Joint Product and By-Product Costing

Key Topics:

– Allocation methods– Choosing a method– Using joint cost allocation information

• Decisions to process further• Choosing a method• Uses of joint costing information

Joint Processes and Common Costs

• Jointly produce more than one product• Joint (common) costs cannot be traced

to individual products• Joint production ends at the split-off

point• Individual products might or might not be

processed beyond the split-off point

Main Products and Byproducts

Allocation Methods

• Physical output• Sales at split-off point• Net realizable value• Constant gross margin NRV

Physical Output Method• Allocate joint costs in proportion to

the physical output for each main product

• Examples of physical measures: meters, pounds, gallons

• All main products must be expressed in the same physical measure

Sales at Split-Off Method

• Allocate joint costs in proportion to the sales value for each main product at the point where joint production ends

• Not always possible to measure sales value at the split-off point

Net Realizable Value Method

• Allocate joint costs in proportion to the net realizable value for each main product, taking into account the final selling price and separable costs

• Same as the sales value at split-off method if there is no additional production beyond the split-off point

Constant Gross Margin NRV Method

• Allocate joint costs so that the gross margin for all main products is the same

– First, calculate combined gross margin for all main products

– Second, calculate joint cost allocation that will result in the same gross margin for all main products, taking into account the final selling price and separable costs

Allocating Joint Costs

The Paint Palette Company produces two products: premium and regular paint. Joint costs are Rs10,000 per batch of 1,000 gallons, 30% premium and 70% regular. If Paint Pallet sold the products at split-off, it would receive Rs10.00 per gallon for premium and Rs5.00 per gallon for regular.

When the paint is processed further, the separable cost per gallon for premium is Rs4.00 and for regular is Rs1.00. Price per gallon after further processing for premium is Rs20.00 per gallon and for regular is Rs10.00 per gallon.

Allocating Joint Costs

•Allocate the joint costs using the following methods:

–Physical units–Sales at split off–NRV–Constant gross margin

Decisions About Processing Further

Regular paint can be processed further into a paint that dries extremely quickly. The new selling price is Rs22 per gallon and separable costs increase to Rs12 per gallon. • What is the contribution of the new product?• Should regular paint be processed further?

Choosing a Method

Major GoalAvoid distortion of individual main product values

Uses of Joint Cost Information

• Financial statements• Income tax returns• Government regulatory reports• Other external reports

• Physical quantities• Sales value at split-off point• Sales prices if processed further• Separable costs

• Joint costs are irrelevant for many types of decisions

Estimations (Uncertainties) in Allocations

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