Cost Allocation Methods for Joint Products and Byproducts

Cost Allocation: Joint Products
and Byproducts
Chapter 16
16 - 1
Learning Objective 1
Identify the split-off point(s)

in a joint-cost situation.
16 - 2
Joint-Cost Basics (E.g. 1)
Split-off point
Joint costs are costs
Incurred in
Raw milk producing the raw milk
Separable costs are costs

Cream Liquid Skim incurred in producing these
separately identifiable products
16 - 3
Joint-Cost Basics (E.g. 2)
Coal
Gas Benzyl Tar
16 - 4
Distinguish joint products

from byproducts.
16 - 5
Joint Products and Byproducts
Main Product = 1
Joint Products 2 Byproducts
High Low
Sales Value
16 - 6
Explain why joint costs should be

allocated to individual products.
16 - 7
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
16 - 8
Allocate joint costs using

four different methods.
16 - 9
Approaches to Allocating
Joint Costs
Two (2) basic ways to allocate

joint costs to products are:
Approach 1: Approach 2:
Market based Physical measure
16 - 10
Approach 1: Market-based Data
3 methods
(1) - Sales value at split-off method

(2) - Estimated net realizable value (NRV) method
(3) - Constant gross-margin percentage NRV method
16 - 11
(1) Sales Value at Split-off
Method 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
16 - 12
Method Example
A B C Total
Sales Value $100,000 $315,000 $230,000 $645,000
Allocation of
Joint Cost
100 645 31,008
315 645 97,674
230 645 71,318
200,000
Gross margin $ 68,992 $217,326 $158,682 $445,000
16 - 13
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 of product A ?
What is the gross margin percentage of each product?
16 - 14
Method Example
Product A Revenues: 7,500 units $10.00 $75,000

Cost of goods sold:
Joint product costs $31,008
Less ending inventory
$31,008 25% 7,752 23,256
Gross margin $51,744
16 - 15
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%
16 - 16
(2) 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
16 - 17
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?
16 - 18
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?
16 - 19
To A1:
85 575 $200,000 = $29,565
To B1:
300 575 $200,000 = $104,348
To C1:
190 575 $200,000 = $66,087
16 - 20
Allocated Separable Inventory

joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565
B1 104,348 46,500 150,848
C1 66,087 51,500 117,587
Total $200,000 $133,000 $333,000
16 - 21
(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.
16 - 22
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.
16 - 23
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
16 - 24
Step 1:
Compute the overall gross-margin percentage.
Expected final sales value $708,000
Deduct joint and separable costs 333,000
Gross margin $375,000
Gross margin percentage:
$375,000 $708,000 = 52.966%
16 - 25
Step 2:
Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods sold
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 $333,000
($1 rounding)
16 - 26
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs allocated
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 $200,000
16 - 27
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
16 - 28
Explain why the sales value at

splitoff method is preferred
when allocating joint costs.
16 - 29
Choosing a Method
Why is the sales value at split-off 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.
16 - 30
Choosing a Method
The NRV method should be used when there is

not enough information about individual
selling prices at split-off point.
The physical-measure method is a more

appropriate method to use in rate regulation.
16 - 31
Avoiding Joint Cost Allocation
Some companies refrain from allocating joint

costs and instead carry their inventories
at estimated net realizable value.
16 - 32
Explain why joint costs

are irrelevant in a
sell-or-process-further decision.
16 - 33
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 Additional
Units price price costs
10,000 A: $10 A1: $12 $35,000
10,500 B: $30 B1: $33 $26,500
11,500 C: $20 C1: $21 $51,500
16 - 34
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 = ($15,000)
Product B: Incremental revenue $31,500
Incremental cost $26,500 = $5,000
Product C: Incremental revenue $11,500
16 - 35
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue $20,000 Split-off
Product B: Incremental revenue $31,500 Processed
Incremental cost $26,500 = $5,000
further
Product C: Incremental revenue $11,500 Split-off
16 - 36
Account for byproducts

using two different methods.
16 - 37
Accounting for Byproducts
Method A:
The production method recognizes byproducts
at the time their production is completed.
(Conceptually, this is the correct method)
Method B:
The sale method delays recognition of
byproducts until the time of their sale.
(used when dollar amount of byproducts are immaterial)
16 - 38
Example
Main Products Byproducts

(Yards) (Yards)
Production 1,000 400
Sales 800 300
Ending inventory 200 100
Sales price $13/yard $1.00/yard
No beginning finished goods inventory
16 - 39
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
16 - 40
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
16 - 41
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?
Joint production costs $9,000
Less byproduct revenue 400
Less main product inventory 1,720
Cost of goods sold $6,880
16 - 42
Method A
Income Statement (Method A)

Revenues: (800 yards $13) $10,400
Cost of goods sold 6,880
Gross margin $ 3,520
What is the gross margin percentage?
$3,520 $10,400 = 33.85%
16 - 43
Method A
What are the inventoriable costs?

Main product: 200 1,000 $8,600 = $1,720
Byproduct: 100 $1.00 = $100
16 - 44
Journal Entries Method A
Work in Process 2,000

Accounts Payable 2,000
To record direct materials purchased and used
in production
Various Accounts 7,000
To record conversion costs in the joint process
16 - 45
Byproduct Inventory 400

Finished Goods 8,600
To record cost of goods completed
Cost of Goods Sold 6,880
To record the cost of the main product sold
16 - 46
Cash or Accounts Receivable 10,400

Revenues 10,400
To record the sale of the main product
16 - 47
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.
16 - 48
Method B
Income Statement (Method B)

Revenues: Main product (800 $13) $10,400
Byproducts sold 300
Total revenues $10,700
Cost of goods sold:
Joint production costs 9,000
Less main product inventory 1,800 $ 7,200
Gross margin $ 3,200
16 - 49
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-
16 - 50
Journal Entries Method B

Accounts Payable 2,000
To record direct materials purchased and used
in production
Various Accounts 7,000
To record conversion costs in the joint process
16 - 51

To record cost of goods completed
Cost of Goods Sold 7,200
To record the cost of the main product sold
16 - 52
Cash or Accounts Receivable 10,400

Revenues 10,400
To record the sale of the main product
Cash or Accounts Receivable 300
Revenues 300
To record the sale of the byproduct
16 - 53
End of Chapter 16
16 - 54

Cost Allocation Methods for Joint Products and Byproducts

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Cost Allocation Methods for Joint Products and Byproducts

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Cost Allocation: Joint Products

Identify the split-off point(s)

Separable costs are costs

Gas Benzyl Tar

Distinguish joint products

Explain why joint costs should be

to compute inventory cost and cost of goods sold

Allocate joint costs using

Two (2) basic ways to allocate

(1) - Sales value at split-off method

Assume all of the units produced

Product A Revenues: 7,500 units $10.00 $75,000

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

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

Allocated Separable Inventory

What is the expected final sales value of total

$200,000 joint cost

20,000 48,000 12,000

Product A Product B Product C

Explain why the sales value at

It measures the value It does not anticipate

The NRV method should be used when there is

The physical-measure method is a more

Some companies refrain from allocating joint

Explain why joint costs

Account for byproducts

Main Products Byproducts

Joint production costs for joint

Method A: The production method

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

Income Statement (Method A)

What are the inventoriable costs?

Work in Process 2,000

Byproduct Inventory 400

Cash or Accounts Receivable 10,400

Income Statement (Method B)

What is the gross margin percentage?

Work in Process 2,000

Finished Goods 9,000

Cash or Accounts Receivable 10,400

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