Unrestricted M.

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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

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 Terms
 Joint process - single process in which one product cannot be manufactured without
producing others.

 Joint products - primary outputs of a joint process; substantial revenue-generating

ability.

 Split-off point - when joint products are first identifiable as individual products. At split-
off joint costs are allocated to joint products

 By-products – incidental output of a joint process with a higher sales value than scrap
but less than joint products.

 Scrap –incidental output of a joint process with a low sales value.

 Waste - residual output with no sales value.

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Approaches to Allocating Joint Costs
Two basic ways to allocate joint costs to products are:

 Approach 1: Physical Measure.

 Approach 2: Market Based.

 Sales value at split-off method.
 Estimated net realizable value (NRV) method.
 Constant gross-margin percentage NRV method.

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Method Selection
 If selling price at splitoff is available, use the Sales Value at
Splitoff Method
 If selling price at splitoff is not available, use the NRV Method
 If simplicity is the primary consideration, Physical-Measures
Method or the Constant Gross-Margin Method could be used
 Despite this, some firms choose not to allocate joint costs at all

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Example;

Final
Joint Product #1 Product
#1
Further Processing Dept 1

Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2

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Example -2

Final
Joint Product #1 Product
#1
Further Processing Dept 1

Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2

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By-Products
 These are secondary products with relatively little
value that are derived from the manufacturing
process.
 The most common practice is to make no allocation
of the processing costs up to the split-off point.

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Sell-or-Process Further Decisions
 In Sell-or-Process Further decisions, joint costs are
irrelevant. Joint products have been produced, and a
prospective decision must be made: to sell
immediately or process further and sell later
 Joint Costs are sunk
 Separable Costs need to be evaluated for relevance
individually

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Management Decisions
To Process or Not to Process?
1. Will revenues exceed total costs?
2. What is the opportunity cost?
3. How to classify outputs?
4. Sell at split-off or process further?

Final
Joint Product #1 Product
#1
Further Processing Dept 1

Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2

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Byproducts
 Two methods for accounting for byproducts
 Production Method – recognizes byproduct inventory
as it is created, and sales and costs at the time of sale
 Sales Method – recognizes no byproduct inventory,
and recognizes only sales at the time of sales:
byproduct costs are not tracked separately

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Assignment
Practice Questions of joint product cost

(Submission
Problem # 1 Date is 10-05-2020 – 8pm
Joint Product Cost is $ 940,000
Further Unit Sales Unit Sales
Product Kg Processing Price (at split Price After
Cost of time) Process
X 320,000 $ 250,000 $ 8 $ 12
Y 200,000 $ 250,000 $ 30 $ 31
Z 380,000 $ 450,000 $ 15 $ 21
Required;
1. Allocate the Joint cost on the following basis;
 Physical measure basis.
 Sale Value basis.
 NRV basis.
2. Should we process further process or not?

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