DECIDING WHAT TO DO WITH JOINT PRODUCTS
Joint costs: cost of common facilities or services employed in producing two or more products
simultaneously that can not be traced with each resulting product directly.
Joint products: products that are produced simultaneously from single raw materials input.
By-product: outputs from joint production process that are relatively minor in quantity and/or
value when compared to the main products.
Waste product: products that have negative residual value.
Split-off point: the point at which the individual joint products are recognizable as distinct and
separate products.
Joint cost allocation is based on principle of reasonableness and should be consistent.
Cost of reasonable level of waste product should be added to joint costs and then should
be allocated to the joint products.
When relative importance of individual products changes, the products need to be
reclassified and the costing procedures need to be changed.
NET REALIZABLE VALUE METHOD
The contention is that if one product sells for more than another, it is because it cost more to
produce. This method can be applied if all the products at split-off point have an active market.
1. NRV costing
Main product Sales value
15,000 units $ 300,000
Split-off product300,000
point
Total joint costs
$ 270,000
Side product Sales value
30,000 units $ 450,000
Main Side
Total
product product
Sales value 300,000 450,000 750,000
Cost allocation base 40% 60% 100%
Allocated joint costs 108,000 162,000 270,000
Unit cost 7.2 5.4
Gross margin 64% 64% 64%
2. Estimated NRV costing
Main product Sales value
15,000 units $ 300,000
Split-off product300,000
point
Total joint costs
$ 270,000
Side product Extra processing costs Sales value
30,000 units $ 50,000 $ 450,000
Main Side
Total
product product
Sales value 300,000 450,000 750,000
Extra processing costs - 50,000 50,000
Estimated NRV at split-off point 300,000 400,000 700,000
Cost allocation base 43% 57% 100%
Allocated joint costs 115,714 154,286 270,000
Unit cost 7.7 5.1
Gross margin 61% 66% 64%
PHYSICAL QUANTITIES METHOD
Companies that use this method argue that all the products produced using the same process
should receive a proportionate share of the total joint production cost.
Main product Sales value
15,000 units $ 300,000
Split-off product300,000
point
Total joint costs
$ 270,000
Side product Sales value
30,000 units $ 450,000
Main Side
Total
product product
Quantity 15,000 30,000 45,000
Cost allocation base 33% 67% 100%
Allocated joint costs 90,000 180,000 270,000
Unit cost 6.0 6.0
Sales value 300,000 450,000 750,000
Gross margin 70% 60% 64%
WEIGHTED AVERAGE METHOD
Weight factors are often assigned to each unit based on unit size, manufacturing difficulty,
manufacturing time, differences in the type of labor employed, the amount of material used, and so
on.
Weight factor Main product Sales value
4 15,000 units $ 300,000
Split-off product300,000
point
Total joint costs
$ 270,000
Weight factor Side product Sales value
1 30,000 units $ 450,000
Main Side
Total
product product
Quantity 15,000 30,000 45,000
Weight factor 4 1
Cost allocation base 67% 33% 100%
Allocated joint costs 180,000 90,000 270,000
Unit cost 12.0 3.0
Sales value 300,000 450,000 750,000
Gross margin 40% 80% 64%
CONSTANT GROSS MARGIN PERCENTAGE METHOD
Main aim is to equate the margins reported by each individual product.
Main product Sales value
15,000 units $ 300,000
Split-off product300,000
point
Total joint costs
$ 270,000
Side product Sales value
30,000 units $ 450,000
Main Side
Total
product product
Sales value 300,000 450,000 750,000
Cost allocation base 36% 36% 36%
Allocated joint costs 108,000 162,000 270,000
Quantity 15,000 30,000 45,000
Unit cost 7.2 5.4
Gross margin 64% 64% 64%
DIFFERENTIAL ANALYSIS OF SELL-OR-PROCESS-FURTHER DECISION
If there is additional net gain prefer to further process
Additional
Low-grade Mid-grade
revenue and
product product
costs
Sales value 450,000 550,000 100,000
Extra processing - 50,000 50,000
Gain 450,000 500,000 50,000
DECIDING WHAT TO DO WITH BY-PRODUCTS
Accounting for by-products
Method 1: NRV of by-product is deducted from total joint costs and the remaining joint costs are
allocated to the main products.
Method 2: Proceeds from sale of by-product are treated as other revenue and all joint costs are
allocated to the main products.
Main Side Side
Method 1 Total
product product product
Sales value 300,000 450,000 15,000 765,000
Cost allocation base 40% 60% 0% 100%
Allocated joint costs 102,000 153,000 15,000 270,000
Quantity 15,000 30,000 15,000 60,000
Unit cost 6.8 5.1 1.0
Gross margin 66% 66% 0% 65%
Main Side Side
Method 2 Total
product product product
Sales value 300,000 450,000 15,000 765,000
Cost allocation base 40% 60% 0% 100%
Allocated joint costs 108,000 162,000 - 270,000
Quantity 15,000 30,000 15,000 60,000
Unit cost 7.2 5.4 -
Gross margin 64% 64% 100% 65%
SOURCES
1.
[Link]
2. methods/#quantitative-method
3.
4.