main Products Byproducts
(Yards) (Yards)
Production 1,
Sales
Ending inventory
Sales price $13/yard $1.00/yard
No beginning finished goods inventory

40. Accounting for Byproducts Example
Joint production costs for joint
(main) products and byproducts:
Material $2,000
Manufacturing labor 3,000
Manufacturing overhead 4,000
Total production cost $9,000

41. Accounting for Byproducts Method A
Method A: The production method
What is the value of ending inventory
of joint (main) products?
$9,000 total production cost
– $400 net realizable value of the byproduct
= $8,600 net production cost for the joint products

42. Accounting for Byproducts Method A
200 ÷ 1,000 × $8,600 = $1,720 is the value
assigned to the 200 yards in ending inventory.
What is the cost of goods sold?
Joint production costs $9,000
Less byproduct revenue
Less main product inventory ,720
Cost of goods sold $6,880

43. Accounting for Byproducts Method A
Income Statement (Method A)
Revenues: (800 yards × $13) $10,400
Cost of goods sold ,880
Gross margin $ 3,520
What is the gross margin percentage?
$3,520 ÷ $10,400 = 33.85%

44. Accounting for Byproducts Method A
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $8,600 = $1,720
Byproduct: 100 × $1.00 = $100

45. Journal Entries Method A
Work in Process ,000
Accounts Payable ,000
To record direct materials purchased and used
in production
Work in Process ,000
Various Accounts ,000
To record conversion costs in the joint process

46. Journal Entries Method A
Byproduct Inventory
Finished Goods 8,600
Work in Process ,000
To record cost of goods completed
Cost of Goods Sold 6,880
Finished Goods ,880
To record the cost of the main product sold

47. Journal Entries Method A
Cash or Accounts Receivable 10,400
Revenues ,400
To record the sale of the main product

48. Accounting for Byproducts Method B
Method B: The sale method
What is the value of ending inventory of
joint (main) products?
200 ÷ 1,000 × $9,000 = $1,800
No value is assigned to the 400 yards of
byproducts at the time of production.
The $300 resulting from the sale of
byproducts is reported as revenues.

49. Accounting for Byproducts Method B
Income Statement (Method B)
Revenues: Main product (800 × $13) $10,400
Byproducts sold
Total revenues $10,700
Cost of goods sold:
Joint production costs 9,000
Less main product inventory 1,800 $ 7,200
Gross margin $ 3,200

50. Accounting for Byproducts Method B
What is the gross margin percentage?
$3,200 ÷ $10,700 = 29.91%
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $9,000 = $1,800
By-product: -0-

51. Journal Entries Method B
Work in Process 2,000
Accounts Payable ,000
To record direct materials purchased and used
in production
Work in Process 7,000
Various Accounts ,000
To record conversion costs in the joint process

52. Journal Entries Method B
Finished Goods 9,000
Work in Process ,000
To record cost of goods completed
Cost of Goods Sold 7,200
Finished Goods ,200
To record the cost of the main product sold

53. Journal Entries Method B
Cash or Accounts Receivable 10,400
Revenues ,400
To record the sale of the main product
Cash or Accounts Receivable
Revenues
To record the sale of the byproduct

54. End of Chapter 16