CHAPTER FIVE

JOINT-PRODUCT
COST ALLOCATIONS

COMPILED BY BENOL.M
1
 Joint-product Cost Allocations
 In this unit, we consider the complex case in which companies’
produce two or more products simultaneously out of the same
process or processes and from the same input.
 Many natural resource and agricultural companies and other
industries face the problem of how to use cost information to
manage processes that can produce different products.
 Companies that are engaged in wood processing, Shell oil
Company which produce petroleum and chemicals; Coal and
mineral producing companies, food processing industries (meat,
milk etc), and many others are encountering such problems.

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 Joint cost X
Raw
Joint process Y Joint products
materi
al
Z

Split-off point

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 Basic terms
Joint Process: is a single production process that
converts a common input into several outputs.
For example, processing timber results jointly in lumber
of various grades plus wood chips and sawdust that can
be converted into paper pulp.
Another example is processing crude oil can result
jointly in gasoline of various grades, Kerosene, jet fuel,
asphalt, and/or petrochemicals.
Joint costs: are the costs of a single production process
that yields products simultaneously.

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 Cont.
Joint products: are the products that jointly result from
processing a common input and that have relatively the same
sales value. We can think of the examples given under the
joint process. Or X, Y, and Z are joint products.
The split off point:-is the juncture or the point in a joint
production process where one or more products become
separately identifiable.
Separable costs:-are all costs incurred beyond the split off
point that are assignable to one or more individual products.
Final product- a final product is one that is ready for sale
without further processing.

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Cont.
Intermediate products- are products that usually require
further processing before they are saleable to the ultimate
consumer, either by the producer or by another processor.
The output of joint production process can be classified into
two general categories-those with a positive sales value and
those with a zero sale value.
A product is any output that has a positive net sales value (or
an output that enables an organization to avoid incurring
costs).
A joint product has relatively high sales value compared to
other products yielded by a joint production process.
No journal entries are made in the accounting system to
record the processing of such products with zero sales value
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 Cont.
In practice companies distinguish between main products

and by-products before allocating joint costs because, by

convention, joint costs are allocated only to main
products. To take a very simple example, consider a
slaughterhouse and assume slaughtering of an ox.
The products are meat, skin and wastage. Meat and skin

have the sales value and wastages have zero sales value.

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 Cont.
Main product-when a joint production process yields only
one product with a relatively high sales value, that product
is termed a main product.
Thus, main product is a joint output that generates a
significant portion of the net realizable value from the
process.
By products: - are products that have relatively low sales
value compared with the sales value of joint or main
products. These are outputs from a joint production process
that are minor in quantity and/or net realizable value when
compared to the main products.

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 Cont.
Some outputs of the joint production process have zero sales
value.
Example, the processing of mineral ore to obtain gold and
silver also yields dirt that is recycled back into the ground.
No journal entries are usually made in the accounting system
to record the processing of such outputs with zero sales value.
Characteristics of joint product
Joint products are produced from the same raw material
They are produced simultaneously a common process
They are comparatively of equal importance
They may require further processing after their point of
separation
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Joint cost allocations Approaches
Several methods can be used in allocating joint cost in
to joint products.
Methods:
Sales value at the split-off point method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method

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 Sales Value at Split-off point method
Manufacturer with joint production process sometimes

must decide whether a joint product should be sold at the

split-off point or processed further before being sold.
Such decision is, however, not affected by the joint costs

to be allocated among the joint products.

The only relevant costs are those costs that differ between

the two alternatives i.e. processing further or selling the

both products or one of the products at the split-off point.

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Cont.
 In most cases of simplest joint production process, the joint

products are sold at the split-off -point without further processing.

 In such cases, the relative sales value at the split-off point method

is used to allocate the joint costs incurred on the joint products.

 That is the joint costs are allocated to the joint products on the basis

of the proportion of their relative sales value at the split-off point.

 This method ignores the separable or further processing cost of the

joint products with the essence that the products are sealable at the
split off point without further processing.

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 Example
For illustration of the sales value at the split-off point

method assume Farmers’ Dairy of Dire-Dawa purchases raw

milk from individual farms and processes it until the split of
point, where two products (cream and liquid skim) emerge.
These two products are sold to an independent company,

which markets and distributes them to supermarkets in Dire-

Dawa and other retail outlets.

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 Cont.
The following diagram indicates the basic relationships in this example.

Cream
Joint costs

Raw Milk Processing

$400,000

Liquid
Split-off point Skim

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 Cont.
- Row milk processed, 110,000 gallons, 10,000 gallons of raw milk are lost in the
production process due to evaporation, spillage and so on, yielding 100,000 gallons of
good product.

Production Sales
Cream 25,000 gallons 20,000 gallons at $ 8/gallon
Liquid skim 75,000 gallons 30,000 gallons at $4/gallon

Beginning Inventory ending inventory

Raw milk 0 gallons 0 gallons
Cream 0 gallons 5,000 gallons
Liquid skim 0 gallons 45,000 gallons

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 Cont.
Cost of purchasing 110,000 gallons of raw milk and
processing it until the split off point to yield 25,000 gallons of
cream and 75,000 gallons of liquid skin is $ 400,000.
Dear learner, much attention should be given to the physical
amounts used for allocation of joint costs at the sales value at
the split of point method.
Reminder! As we have discussed already sales value at the
split-off point method allocates joint costs to joint products
on the basis of the relative sales value at the split off point of
the total production of these products during the accounting
period.
The total production volume is used for the allocation process
not the number of units sold.
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 Cont.
The number of units sold and remained is used to find out
the actual revenue reported in the income statement, cost of
goods sold and cost of ending inventory reported in the
balance sheet. Keep in touch very carefully with the
example below.
Required:
1. Allocate the joint costs to each product using the Sales
value at the split off point method
2. How much of the joint costs should be allocated to the cost
of goods sold and to the ending inventory of each product.

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