Unit 3 - Joint and Byproducts - 230731 - 180528

Study Unit 2
Cost Allocation:
Joint Products and Byproducts
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved. 16-1
Joint Cost Terminology
• Joint Costs – costs of a single production
process that yields multiple products
simultaneously
• Split off Point – the place in a joint production
process where two or more products become
separately identifiable
• Separable Costs – all costs incurred beyond
the split off point that are assignable to each
of the now-identifiable specific products
• Main Product – output of a joint production
process that yields one product with a high
sales value compared to the sales values of
the other outputs
• 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
• Byproducts – outputs of a joint production
process that have low sales values compare to
the sales values of the other outputs
Joint Process Flowchart
Steam:
An Output with Zero Sales Value
Joint Product #1
Single Production
Process
Joint Product #2
Byproduct
Reasons for Allocating Joint Costs
• Required for GAAP and taxation purposes

• Cost values may be used for evaluation
purposes
• Cost-based contracting
• Insurance settlements
• Required by regulators
• Litigation
Joint Cost Allocation Methods
• Physical Measures – allocate using tangible
attributes of the products, such as weight,
litres, barrels, etc.
• Market-Based – allocate using market-
derived data (dollars):
1. Sales value at split off
2. Net Realizable Value (NRV)
3. Constant Gross-Margin percentage NRV
Physical-Measure Method
• Allocates joint costs to joint products on the
basis of the relative weight, volume, or other
physical measure at the split off point of total
production of the products
Physical-Measure Example
• Consider the following example of two products arising
out of one joint process costing $500
• Assumes 1 gallon of Cream is equal to 1 gallon of Skim-
milk
Joint
Product % Joint Costs
Gallons of Total Volume Costs Allocated
Cream 25 25% $ 500 $ 125
Skim-milk 75 75% 500 375
Total 100 100% $ 500
Sales Value at Splitoff Method
• Uses the sales value of the entire production
of the accounting period to calculate
allocation percentage
• Ignores inventories
Sales Value at Splitoff Example
Cream Skim-milk Total

Final Sales Value of Production
Cream: 25 gals@ $50/gal $ 1,300
Skim-milk: 75 gals@ $10/gal $ 800
Total $ 2,100
Allocation Based on % of
Total Sales (rounded) 61.9% 38.1%
Joint Costs ($500) Allocated:

Joint Cost X Allocation % $ 310 $ 190
Net Realizable Value Method
• Allocates joint costs to joint products on the
basis of relative NRV of total production of the
joint products
• NRV = Final Sales Value – Separable Costs
NRV Example
Cream: 25 gals@ $50/gal $ 1,300
Total $ 2,100
Less: Separable Costs 900 200 1,100
NRV 400 600 1,000
NRV Weighting:
Product NRV ÷ Total NRV 40% 60%
Joint Costs 500 500
Joint Costs Allocated
NRV Weighting X Joint Costs $ 200 $ 300
Constant Gross Margin 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
Constant Gross Margin NRV Method Example

Cream: 25 gals@ $50/gal $ 1,300
Total $ 2,100
Less: Separable Costs 1,100
NRV 1,000
Joint Costs 500
Gross Profit $ 500
Gross Profit % of Sales Value (rounded) 23.8%
Sales Values $ 1,300 $ 800 $ 2,100
Less Gross Margin @ 23.8%(rounded) 310 190 500
Total Product Costs 990 610 1600
Less Separable Costs 900 200 1100
Joint Costs Allocated $ 90 $ 410 $ 500
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
Sell-or-Process Further Flowchart
Final
Joint Product #1 Product
#1
Further Processing Dept 1
Single Production
Process Final
Joint Product #2 Product
#2
Further Processing Dept 2
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
Relevant costs for decision-making
Joint cost allocations are necessary for financial accounting, but they should not
be used for decision-making.
Example
Joint product costs $100 000
Sales value at split-off point:
Product X (5 000 units at $16) $80 000
Product Y (5 000 units at $8) $40 000
If additional costs of $6 000 are incurred on product Y it can be converted into
product Z and sold for $10 per unit.
• Note that the joint costs are irrelevant for this decision since they will be
incurred irrespective of which decision is taken.
• The decision should be based on a comparison of relevant
costs with relevant revenues:
Relevant revenues (additional revenues of 5 000 × $2) $10 000

Relevant costs (additional costs of processing) 6 000
Additional profit from conversion 4 000
Example
Swaco Chemicals (Pty) Ltd (SC) processes salt into various

industrial products. In July 2013, SC incurred joint costs of
N$100 000 to purchase salt and convert it into two saleable
products: Caustic soda and Chlorine. Although there is an
active outside market for chlorine, SC processes all 800 tons of
chlorine it produces into 500 tons of Polyvinyl Chloride (PVC),
which is then sold. There were no beginning and no ending
inventories of salt, caustic soda, or PVC in July 2013.
Information for July 2013 production and sales follows:
Example Continues
Joint costs PVC
Joint costs (cost of salt and
processing to split off point) $ 100,000.00
Separable cost of processing 800 tons
chlorine into 500 tons of PVC $ 20,000.00
Caustic soda Chlorine PVC

Beginning inventory (tons) - - -
Production (tons) 1,200 800 500
Transfer for further processing (tons) 800
Sales (tons) 1,200 500
Ending inventory (tons) - - -
Selling price per ton in active outside
market (for products not actually sold) $ 75.00
Selling price per ton for products sold $ 50.00 $ 200.00
Example continues
Required: Marks
1 Allocate the joint costs between caustic soda and chlorine under:
a) The sales value at split off method 4
b) The physical-measure method 4
2 Allocate the joint costs between caustic soda and PVC under the
NRV method 7
3 What is the gross-margin percentage of: 11
a) Caustic soda and
b) PVC under the three allocation methods
4 Dolphin Swimming Pools offers to purchase 800 tons of chlorine in
July 2013 at N$75 per ton. Assume all other production and sales
data are the same for August as they were in July. This sale of
chlorine to Dolphin would mean that no PVC would be produced.
How would accepting this offer affect SC’s August 2013 operating 6
income?
Solution

Unit 3 - Joint and Byproducts - 230731 - 180528

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Study Unit 2

• Required for GAAP and taxation purposes

Cream Skim-milk Total

Joint Costs ($500) Allocated:

• Allocates joint costs to joint products in a way

Cream Skim-milk Total

• In Sell-or-Process Further decisions, joint costs

Relevant revenues (additional revenues of 5 000 × $2) $10 000

Swaco Chemicals (Pty) Ltd (SC) processes salt into various

Caustic soda Chlorine PVC

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