1. Cost Allocation: Joint Products and By-products

2. Joint-Cost Basics Joint costs Joint products Byproduct Splitoff point
Separable costs

3. Key terms:
Joint products – two or more outputs produced simultaneously by a single manufacturing process using common input
Split-off point – the stage of processing where joint products are separated.
Joint cost – costs of processing two or more products prior to the split-off point; common cost
Byproducts– products that result incidentally from the joint products
- Separable cost – cost after the split-off point

4. Joint Product Cost Allocation
Consider the following example of an oil refinery.
We will assume only two products, gasoline and oil.

5. Joint Product Cost Allocation
Input
Production
Process
Split-Off
Point
Joint Product
Costs
Oil
Gasoline
Final
Sale
Separate
Processing
Separate Processing Costs
Separate Processing Costs

6. Joint Products and Byproducts
Main Products
Joint Products
Byproducts
High
Low
Sales Value

7. Relatively low value or quantity when compared to major products
By-Products
Joint
Input
Production
Process
Split-Off
Point
Costs
By-products
Major Product
Relatively low value or quantity when compared to major products

8. Explain why joint costs should be allocated to individual products.

9. 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

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

11. Allocating Joint Costs
Approach 1
a. Physical-Units Method
b. Net-Realizable- Value Method
Joint Product Costs
Approach 2
a. Relative- Sales Value Method
c. Gross margin
Percent method

12. Physical-Units Method
Allocation based on a physical measure of the joint products at the split-off point.
Allocation based on the relative values of the products at the split-off point.
Relative-Sales- Value Method
Net-Realizable- Value Method
Allocation based on final sales values less separable processing costs.
Allocation based on a constant gross margin
for all products.
Gross margin
Percent Method

13. Physical-Units Method
240,000 gallons
360,000 gallons
Joint
Production
Process
Split-Off
Point
Oil
Gasoline
Joint material
cost = $275,000
Joint conversion cost = $225,000

14. 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

15. Market-based Data Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method

16. Allocating Joint Costs Example
1,000 units of A at a
selling price of P100 = P100,000
Joint processing
cost is P200,000
1,500 units of B at a
selling price of P300 = P450,000
2,000 units of C at a
selling price of P200 = P400,00
Splitoff point

17. Allocating Joint Costs Example
A B C Total
Sales Value P100,000 P450,000 P400,000 P950,000
Allocation of
Joint Cost
100 ÷ ,053
450 ÷ ,737
400 ÷ ,210
200,000
Gross margin P 78,947 P355,263 P315,790 P750,000

18. Sales Value at Splitoff Method Example
Assume all of the units produced
of B and C were sold.
250 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?

19. Sales Value at Splitoff Method Example
Product A Revenues: 750 units × P P75,000
Cost of goods sold:
Joint product costs P21,053
Less ending inventory
P21,053 × 25% , ,790
Gross margin P59,210

20. Sales Value at Splitoff Method Example
Product A:
(P75,000 – P 15,790) ÷ 75,000 = 79%
Product B:
(P450,000 – P94,737) ÷ P450,000 = 79%
Product C:
(P400,000 – $84,210) ÷ P400,000 = 79%

21. Estimated Net Realizable Value (NRV) Method Example
Assume that MBA-TEP Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:
1,000 × P120
= P120,000
B1:
1,500 × P330
= P495,000
C1:
2,000 × $210
= P420,000

22. Estimated Net Realizable Value (NRV) Method Example
Additional processing (separable) costs are as follows:
A1: P35,000
B1: P50,000
C1: P55,000
What is the estimated net realizable value of each
product at the splitoff point?

23. Estimated Net Realizable Value (NRV) Method Example
Product A1: P120,000 – P35,000 = P85,000
Product B1: P495,000 – P50,000 = P445,000
Product C1: P420,000 – P55,000 = P365,000
How much of the joint cost is allocated
to each product?

24. Estimated Net Realizable Value (NRV) Method Example
To A1:
85,000 ÷ 895,000 × P200,000 = P18,994
To B1:
445,000 ÷ 895,000 × P200,000 = P99,441
To C1:
365,000 ÷ 895,000 × P200,000 = P81,564

25. Estimated Net Realizable Value (NRV) Method Example
Allocated Separable Inventory
joint costs costs costs
A1 P 18,994 P 35,000 P 53,994
B , , ,442
C , , ,564
Total P200,000 P140,000 P340,000

26. 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.

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

28. Constant Gross-Margin Percentage NRV Method
What is the expected final sales value of total
production during the accounting period?
Product A1: P 120,000
Product B1: ,000
Product C1: ,000
Total P1,035,000

29. Constant Gross-Margin Percentage NRV Method
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value P1,035,000
Deduct joint and separable costs ,000
Gross margin P695,000
Gross margin percentage:
P695,000 ÷ P1,035,000 = 67.15%

30. Constant Gross-Margin Percentage NRV Method
Step 2:
Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods sold
Product A1: P120,000 P 80,580 P 39,421
Product B1: 495, , ,608
Product C1: 420, , ,971
Total P 1,035,000 P695,000 P340,000

31. Constant Gross-Margin Percentage NRV Method
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs allocated
Product A1: P 39,421 P 35,000 P 4,421
Product B1: 162, , ,608
Product C1: 137, , ,971
Total P340,000 P140,000 P200,000

32. Explain why the sales value at splitoff method is preferred
when allocating joint costs.

33. Choosing a Method
Why is the sales value at splitoff 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.

34. Choosing a Method The purpose of the joint-cost allocation is
important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.

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

36. Explain why joint costs sell-or-process-further decision.
are irrelevant in a
sell-or-process-further decision.

37. 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
1,000 A: P100 A1: P120 P35,000
1,500 B: P300 B1: P330 P50,000
2,000 C: P200 C1: P P55,000

38. 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 P20,000
– Incremental cost P35,000 = (P15,000)
Product B: Incremental revenue P45,000
– Incremental cost P50,000 = (P5,000)
Product C: Incremental revenue $20,000
– Incremental cost P55,000= (P35,000)

39. Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sale method delays recognition of
byproducts until the time of their sale.

40. End of Report Thank you