joint process
➢ one during which one product cannot be manufactured without
producing others.
➢ Such processes are common in the food, extractive, agricultural,
and chemical industries.
➢ Additionally, the process of producing first-quality merchandise
and factory seconds in a single operation can be viewed as a joint
process
joint cost
➢ Costs incurred for material, labor, and overhead during a joint
process.
➢ allocated only to the primary products of a joint process using
either a physical or a monetary measure.
➢ Although joint cost allocations are necessary to determine
financial statement valuations, such allocations should not be
used in making internal decisions.
separate costs that are assignable to specific products may be
incurred in later production stages.
Note:
➢ advertising and marketing expenditures can be joint costs. For
example, a not-for-profit (NFP) organization could produce a
brochure that serves the concurrent purposes of providing
public service information and requesting donations.
A joint process inevitably produces more than one product line.
A product that results from a joint process and that has a sales value
is classified as a
o joint product (also called a primary product, main
product, or co-product),
o a by-product, or
o scrap.
Joint products
➢ the primary outputs of a joint process.
➢ have substantial revenue-generating ability and, as such, provide
the financial motive for entering into the production process.
➢ include similar products of differing quality that result from the
same process.
by-product and scrap
➢ incidental outputs of a joint process.
➢ Both are salable, with by-products having a higher sales
value than scrap.
➢ the sales values of these products alone would not be
sufficient for management to undertake the joint process.
A final residual output from a joint process is waste, which has no
sales value.
➢ The expense incurred in waste disposal may exceed its
production costs in some industries.
➢ However, many companies have learned either to minimize their
production waste by changing their processing techniques or to
reclassify waste as by-product or scrap by finding a use that
generates some minimal amount of revenue.
➢ Over time, a product classification may change because of
technology advances, consumer demand, or ecological factors.
➢ New joint products may be developed from a product.
➢ Some products originally classified as by-products can be
reclassified as joint products, and some joint products can be
reduced to the by-product category.
➢ Even products originally viewed as scrap or waste can be
upgraded to joint product status.
Joint process output is classified based on management’s judgment
about the relative sales values of outputs.
Classifications are unique to each company.
Joint products are typically manufactured in companies using mass
production processes and a process costing accounting method.
The point at which joint process outputs are first identifiable as
individual products is called the split-off point.
➢ A joint process can have one or more split-off points, depending
on the number and types of output produced.
➢ Output may be sold at the split-off point (if a market exists for
products at that degree of completion) or may be processed
further and then sold.
➢ Joint cost includes all direct material, direct labor, and overhead
costs incurred up to the split-off point.
➢ Financial reporting requires that all necessary and reasonable
costs of production be attached to products.
➢ If joint output is processed beyond the split-off point, additional
costs will be incurred and must be assigned to the specific
products for which those costs were incurred.
1. Before committing resources to a joint process, management
must first decide whether total expected revenue from selling
the joint output “basket” of products is likely to exceed total
expected processing cost, which includes
➢ joint cost,
➢ separate processing costs after split-off
➢ selling expenses for the goods, and• disposal costs for
any waste materials
If total anticipated revenue exceeds all anticipated costs, managers
should compare the income from this use of company resources to
that provided by the best alternative use.
2. If the joint process income exceeds that of the best alternative,
management would decide that this production process is the
best capacity use and would begin production.
The next two decisions are made at split-off .
3. The third decision is to determine how to classify joint process
outputs. This classification decision is necessary because joint
cost is assigned only to joint products. Prior to allocation,
however, the joint cost may be reduced by the sales value of any
by-product or scrap.
4. The fourth decision is the most complex. Management must
decide whether to sell (any or all of) the joint output at split-off
or to process it further. If joint products are salable at split-off,
further processing should be undertaken only if the value added
 to the product, as reflected by the incremental revenue, exceeds
the incremental cost.
Physical Measure Allocation
➢ An easy, objective way to prorate joint cost at the split-off point
is to use physical measure allocation or proration using a
common physical characteristic of the joint products.
➢ provide an unchanging yardstick of output.
➢ Useful in allocating joint cost to products that have highly
variable selling prices.
➢ These measures are also necessary in rate-regulated industries
that use cost to determine selling prices.
➢ ignores the revenue-generating ability of individual joint
products.
➢ Products that weigh the most or that are produced in the largest
quantity will receive the highest proportion of joint cost
allocation—regardless of their ability to bear that cost when they
are sold.
Monetary Measure Allocation
➢ The primary benefit of monetary over physical measure
allocations is that the former recognizes the relative revenue
generation of each product.
➢ A problem with monetary measure allocations is that the basis
used is dynamic.
➢ Because of fluctuations in general and specific price levels, a
dollar of output today is different from a dollar of output from
the same process five years ago.
➢ However, accountants customarily ignore price-level
fluctuations when recording or processing data, so this particular
flaw of monetary measures is manageable.
➢ All allocation methods employ a proration process.
➢ Because the physical measure allocation process is so simplistic,
a detailed proration scheme is unnecessary.
Note:
➢ Monetary measures are more reflective of the primary
reason a joint process is undertaken: profit.
➢ Physical measure allocations are sometimes of dubious
value because they are based on the flawed assumption
that all physical units are equally desirable.
Sales Value at Split-Off
➢ assigns joint cost to joint products based on the relative split-off
point sales values for the products.
➢ To use this method, all joint products must be salable at split-off.
➢ uses a weighting technique based on both quantity produced
and selling price of production.
Net Realizable Value at Split-Off
➢ assigns joint cost based on the net realizable values of the joint
products at the split-off point.
Net realizable value (NRV) = sales revenue at split-off minus
preparation and disposal costs for the product.
➢ This method requires that all joint products be salable at split-off
and considers the costs that must be incurred at split-off to
realize the estimated sales revenue.
Approximated Net Realizable Value at Split-Off
➢ Often, some or all of the joint products are not salable at split-
off.
➢ These products must be processed at an additional cost beyond
the split-off point.
➢ This lack of marketability at split-off means that neither the sales
value at split-off nor the NRV at split-off approach can be used.
➢ The approximated net realizable value at split-off allocation uses
simulated NRVs for the joint products at split-off to calculate the
joint cost allocation.
➢ For each product, this value is the final sales price minus
incremental separate costs.
➢ Incremental separate costs are all processing, marketing, and
disposal costs incurred between the split-off point and point of
sale.
➢ An underlying assumption of this method is that the incremental
revenue from further processing is equal to or greater than the
incremental costs of further processing and selling.
➢ Decisions made about further processing affect the values used
to allocate joint cost in the approximated NRV method.
➢ If it is not economical to process one or more products beyond
split-off, the base used for allocating joint cost will be a mixture
of actual and approximated NRVs at split-off.
➢ Products that will not be processed further will be valued at their
actual NRVs at split-off, whereas products that will be processed
further are valued at approximated NRVs at split-off.
Accounting for By-Product and Scrap
➢ The distinction between by-product and scrap is merely one of
degree.
➢ "scrap" can be substituted anywhere that “by-product” is used.
➢ Similar to the accounting for joint cost, a variety of methods exist
in practice to account for a by-product.
➢ The choice of method should depend on the magnitude of the
net realizable value of the by- product and the need for
additional processing after split-off.
➢ As the sales value of the by-product increases, so does the need
for inventory recognition.
➢ Sales value of the by-product is generally recorded under either
the NRV approach or realized value approach.
Net Realizable Value Approach
➢ The net realizable value approach (or off set approach) reduces
joint product cost for the net realizable value created by the by-
product’s sale.
➢ When by-product is generated, the NRV is debited to inventory
and one of two accounts may be credited: Work in Process
Inventory—Joint Products or Cost of Goods Sold for the joint
products.
➢ Using the Work in Process account allows the joint cost to be
reduced immediately when the by-product is produced.
➢ However, recording that reduction immediately is less
conservative than waiting until the by-product is actually sold.
➢ It is also possible that the by-product could have sales potential
beyond that currently known by management.
Realized Value Approach
➢ Under the realized value approach (or other income approach),
no value is recognized for the by-product until it is sold.
➢ This method is the simplest approach to accounting for by-
product.
➢ Several reporting techniques can be used with the realized value
approach.
➢ One presentation shows total sales of by-product on the income
statement under the Other Revenue caption.
➢ Costs of additional processing or disposal of the by-product are
included in the cost of producing the joint products.
➢ This presentation provides little useful information to
management because it does not match the costs of producing
the by-product with its revenues.
Note:
➢ Allocation of joint costs is not unique to manufacturing
organizations.
➢ Some costs incurred in service businesses and in not-for-profit
organizations are considered joint costs in that it may be
necessary to allocate those costs among product lines,
organizational locations, or types of organizational activities.
➢ Conceptually, the treatment of the profitability of by-
product/scrap in a job order system is similar to the treatment
of the costs of spoilage in a job order system,

