2. Joint Cost Terminology
• Joint Costs – Costs of a single production process
that yields multiple products simultaneously.
• Splitoff Point – The place in a joint production
process where two or more products become
separately identifiable
• Separable Costs – All costs incurred beyond the
splitoff point that are assignable to each of the
now-identifiable specific products
3. Joint Cost Terminology
• 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
6. 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
7. Distinction and Similarity Between Joint
Products and By-Products
• The distinction between joint products and by-products rests solely
on the relative importance of their sales value.
• A by-product is a secondary product whose total sales value is
relatively minor in comparison with the sales value of the main
product (joint product).
• Relationships between joint products and by-products change over
time as technology and markets change.
• By-products may become more and more important, eventually
becoming joint products.
• When the relative importance of individual products changes, the
products need to be reclassified and the costing procedures need
to be changed.
8. Joint Cost Allocation Methods
•
Market-Based – allocate using market-derived
data (dollars):
1. Net Realizable Value (NRV)
•
Physical Measures – allocate using tangible
attributes of the products, such as pounds,
gallons, barrels, etc
1. The sales value at Splitoff method
2.The Physical-measure method
3. Weighted average
9. Physical-Measure Method
• Allocates joint costs to joint products on the
basis of the relative weight, volume, or other
physical measure at the splitoff point of total
production of the products
13. Weighted Average Method
• The weighted average method uses the weight factors to include
such diverse elements as amount of material used, difficulty to
manufacture, time consumed, difference in type of labor used, and
size of unit.
Weighted physical units = Number of units × Weight factor
Example: The canning industry uses weight factors to distinguish
between can sizes or quality of product. The weighted average
method allocates relatively more of the joint cost to the high-grade
products because they represent more desirable and profitable
products.
14. Sales Value at Splitoff Point Method
• Uses the sales value of the entire production of the
accounting period to calculate allocation percentage
• The cost-allocation base (total sales value at splitoff) is
expressed in terms of a common denominator (the
amount of revenues) that is systematically recorded in
the accounting system. To use this method, selling prices
must exist for all products at the splitoff point
18. 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
23. Method Selection
• If selling price at splitoff is available, use the Sales
Value at Splitoff Method
• If selling price at splitoff is not available, use the
NRV method
• If simplicity is the primary consideration,
Physical-Measures Method.
• Despite this, some firms choose not to allocate
joint costs at all
24. Byproducts
• Byproducts have low sales value and some times
their salvage value is not considered.
• Two methods for accounting for byproducts
• Production Method –
i) Recognizes byproduct inventory as it is created,
ii) Byproduct revenues appear in the income
statement as Cost reduction for the main
product
• Sales Method –
i) Recognizes only sales at the time of sales,
ii) Byproduct revenues appear in the income
statement as Separate item of revenue or other
income
25. Accounting for Byproducts
Neither approach is conceptually correct.
Both technically violate GAAP.
• Method A- Production method
• Recognizes byproducts revenue
at the time their production is completed.
• Method B: Sales method
Does not recognize byproducts in inventory.
27. The Westlake Corporation processes timber into fine-grade lumber
and wood chips that are used as mulch in gardens and lawns.
Information about these products follows:
Fine-Grade lumber (the main product)—sells for $6 per board foot
(b.f.)
Wood chips (the byproduct)—sells for $1 per cubic foot (c.f.)
Data for July 2012 are as follows
Beginning
production
production
sales
Ending
inventory
Fine-Grade
lumber
0
50,000
40,000
10,000
Wood
chips
0
4,000
1,200
2,800
