Chapter 9 Joint Product and By-Product Costing

1. Chapter 9Joint Product and By-Product Costing Key Topics: • Joint processes and common costs • Main products and byproducts • Allocation methods • Choosing a method • Using joint cost allocation information • Decisions to process further • Choosing a method • Uses of joint costing information

2. 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

3. Main Products and Byproducts

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

5. 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

6. 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

7. 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

8. 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

9. Allocating Joint Costs

10. Allocating Joint Costs

11. Decisions About Processing Further

12. Choosing a Method Major Goal Avoid distortion of individual main product values

13. Uses of Joint Cost Information • Financial statements • Income tax returns • Government regulatory reports • Other external reports

14. Estimations (Uncertainties) in Allocations • Physical quantities • Sales value at split-off point • Sales prices if processed further • Separable costs • Joint costs are irrelevant for many types of decisions