A second presentation for the realized value approach shows by-

product revenue, net of additional costs of processing and disposal,
on the income statement.
➢ The net by-product revenue is presented as an enhancement of
net income in the period of sale under the Other Income caption.
➢ This presentation allows management to recognize the
monetary benefit realized from managing the costs and
revenues related to by-product.

The Other Income method matches by-product revenue with related

storage, further processing, transportation, and disposal costs.
➢ As such, this method
o presents detailed information on financial
responsibility and accountability for disposition of
these secondary outputs,
o provides better control opportunities than the realized
value approach, and
o could improve performance because managers are
more apt to look for new or expanded sales potential
given that the net benefits of doing so are provided on
the income statement.
➢ Regardless of whether a company uses the NRV or the realized
value approach, the specific method used to account for by-
product should be established before the joint cost is allocated
to the joint products.

By-Product and Scrap in Job Order Costing

➢ Although joint products are not normally associated with job
order costing systems, accounting for by-product or scrap is
common in these systems.
➢ Either the NRV or the realized value approach can be used to
recognize the value of by-product/scrap.
➢ In a job order system, the value of by-product/scrap is
appropriately credited to either manufacturing overhead or the
specific jobs in process.
➢ Overhead is credited if by-product/ scrap is typically created by
most jobs undertaken.
➢ This method reduces the amount of overhead that is applied to
all products for the period.
➢ In contrast, if only a few or specific jobs generate substantial
amounts of by-product/scrap, the individual jobs causing this
output should be credited with its value.
➢ This method reduces the total costs assigned to those jobs.