This document discusses concepts and methods related to allocating joint costs among joint products. It defines key terms like joint costs, splitoff point, separable costs, joint products, byproducts, and main product. It also describes and provides examples of several joint cost allocation methods: physical measure method, sales value at splitoff method, net realizable value method, and constant gross margin net realizable value method. Finally, it discusses considerations for selecting an allocation method and accounting for byproducts.

1. CHAPTER 16
Cost Allocation:
Joint Products and Byproducts

2. 16-2
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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. 16-3
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Joint Cost Terminology
 Categories of Joint Process Outputs:
1. Outputs with a positive sales value
2. Outputs with a zero sales value
 Product – any output with a positive sales
value, or an output that enables a firm to
avoid incurring costs
 Value can be high or low

4. 16-4
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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

5. 16-5
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Joint Cost Terminology
 Byproducts – outputs of a joint production
process that have low sales values compare
to the sales values of the other outputs

6. 16-6
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Joint Process Flowchart
Single Production
Process
Joint Product #1
Byproduct
Joint Product #2
Steam:
An Output with Zero Sales Value

7. 16-7
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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

8. 16-8
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Joint Cost Allocation Methods
 Physical Measures – allocate using tangible
attributes of the products, such as pounds,
gallons, barrels, etc.
 Market-Based – allocate using market-
derived data (dollars):
1. Sales value at splitoff
2. Net Realizable Value (NRV)
3. Constant Gross-Margin percentage NRV

9. 16-9
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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

10. 16-10
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Physical-Measure Example
 Consider the following example of two products
arising out of one joint process costing $500
 Assumes 1 gallon of Cream is equal to 1 gallon of
Skim-milk
Joint
Product % Joint Costs
Gallons
o+D17f Total Volume
Costs Allocated
Cream 25 25% 500
$ 125
$
Skim-milk 75 75% 500 375
Total 100 100% 500
$

11. 16-11
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sales Value at Splitoff Method
 Uses the sales value of the entire production
of the accounting period to calculate
allocation percentage
 Ignores inventories

12. 16-12
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sales Value at Splitoff Example
Cream Skim-milk Total
Final Sales Value of Production
Cream: 25 gals@ $50/gal 1,300
$
Skim-milk: 75 gals@ $10/gal 800
$
Total 2,100
$
Allocation Based on % of
Total Sales (rounded) 61.9% 38.1%
Joint Costs ($500) Allocated:
Joint Cost X Allocation % 310
$ 190
$

13. 16-13
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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

14. 16-14
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
NRV Example
Cream Skim-milk Total
Final Sales Value of Production
Cream: 25 gals@ $50/gal 1,300
$
Skim-milk: 75 gals@ $10/gal 800
$
Total 2,100
$
Less: Separable Costs 900 200 1,100
NRV 400 600 1,000
NRV Weighting:
Product NRV ÷ Total NRV 40% 60%
Joint Costs 500 500
Joint Costs Allocated
NRV Weighting X Joint Costs 200
$ 300
$

15. 16-15
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Constant Gross Margin NRV Method
 Allocates joint costs to joint products in a way
that the overall gross-margin percentage is
identical for the individual products
 Joint Costs are calculated as a residual
amount

16. 16-16
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Constant Gross Margin NRV Method
Example
Cream Skim-milk Total
Final Sales Value of Production
Cream: 25 gals@ $50/gal 1,300
$
Skim-milk: 75 gals@ $10/gal 800
$
Total 2,100
$
Less: Separable Costs 1,100
NRV 1,000
Joint Costs 500
Gross Profit 500
$
Gross Profit % of Sales Value (rounded) 23.8%
Cream Skim-milk Total
Sales Values 1,300
$ 800
$ 2,100
$
Less Gross Margin @ 23.8%(rounded) 310 190 500
Total Product Costs 990 610 1600
Less Separable Costs 900 200 1100
Joint Costs Allocated 90
$ 410
$ 500
$

17. 16-17
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
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 or the Constant Gross-Margin
Method could be used
 Despite this, some firms choose not to allocate joint
costs at all

18. 16-18
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sell-or-Process Further Decisions
 In Sell-or-Process Further decisions, joint
costs are irrelevant. Joint products have
been produced, and a prospective decision
must be made: to sell immediately or process
further and sell later
 Joint Costs are sunk
 Separable Costs need to be evaluated for
relevance individually

19. 16-19
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Sell-or-Process Further Flowchart
Single Production
Process
Joint Product #1
Joint Product #2
Further Processing Dept 1
Further Processing Dept 2
Final
Product
#1
Final
Product
#2

20. 16-20
To accompany Cost Accounting 12e, by Horngren/Datar/Foster. Copyright © 2006 by Pearson Education. All rights reserved.
Byproducts
 Two methods for accounting for byproducts
 Production Method – recognizes byproduct
inventory as it is created, and sales and costs
at the time of sale
 Sales Method – recognizes no byproduct
inventory, and recognizes only sales at the
time of sales: byproduct costs are not tracked
separately