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# Cost Allocation

## Joint Products and Byproducts

Joint Products in Joint Processes

## • Joint costs are costs which are incurred up to split-

off point
• Split-off point is the juncture in the process when
separate identifiable products emerge
• Separable costs are costs incurred beyond the split-
off point and are assignable to separate products

Split-off
Point
Separable
Product A Product A
Costs A
Joint
Costs
Separable
Product B Product B
Costs B
Joint Products, Byproducts

## • Joint products have a relatively high sales value and

are not separately identifiable as individual products
until the split-off point
• Main product is the one with the highest sales value
resulting from a process yielding two or more products
• Byproducts have a low sales value relative to sales
value of the main or joint products (s)

Main Products
Joint Products Byproducts

High Low
Sales Value
Why Allocate Joint Costs?

## Allocate joint costs to products for:

• inventory valuation
• Income determination
Approaches

## • Joint costs cannot be traced to individual products,

they must be allocated. The methods available for this
allocation can be classified in two conceptual
groupings
• Physical measure based approach- volume, weight
• Market based approaches assign total cost to each
product on monetary basis- Sales-value at split-off
point, Net realizable value method, Constant gross
margin percentage method
Physical-Measure Based Approach

## Example: A refinery processes 1,000 barrels of crude oil

and incurs \$100,000 of processing costs. The process
results in the following output-

## Asphalt \$100,000*(300 barrels/1000 barrels)= 30,000

Fuel oil \$100,000*(300 barrels/1000 barrels)= 30,000
Diesel \$100,000*(200 barrels/1000 barrels)= 20,000
Kerosene \$100,000*(100 barrels/1000 barrels)= 10,000
Gasoline \$100,000*(100 barrels/1000 barrels)= 10,000
Joint Cost Allocated \$ 100,000
Sales Value at Split-off Point Method

## Based on entire production run and sales values of the

separate products at split-off

## Asphalt 300 barrels@\$60/ barrel = 18,000

Fuel oil 300 barrels@\$180/ barrel= 54,000
Diesel 200 barrels@\$160/ barrel= 32,000
Kerosene 100 barrels@\$80/barrel = 8,000
Gasoline 100 barrels@\$180/barrel = 18,000
Total sales value at split-off \$ 130,000
Continued…

## The total expected sales value for the entire production

run at split-off is thus \$ 130,000.

## Asphalt \$100,000*(\$18,000/\$130,000) = 13,846

Fuel oil \$100,000*(\$54,000/\$130,000) = 41,539
Diesel \$100,000*(\$32,000/\$130,000) = 24,615
Kerosene \$100,000*(\$8,000/\$130,000) = 6,154
Gasoline \$100,000*(\$18,000/\$130,000) = 13,846
Joint Cost Allocated \$ 100,000
Net Realizable Value (NRV) Method

## Allocates joint costs based on market values of the

product, all separable costs necessary to make the
product salable are subtracted before the allocation is

## Asphalt 300 barrels@\$70/ barrel = 21,000

Fuel oil 300 barrels@\$200/ barrel= 60,000
Diesel 200 barrels@\$180/ barrel= 36,000
Kerosene 100 barrels@\$90/barrel = 9,000
Gasoline 100 barrels@\$190/barrel = 19,000
NRV continued…

## Asphalt 21,000 - 1,000= 20,000

Fuel oil 60,000 - 1,000= 59,000
Diesel 36,000 - 1,000= 35,000
Kerosene 9,000 – 2,000= 7,000
Gasoline 19,000 – 2,000= 17,000
Total NRV \$ 138,000
NRV continued…

## Asphalt \$100,000*(\$20,000/\$138,000) = 14,493

Fuel oil \$100,000*(\$59,000/\$138,000) = 42,754
Diesel \$100,000*(\$35,000/\$138,000) = 25,362
Kerosene \$100,000*(\$7,000/\$138,000) = 5,072
Gasoline \$100,000*(\$17,000/\$138,000) = 12,319
Joint Cost Allocated \$ 100,000
Constant Gross Margin % NRV Method

## Based on allocating joint costs so that the gross-margin

percentage is the same for every product

## Asphalt 300 barrels@\$70/ barrel = 21,000

Fuel oil 300 barrels@\$200/ barrel= 60,000
Diesel 200 barrels@\$180/ barrel= 36,000
Kerosene 100 barrels@\$90/barrel = 9,000
Gasoline 100 barrels@\$190/barrel = 19,000
Total final sales price \$145,000
Constant Gross Margin % NRV continued

From the total \$145,000, deduct the joint costs and total
separable costs to arrive at a total gross margin for all
products
\$145,000 - \$100,000 – \$7,000 =\$38,000

## The gross margin % is :

\$38,000 /\$ 145,000 = 26.21 %
Constant Gross Margin % NRV continued

of goods sold:

## Asphalt \$ 21,000 – (21,000* 26.21%) = \$ 15,497

Fuel oil 60,000 – (60,000* 26.21%) = 44,276
Diesel 36,000 – (36,000*26.21%) = 26,565
Kerosene 9,000 – (9,000*26.21%) = 6,641
Gasoline 19,000 – (19,000*26.21%) = 14,021
Constant Gross Margin % NRV continued

## Deduct the separable costs from each product to arrive

at the allocated joint costs:

## Asphalt \$ 15,497 - \$ 1,000= \$ 14,497

Fuel oil 44,276 - 1,000= 43,276
Diesel 26,565 - 1,000= 25,565
Kerosene 6,641 - 2,000= 4,641
Gasoline 14,021- 2,000= 12,021
Joint costs allocated \$100,000
Irrelevance of Joint Costs

## • When considering whether to sell a product at the

split-off point or process further, ignore joint costs
Split-off
Point Processing
Cream \$280 Butter \$500
Raw Milk
\$400 Processing Condensed
Skim
\$520 Milk \$1,100

## Relevant revenue \$200 \$500

Relevant costs 280
Incremental operating income \$200 \$320
Main Products and Byproducts

## • Main products are products which constitute the

major portion of the total sales value
• Byproducts are products with low sales values
compared to the main products
• Scrap are outputs with minimal sales values
• Wastage happens in the normal due course of the