ACCT 3420

Intermediate Managerial Accounting

Chapter 16

Cost Allocation: Joint

Products and Byproducts

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Learning Objectives (1 of 2)
1. Distinguish among different types of saleable
products, scrap, and toxic waste.
2. Analyze the physical measure and sales value at
splitoff methods to allocate joint costs.
3. Analyze the two methods to use when there is no
sales value at the splitoff point.

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Learning Objectives (2 of 2)
4. Understand the irrelevance of joint costs in the
“sell of process further” decision.
5. Identify the strategic implications of a decision to
implement one joint cost allocation method.
6. Account for byproducts using two different
methods.

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Joint Cost Terminology (1 of 4)
• Joint Costs
– Costs of a single production process that yields
multiple products simultaneously
• Splitoff Point
– The place, in a joint production process, where two or
more products become separately identifiable
• Separable Costs
– The full product costs of processing incurred by each
identifiable product beyond the splitoff point.

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Joint Cost Terminology (2 of 4)
• Product
– Any output that can be sold at full product cost plus
profit, or enables the company to avoid purchasing
direct materials
▪ Sales value can be high or low

• Categories of joint process outputs:

– Outputs with a positive sales value
– Outputs with a zero sales value

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Joint Cost Terminology (3 of 4)
• Joint Products
– Outputs of a joint production process that yields two or
more products with a high sales value compared to the
sales values of any other outputs
▪ But are not separately identifiable as individual products until
after the split-off point

• Main Product
– Output of a joint production process that yields one
product with a high sales value compared to the values
of the other outputs

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Joint Cost Terminology (4 of 4)
• Byproduct
– Outputs of a joint production process that have a low sales
value compared to the sales values of other outputs (i.e.,
the main or joint products)
• Scrap
– Has a minimal to zero sales value
• Toxic Waste
– Has negative revenue when the costs of reclamation and
remediation are considered
– Costs of recovering or disposing of toxic emissions are life-
cycle costs that should be added to joint production costs
prior to allocating this cost pool to main, joint, or byproducts
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Industries Incurring Joint Costs

Exhibit 16-2 Industries Incurring Joint Costs

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Reasons for Allocating Joint Costs
• Calculation of inventoriable costs and cost of goods
sold for external financial, tax reporting, and internal
financial reporting
• Cost reimbursement
• Customer profitability analysis
• Insurance settlements
• Rate regulations
• Litigation

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Joint Cost Allocation Methods
• Market-based — allocate using market-derived
data (dollars):
1. Sales value at splitoff
2. Net realizable value (NRV)
3. Constant gross-margin percentage NRV
• Physical measures — allocate using tangible
attributes of the products, such as weight or
volume

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Joint Cost — Illustration Overview

Exhibit 16-3 Farmers Dairy Overview

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Joint Cost — Illustration Data
blank Joint Costs blank
Joint costs (costs of 4,400 hL
of raw milk and processing to
splitoff point) $ 345,000 blank
blank Cream Liquid Skim
Beginning inventory (hectolitres) 0 0
Production (hL) 1,000 3,000
Sales (hL) 800 900
Ending inventory (hL) 200 2,100
Selling price per hL $155.00 $75.00

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Physical Measure Method
• Allocates joint costs on the basis of their relative
proportions at the splitoff point
– Using a common physical measure such as weight or
volume
• Less desirable as physical allocation measure has
no relationship to revenue-producing power of the
individual products
• Can be problematic if no common physical
measure is available

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Physical Measure — Example

blank Cream Skim Total

Physical Measure of Production 1,000 3,000 4,000
Weighting 0.25 0.75 blank
Joint Costs Allocated: blank blank blank
Joint Cost X Weighting $ 86,250 $ 258,750 $ 345,000
Joint production cost per hL $ 86.25 $ 86.25 blank

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Sales Value at Splitoff Method
• Uses the sales value of the entire production in
the accounting period to calculate allocation
percentage
– Costs are allocated to products in proportion to their
revenue-generating power
– Consistent with the benefits-received criterion of cost
allocation
• Ignores inventories

