Joint Cost Allocation in Oil Refining
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ScribdTranslationsJoint Cost Allocation in Oil Refining
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ScribdTranslationsPRACTICAL CASE OF JOINT COSTS
Petroperú produces gasoline, heating oil, and aviation fuel from the
refining of crude oil. The initial refining of 820,000 gallons began on the
department 1. In this (separation point) three products partially emerged
finished.
Then each product was sent to the following departments to complete its processing:
DEPARTMENT FINAL PRODUCT GALLONS RECEIVED
2 Gasoline 280,000
3 Heating oil 340,000
4 Fuel for airplanes 200,000
TOTAL 820,000
FINAL VALUE OF
DEPARTMENT COSTS OF TOTAL COSTS OF VALUE OF MARKET
PRODUCTION THE SALE MARKET IN THE AFTER THE
SEPARATION PROCESSING
ADDITIONAL
1 164,000 - - -
2 50,000 4,000 0.80 1.15
3 30,000 1,000 0.70 1.00
4 35,000 5,000 0.95 1.40
TOTAL 279,000 10,000
The costs of S/164,000 for department 1 correspond to JOINT COST because they occur
before the separation point and, therefore, are related to the three products. The costs of
production of department 2 (S/50,000), department 3 (S/30,000) and department 4 (S/
35,000) are considered ADDITIONAL PROCESSING COSTS because they occur after the
separation point.
METHOD OF UNITS PRODUCED
Formula:
Joint cost allocation = Production by product * Joint cost
To each product Total number of joint products
GASOLINE: 280,000/ 820,000 x 164,000 = 56,000
HEATING OIL: 340,000 out of 820,000 = 68,000
FUEL FOR AIRCRAFT: 200,000 / 820,000 = 40,000
TOTAL JOINT COST 164,000
The total costs of producing a product are calculated as follows:
JOINT COST PROCESSING COSTS TOTAL COSTS
PRODUCT ASSIGNED ADDITIONAL (DEPART. 2, 3 AND 4) FROM PRODUCTION
(DEPARTMENT 1)
Gasoline 56,000 50,000 106,000
Oil for 68,000 30,000 98,000
heating
Fuel for 40,000 35,000 75,000
airplanes
TOTAL 164,000 115,000 279,000
MARKET VALUE METHOD AT THE POINT OF SEPARATION
Formula:
Joint cost allocation = Market total value of each product * joint costs
To each product Total market value of all products
First, the total market value of each combined product is calculated at the point of
separation.
UNITS UNITARY VALUE OF TOTAL VALUE OF
PRODUCED FROM MARKET OF EACH MARKET OF EACH
PRODUCT EACH PRODUCT PROD. AT THE POINTProduced at the point
OF SEPARATION OF SEPARATION
Gasoline 280,000 0.80 224,000
Oil for 340,000 0.70 238,000
heating
Fuel for 200,000 0.95 190,000
airplanes
Total market value of all products 652,000
Second, the formula is applied to determine the value of the joint cost that will
assign to each joint product:
PRODUCT PORTION JOINT COST ASSIGNMENT OF
JOINT COST
Gasoline 224,000/652,000 164,000 56,344
Oil for 238,000/652,000 164,000 59,865
heating
Fuel for 190,000 out of 652,000 164,000 47,791
airplanes
TOTAL 164,000
Third and last, the total cost of manufacturing the joint products is obtained
adding only the costs of additional processing to the allocated joint costs. (The
Sales costs are selling expenses, not production costs.
JOINT COST COSTS OF
PRODUCT ASSIGNED PROCESSING TOTAL COSTS OF
(DEPARTMENT 1) ADDITIONAL ([Link] PRODUCTION
2, 3 and 4
Gasoline 56,344 50,000 106,344
Oil for 59,865 30,000 89,865
heating
Fuel for 47,791 35,000 82,791
airplanes
TOTAL 164,000 115,000 279,000
REALIZABLE VALUE METHOD
Formula:
Joint cost allocation = Hypothetical market V.T. of each product * joint costs
To each product Hypothetical market V.T. of all products
According to information from Petroperú, the following allocation of joint costs was made:
PRODUCTO PROPORTION JOINT COST ASSIGNMENT OF
JOINT COST
gasoline 268,000 out of 817,000 164,000 53,797
Oil for 309,000 out of 817,000 164,000 62,027
heating
Fuel for 240,000/817,000 164,000 48,176
airplanes
TOTAL 164,000
(F) value of
Units Value of (D) Value of Market processing
Product produced final market market total additional total
(A) (B) per unit total and final and expenses of hypothetical of
(C) (B) x (C) sale each prod.
Set
(D) x (E)
Gasoline 280,000 1.15 322,000 54,000 268,000
Oil for 340,000 1.00 340,000 31,000 309,000
heating
Combustible 200,000 1.40 280,000 *40,000 240,000
for planes
TOTAL 817,000
50,000 + 4,000 = 54,000
30,000 + 1,000 = 309,000
* 35,000 + 5,000 = 240,000
To obtain the total manufacturing cost of the products, only the costs are added.
additional processing to joint costs, as follows:
JOINT COST COSTS OF
PRODUCTO ASSIGNED PROCESSING TOTAL COSTS OF
(DEPARTMENT 1) ADDITIONAL ([Link] PRODUCTION
2, 3, and 4
Gasoline 53,797 50,000 103,797
Oil for 62,027 30,000 92,027
heating
Fuel for 48,176 35,000 83,176
airplanes
TOTAL 164,000 115,000 279,000
Note that in all methods the total combined cost is S/ 164,000 and the cost of
Total production S/. 279,000 is the same. The difference between the methods is the way in which
these costs are assigned to individual products.