joint-products-and-by-products

Cost Allocation: Joint Products
and Byproducts
Chapter 16
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 1

Learning Objective 1
Identify the splitoff point(s)

in a joint-cost situation.

Joint-Cost Basics
Joint costs Joint products
Byproduct Splitoff point
Separable costs

Joint-Cost Basics
Raw milk
Cream Liquid Skim

Joint-Cost Basics
Coal
Gas Benzyl Tar

Distinguish joint products

from byproducts.

Joint Products and Byproducts
Main Products
Joint Products Byproducts
High Low
Sales Value

Explain why joint costs should be

allocated to individual products.

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

Allocate joint costs using

four different methods.

Approaches to Allocating
Joint Costs
Two basic ways to allocate

joint costs to products are:
Approach 1: Approach 2:
Market based Physical measure

Approach 1: Market-based Data
Sales value at splitoff method

Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method

Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
Joint processing
cost is $200,000
10,500 units of B at a
selling price of $30 = $315,000
11,500 units of C at a
selling price of $20 = $230,00 Splitoff point
Allocating Joint Costs Example
A B
Sales Value $100,000 $315,000 $230,0
Allocation of
Joint Cost
100 ÷ 645 31,008
315 ÷ 645 97,674
230 ÷ 645
Gross margin $ 68,992 $217,326 $158,6

Sales Value at Splitoff
Method Example
Assume all of the units produced

of B and C were sold.
2,500 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?

Method Example
Product A Revenues: 7,500 units × $10.00 $75,0

Cost of goods sold:
Joint product costs $31,008
Less ending inventory
$31,008 × 25% 7,752
Gross margin

Method Example
Product A:
($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:
($315,000 – $97,674) ÷ $315,000 = 69%
Product C:
($230,000 – $71,318) ÷ $230,000 = 69%

Estimated Net Realizable Value
(NRV) Method Example
Assume that Oklahoma Company can process

products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1: B1: C1:

10,000 × $12.00 10,500 × $33.00 11,500 × $21.00
= $120,000 = $346,500 = $241,500
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of each

product at the splitoff point?

Product A1: $120,000 – $35,000 = $85,000

Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocated
to each product?

To A1:
85 ÷ 575 × $200,000 = $29,565
To B1:
300 ÷ 575 × $200,000 = $104,348
To C1:
190 ÷ 575 × $200,000 = $66,087

Allocated Separable
joint costs costs
A1 $ 29,565 $ 35,000 $
B1 104,348 46,500 1
C1 66,087 51,500 1
Total $200,000 $133,000 $3

Constant Gross-Margin
Percentage NRV Method
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.

What is the expected final sales value of total

production during the accounting period?
Product A1: $120,000
Product B1: 346,500
Product C1: 241,500
Total $708,000

Step 1:
Compute the overall gross-margin percentage.
Expected final sales value $708,000
Deduct joint and separable costs 333,000
margin $3
Gross margin percentage:
$375,000 ÷ $708,000 = 52.966%
Step 2:
Deduct the gross margin.
Sales Gross Cos
Value Margin Go
Product A1: $120,000 $ 63,559 $ 56,441
Product B1: 346,500 183,527 162,973
Product C1: 241,500 127,913 113,587
Total $708,000 $375,000 $333,00
($1 rounding)
Step 3:
Deduct separable costs.
Cost of Separable Jo
goods sold costs alloc
Product A1: $ 56,441 $ 35,000 $ 21,441
Product B1: 162,973 46,500 116,473
Product C1: 113,587 51,500 62,087
Total $333,000 $133,000 $200,00
Approach 2: Physical
Measure Method Example
$200,000 joint cost
20,000 48,000 12,000

pounds A pounds B pounds C
Product A Product B Product C

$50,000 $120,000 $30,000
Explain why the sales value at

splitoff method is preferred
when allocating joint costs.

Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value It does not anticipate

of the joint product subsequent management
immediately. decisions.
It uses a
It is simple.
meaningful basis.
Choosing a Method
The purpose of the joint-cost allocation is

important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.

Avoiding Joint Cost Allocation
Some companies refrain from allocating joint

costs and instead carry their inventories
at estimated net realizable value.

Explain why joint costs

are irrelevant in a
sell-or-process-further decision.

Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling Selling
Units price price
10,000 A: $10 A1: $12
10,500 B: $30 B1: $33
11,500 C: $20 C1: $21
Irrelevance of Joint Costs
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000
– Incremental cost $35,000 = ($
Product B: Incremental revenue $31,500
Product C: Incremental revenue $11,500
Account for byproducts

using two different methods.

Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sale method delays recognition of
byproducts until the time of their sale.

Example
Main Products B
(Yards)
Production 1,000
Sales 800
Ending inventory 200
Sales price $13/yard
No beginning finished goods inventory

Example
Joint production costs for joint

(main) products and byproducts:
Material $2,000
Manufacturing labor 3,000
Manufacturing overhead 4,000
Total production cost $9,000

Method A
Method A: The production method

What is the value of ending inventory
of joint (main) products?
$9,000 total production cost
– $400 net realizable value of the byproduct
= $8,600 net production cost for the joint products

Method A
200 ÷ 1,000 × $8,600 = $1,720 is the value

assigned to the 200 yards in ending inventory.
What is the cost of goods sold?
nt production costs $9,0
ss byproduct revenue 4
Less main product inventory 1,720
of goods sold $
Method A
Income Statement (Method A)

Revenues: (800 yards × $13) $10,400
Cost of goods sold 6,880
ross margin $ 3,520
What is the gross margin percentage?
$3,520 ÷ $10,400 = 33.85%

Method A
What are the inventoriable costs?

Main product: 200 ÷ 1,000 × $8,600 = $1,720
Byproduct: 100 × $1.00 = $100

Journal Entries Method A
Work in Process 2,000

Accounts Payable
To record direct materials purchased and used
in production
Various Accounts
To record conversion costs in the joint process
Byproduct Inventory 400

Finished Goods 8,600
Work in Process
To record cost of goods completed
Cost of Goods Sold 6,880
Finished Goods
To record the cost of the main product sold
Cash or Accounts Receivable 10,400

Revenues
To record the sale of the main product

Method B
Method B: The sale method
What is the value of ending inventory of
joint (main) products?
200 ÷ 1,000 × $9,000 = $1,800
No value is assigned to the 400 yards of
byproducts at the time of production.
The $300 resulting from the sale of
byproducts is reported as revenues.
Method B
Income Statement (Method B)

Revenues: Main product (800 × $13) $10,400
Byproducts sold
Total revenues
Cost of goods sold:
Joint production costs 9,000
Less main product inventory 1,800
Gross margin
Method B
What is the gross margin percentage?

$3,200 ÷ $10,700 = 29.91%
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × $9,000 = $1,800
By-product: -0-

Journal Entries Method B

Accounts Payable
To record direct materials purchased and used
in production
Various Accounts
To record conversion costs in the joint process
Finished Goods 9,000

Work in Process
To record cost of goods completed
Cost of Goods Sold 7,200
Finished Goods
To record the cost of the main product sold

Cash or Accounts Receivable 10,400

Revenues
To record the sale of the main product
Cash or Accounts Receivable 300
Revenues
To record the sale of the byproduct

End of Chapter 16

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Cost Allocation: Joint Products

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 1

Identify the splitoff point(s)

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 2

Joint costs Joint products

Byproduct Splitoff point

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 3

Cream Liquid Skim

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 4

Gas Benzyl Tar

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 5

Distinguish joint products

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 6

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 7

Explain why joint costs should be

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 8

• to compute inventory cost and cost of goods sold

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 9

Allocate joint costs using

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 10

Two basic ways to allocate

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 11

Sales value at splitoff method

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 12

Gross margin $ 68,992 $217,326 $158,6

Assume all of the units produced

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 15

Product A Revenues: 7,500 units × $10.00 $75,0

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 16

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 17

Assume that Oklahoma Company can process

A1: B1: C1:

Additional processing (separable) costs are as follows:

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of each

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 19

Product A1: $120,000 – $35,000 = $85,000

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 20

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 21

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 22

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 24

What is the expected final sales value of total

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 25

$200,000 joint cost

20,000 48,000 12,000

Product A Product B Product C

Explain why the sales value at

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 30

It measures the value It does not anticipate

The purpose of the joint-cost allocation is

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 32

Some companies refrain from allocating joint

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 33

Explain why joint costs

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 34

Account for byproducts

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 37

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 38

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 39

Joint production costs for joint

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 40

Method A: The production method

©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster 16 - 41

200 ÷ 1,000 × $8,600 = $1,720 is the value