©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Cost Allocation: Joint Products
and Byproducts
Horngren, Foster & Datar
Modified by Charles Bailey
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 1
Identify the splitoff point(s)
in a joint-cost situation.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Joint productsJoint costs
Separable costs
Splitoff pointByproduct
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Raw milk
Cream Liquid Skim
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coal
Gas Benzyl Tar
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 2
Distinguish joint products
from byproducts.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint Products and Byproducts
Sales Value
High Low
Main ProductsJoint Products Byproducts
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 3
Explain why joint costs should be
allocated to individual products.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Why Allocate Joint Costs?
• to compute inventory cost and cost of goods sold
• to determine cost reimbursement under contracts
• for insurance settlement computations
• for rate regulation
• for litigation purposes
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 4
Allocate joint costs using
four different methods.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approaches to AllocatingJoint Costs
Approach 2:Physical measure
Approach 1:Market based
Two basic ways to allocatejoint costs to products are:
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 1: Market-based Data
Sales value at splitoff method
Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method
We will not cover:
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
10,000 units of A at aselling price of $10 = $100,000
10,500 units of B at aselling price of $30 = $315,000
11,500 units of C at aselling price of $20 = $230,00
Joint processingcost is $200,000
Splitoff point
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Allocating Joint Costs Example
A B C TotalSales Value $100,000 $315,000 $230,000 $645,000Allocation ofJoint Cost100 ÷ 645 31,008 315 ÷ 645 97,674230 ÷ 645 71,318
200,000Gross margin $ 68,992 $217,326 $158,682 $445,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod Example
Assume all of the units producedof B and C were sold.
2,500 units of A (25%)remain in inventory.
What is the gross marginpercentage of each product?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod Example
Product A Revenues: 7,500 units × $10.00 $75,000Cost of goods sold:
Joint product costs $31,008Less ending inventory
$31,008 × 25% 7,752 23,256Gross margin $51,744
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Sales Value at SplitoffMethod Example
Product A:($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:($315,000 – $97,674) ÷ $315,000 = 69%
Product C:($230,000 – $71,318) ÷ $230,000 = 69%
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
Assume that Oklahoma Company can processproducts A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1:10,000 × $12.00
= $120,000
B1:10,500 × $33.00
= $346,500
C1:11,500 × $21.00
= $241,500
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of eachproduct at the splitoff point?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
Product A1: $120,000 – $35,000 = $85,000
Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocatedto each product?
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
To A1:85 ÷ 575 × $200,000 = $29,565
To B1:300 ÷ 575 × $200,000 = $104,348
To C1:190 ÷ 575 × $200,000 = $66,087
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Estimated Net Realizable Value(NRV) Method Example
Allocated Separable Inventory joint costs costs costs
A1 $ 29,565 $ 35,000 $ 64,565B1 104,348 46,500 150,848C1 66,087 51,500 117,587Total $200,000 $133,000 $333,000
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Approach 2: PhysicalMeasure Method Example
$200,000 joint cost
20,000pounds A
48,000pounds B
12,000pounds C
Product A$50,000
Product B$120,000
Product C$30,000
(20/60)*$200K
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 5
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the valueof the joint product
immediately.
It does not anticipatesubsequent management
decisions.
It uses ameaningful basis.
It is simple.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Choosing a Method
The purpose of the joint-cost allocation isimportant in choosing the allocation method.
The physical-measure method is a moreappropriate method to use in rate regulation.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 6
Joint costs
are irrelevant in
managerial decisions!
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costsfor Decision Making
Assume that products A, B, and C can be soldat the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional Units price price costs10,000 A: $10 A1: $12 $35,00010,500 B: $30 B1: $33 $46,50011,500 C: $20 C1: $21 $51,500
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Irrelevance of Joint Costsfor Decision Making
Should A, B, or C be sold at the splitoffpoint or processed further?
Product A: Incremental revenue $20,000– Incremental cost $35,000 = ($15,000)
Product B: Incremental revenue $31,500– Incremental cost $46,500 = ($15,000)
Product C: Incremental revenue $11,500– Incremental cost $51,500 = ($40,000)
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Learning Objective 7
Accounting for byproducts:
A very brief overview omitting
bookkeeping details.
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Accounting for Byproducts
The net sales value of a by product reduces the joint costs to be assigned to the joint or
main product(s).
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
Joint-Cost Basics
Coaleach ton costs $50
GasNRV=$100
BenzylNRV=$80
Tar (byproduct)NRV=$10
Now the net joint costs to assign to Gas & Benzyl are ($50-10)=$40/ton
©2003 Prentice Hall Business Publishing, Cost Accounting 11/e, Horngren/Datar/Foster
The End
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