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Understanding Cost Allocation Methods in Joint Product Processes

Learn about joint cost terminology, allocation methods, and sell-or-process decisions in joint product processes. Explore byproduct accounting methods and the importance of cost allocation for GAAP, taxation, evaluation, and more.

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Understanding Cost Allocation Methods in Joint Product Processes

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  1. CHAPTER 16 Cost Allocation: Joint Products and Byproducts

  2. 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. 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

  4. Joint Cost Terminology • Byproducts – outputs of a joint production process that have low sales values compare to the sales values of the other outputs

  5. Joint Process Flowchart

  6. 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

  7. 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): • Sales value at splitoff • Net Realizable Value (NRV) • Constant Gross-Margin percentage NRV

  8. Sales Value at Splitoff Method • Uses the sales value of the entire production of the accounting period to calculate allocation percentage • Ignores inventories

  9. Sales Value at Splitoff Example

  10. 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

  11. NRV Example

  12. 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

  13. 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

  14. Sell-or-Process Further Flowchart

  15. 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

  16. THE END • CHAPTER 16 and • ACCT 303 POWERPOINTS

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