Cost Allocation

Joint Products and Byproducts

Joint Products in Joint Processes

• Joint costs are costs which are incurred up to split-

off point
• Split-off point is the juncture in the process when
separate identifiable products emerge
• Separable costs are costs incurred beyond the split-
off point and are assignable to separate products

Split-off
Point
Separable
Product A Product A
Costs A
Joint
Costs
Separable
Product B Product B
Costs B
Joint Products, Byproducts

• Joint products have a relatively high sales value and

are not separately identifiable as individual products
until the split-off point
• Main product is the one with the highest sales value
resulting from a process yielding two or more products
• Byproducts have a low sales value relative to sales
value of the main or joint products (s)

Main Products
Joint Products Byproducts

High Low
Sales Value
Why Allocate Joint Costs?

Allocate joint costs to products for:

• inventory valuation
• Income determination
Approaches

• Joint costs cannot be traced to individual products,

they must be allocated. The methods available for this
allocation can be classified in two conceptual
groupings
• Physical measure based approach- volume, weight
• Market based approaches assign total cost to each
product on monetary basis- Sales-value at split-off
point, Net realizable value method, Constant gross
margin percentage method
Physical-Measure Based Approach

Example: A refinery processes 1,000 barrels of crude oil

and incurs $100,000 of processing costs. The process
results in the following output-

Asphalt $100,000*(300 barrels/1000 barrels)= 30,000

Fuel oil $100,000*(300 barrels/1000 barrels)= 30,000
Diesel $100,000*(200 barrels/1000 barrels)= 20,000
Kerosene $100,000*(100 barrels/1000 barrels)= 10,000
Gasoline $100,000*(100 barrels/1000 barrels)= 10,000
Joint Cost Allocated $ 100,000
Sales Value at Split-off Point Method

Based on entire production run and sales values of the

separate products at split-off

Asphalt 300 barrels@$60/ barrel = 18,000

Fuel oil 300 barrels@$180/ barrel= 54,000
Diesel 200 barrels@$160/ barrel= 32,000
Kerosene 100 barrels@$80/barrel = 8,000
Gasoline 100 barrels@$180/barrel = 18,000
Total sales value at split-off $ 130,000
Continued…

The total expected sales value for the entire production

run at split-off is thus $ 130,000.

Asphalt $100,000*($18,000/$130,000) = 13,846

Fuel oil $100,000*($54,000/$130,000) = 41,539
Diesel $100,000*($32,000/$130,000) = 24,615
Kerosene $100,000*($8,000/$130,000) = 6,154
Gasoline $100,000*($18,000/$130,000) = 13,846
Joint Cost Allocated $ 100,000
Net Realizable Value (NRV) Method

Allocates joint costs based on market values of the

product, all separable costs necessary to make the
product salable are subtracted before the allocation is
made

Asphalt 300 barrels@$70/ barrel = 21,000

Fuel oil 300 barrels@$200/ barrel= 60,000
Diesel 200 barrels@$180/ barrel= 36,000
Kerosene 100 barrels@$90/barrel = 9,000
Gasoline 100 barrels@$190/barrel = 19,000
NRV continued…

Separable costs are subtracted:

Asphalt 21,000 - 1,000= 20,000

Fuel oil 60,000 - 1,000= 59,000
Diesel 36,000 - 1,000= 35,000
Kerosene 9,000 – 2,000= 7,000
Gasoline 19,000 – 2,000= 17,000
Total NRV $ 138,000
NRV continued…

Asphalt $100,000*($20,000/$138,000) = 14,493

Fuel oil $100,000*($59,000/$138,000) = 42,754
Diesel $100,000*($35,000/$138,000) = 25,362
Kerosene $100,000*($7,000/$138,000) = 5,072
Gasoline $100,000*($17,000/$138,000) = 12,319
Joint Cost Allocated $ 100,000
Constant Gross Margin % NRV Method

Based on allocating joint costs so that the gross-margin

percentage is the same for every product

Asphalt 300 barrels@$70/ barrel = 21,000

Fuel oil 300 barrels@$200/ barrel= 60,000
Diesel 200 barrels@$180/ barrel= 36,000
Kerosene 100 barrels@$90/barrel = 9,000
Gasoline 100 barrels@$190/barrel = 19,000
Total final sales price $145,000
Constant Gross Margin % NRV continued

From the total $145,000, deduct the joint costs and total
separable costs to arrive at a total gross margin for all
products
$145,000 - $100,000 – $7,000 =$38,000

The gross margin % is :

$38,000 /$ 145,000 = 26.21 %
Constant Gross Margin % NRV continued

Deduct gross margin from each product to arrive at cost

of goods sold:

Asphalt $ 21,000 – (21,000* 26.21%) = $ 15,497

Fuel oil 60,000 – (60,000* 26.21%) = 44,276
Diesel 36,000 – (36,000*26.21%) = 26,565
Kerosene 9,000 – (9,000*26.21%) = 6,641
Gasoline 19,000 – (19,000*26.21%) = 14,021
Constant Gross Margin % NRV continued

Deduct the separable costs from each product to arrive

at the allocated joint costs:

Asphalt $ 15,497 - $ 1,000= $ 14,497

Fuel oil 44,276 - 1,000= 43,276
Diesel 26,565 - 1,000= 25,565
Kerosene 6,641 - 2,000= 4,641
Gasoline 14,021- 2,000= 12,021
Joint costs allocated $100,000
Irrelevance of Joint Costs

• When considering whether to sell a product at the

split-off point or process further, ignore joint costs
Split-off
Point Processing
Cream $280 Butter $500
Raw Milk
$400 Processing Condensed
Skim
$520 Milk $1,100

Cream versus Butter Cream Sell @ Split-off Process Further

Relevant revenue $200 $500

Relevant costs 280
Incremental operating income $200 $320
Main Products and Byproducts

• Main products are products which constitute the

major portion of the total sales value
• Byproducts are products with low sales values
compared to the main products
• Scrap are outputs with minimal sales values
• Wastage happens in the normal due course of the
business