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 Sales Value at Splitoff — Example

blank Cream Skim Total

Sales Value of Production blank blank blank
Cream: 1,000 hL@ $155/hL $ 155,000 blank blank
Skim: 3,000 hL@ $75/hL blank $ 225,000 blank
Total blank blank $ 380,000
Allocation Based on % of Total Sales (rounded) 40.79% 59.21% blank
Joint Costs Allocated: blank blank blank
Joint Cost X Allocation % $ 140,724 $ 204,276 $ 345,000
Joint production cost per hL $ 140.72 $ 68.09 blank

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Net Realizable Value Method
• Allocates joint costs on the basis of relative
estimated net realizable value (NRV) of total
production of the joint products
– Expected sales value less expected separable costs of
production and marketing of total production
NRV = Final Sales Value – Separable Costs
• An alternative when selling prices of one or more
products at splitoff do not exist

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 NRV — Example
blank Condensed
Buttercream Milk Total
Final Sales Value of Production blank blank blank
Buttercream: 800 hL@ $420/hL $ 336,000 blank blank
Condensed milk: 2,000 hL@ $305/hL blank $ 610,000 blank
Total blank blank $ 946,000
Less: Separable Costs 135,000 270,000 405,000
NRV 201,000 340,000 541,000
NRV Weighting: blank blank blank
Product NRV ÷ Total NRV 37.15% 62.85% blank
Joint Costs Allocated $ 128,179 $ 216,821 $ 345,000
Production Cost per hL $ 328.97 $ 243.41 blank

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Constant Gross Margin Percentage of NRV
Method
• Allocates joint costs to joint products in a way that
the overall gross-margin percentage is identical
for the individual products
• Joint costs are calculated as a residual amount

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Constant Gross Margin % of NRV Method
— Example
Final Sales Value of Production blank blank blank
Buttercream: 800 hL @ $420/hL blank blank $ 336,000
Condensed milk: 2,000 hL @ $305/hL blank blank $ 610,000
Total blank blank $ 946,000
Less: Joint and separable costs blank blank
($345,000+$135,000+$270,000) 750,000
Gross margin blank blank $ 196,000
Gross margin percentage blank blank 20.719%
Blank Buttercream Condensed milk Total
Sales values $ 336,000 $ 610,000 $ 946,000
Less gross margin @ 20.719% 69,615 126,385 196,000
Total Product Costs $ 266,385 $ 483,615 $ 750,000
Less Separable Costs 135,000 270,000 405,000
Joint Costs Allocated $ 131,385 $ 213,615 $ 345,000

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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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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 costs.
• Don’t assume all separable costs in joint-cost allocations
are always incremental costs.
• Some separable costs may be fixed costs.
• Separable costs need to be evaluated for relevance
individually.
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Sell-or-Process Further Income Statement
Example

Exhibit 16-9 Farmers Dairy Product-Line Income Statement for May 2021: No Allocation of Joint Costs

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Challenges for Management Accountants
• Potential conflict between cost concepts for
decision making and those used for performance
evaluation
• Market-based joint cost allocation methods result
in positive operating incomes for all products
• Allocating joint costs using physical measures can
result in one or more joint products having
negative operating income

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Byproducts
• Two methods for accounting for byproducts:
1. Production byproduct method
▪ Recognizes byproduct inventory as it is produced, and sales
and costs at the time of sale
▪ Recorded as inventory at their selling price, or at selling price
less normal profit margin
2. Sale byproduct method
▪ Delays recognition of byproducts until they are sold; byproduct
costs are not tracked separately
▪ Byproduct inventory is not recognized
▪ Revenue is recorded at the time of sale

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Income Statement — Byproducts

Exhibit 16-11 Operating Income Statements of Westlake Corporation for 2021 Using the Production and
Sales Methods for Byproduct Accounting

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