CHAPTER 16

COST ALLOCATION: JOINT PRODUCTS

AND BYPRODUCTS
LEARNING OBJECTIVES
1. Identify the splitoff point in a joint-cost situation
2. Distinguish joint products from byproducts
3. Explain why joint costs should be allocated to individual products
4. Allocate joint costs using several different methods
5. Explain why the sales value at splitoff method is preferred when allocating joint costs
6. Explain why joint costs are irrelevant in a sell-or-process-further decision
7. Account for byproducts using two different methods

CHAPTER OVERVIEW
Chapter 16 continues the study of cost allocation. The focus of the allocation is different. The cost to be
allocated is incurred to identify the individual products rather than to manufacture or produce them. The
production processing results in the individual products along with other output. The distinction, then,
needs to be made between output and product: output is anything that comes from processing a material
into its component parts whereas a product is output with a positive sales valuerevenue will exceed
processing costs.
Basic terms are identified and explained at the beginning of the chapter. The reasons why joint costs are
allocated are noted for giving purpose to the process. Most of the reasons cited relate to measuring
income and assets for reporting purposes or to justifying reimbursement. Due to the nature of this type of
allocation, the criterion of cause and effect has no meaning. The criterion of benefits received is preferred
and is exemplified through the market-based data methods. Revenues are considered the better indicator
of benefits than are physical measures.
The major portion of the chapter is used for illustrating the four methods typically employed to allocate
joint costs: sales value at splitoff, physical measure, estimated net realizable value (NRV), and constant
gross-margin percentage NRV. Diagrams are used extensively to provide example of concepts.
The text theme of different costs for different purposes is highlighted in examining decisions of
whether to sell at splitoff point or to further process a product. For those decisions, the allocation of joint
costs is irrelevant.
The accounting methods for byproducts is explained and illustrated at the end of the chapter.

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215

CHAPTER OUTLINE
I.

Costing joint products

A. Basics [Exhibit 16-1]
1. Joint costs: costs of production process that yields multiple products simultaneously

Learning Objective 1:
Identify the splitoff point in a joint-cost situation
2. Splitoff point: juncture in joint production process when two or more products become
separately identifiable
3. Separable costs: all costs (manufacturing, marketing, distribution, etc.) incurred beyond the
splitoff point that are assignable to each of the specific products identified at splitoff point
B. Focus of joint costing
1. Assigning costs to individual products at splitoff point
2. Classifying outputs by sales value
a. Product: any output with positive net sales value (enables organization to avoid incurring
costs)
Learning Objective 2:
Distinguish joint products from byproducts
b. Main product: yield of joint production process of only one product with high sales
value compared with other products of process
c. Joint product: yield of two or more products with high sales value compared to other
products of process
d. Byproduct: low sales value compared with sales value of main or joint products
e. Some output has zero sales value [Exhibit 16-2]
f.

Some output has negative sales value [Footnote 1]

3. Changing values of products over time and distinctions of terms in organizations

Learning Objective 3:
Explain why joint costs should be allocated to individual products
C. Purposes for allocating joint costs

216 Chapter 16

1. Computation of inventoriable costs and cost of goods sold for financial accounting purposes
and reports for income tax authorities
2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes,
used in division profitability analysis and affect evaluation of division managers
performance
3. Cost reimbursement under contracts for companies that have few, but not all, of products or
services reimbursed under cost-plus contracts
4. Insurance-settlement computations for damage claims made on basis of cost information by
company having joint products, main products, or byproducts
5. Rate regulation for one or more of the jointly produced products or services are subject to
price regulation
6. Litigation in which costs of joint products are key inputs
7. Other reasons
Learning Objective 4:
Allocate joint costs using four different methods
D. Approaches to allocating joint costs
1. Market-based data, such as revenues, used as basis of allocation
a. Sales value at splitoff method
b. Net realizable value (NRV) method
c. Constant gross-margin percentage NRV method
2. Physical measures data, such as weight or volume, of joint products
Learning Objective 5:
Explain why the sales value at splitoff method is preferred when allocating joint costs
E. Criterion to support use of market-based data as basis of joint cost allocation
1. Cause-and-effect criterion not applicable by definition at individual product level
2. Benefits-received criterion: revenues better indicator of benefits received than physical
measures
F. Illustrations in production settings of joint cost allocation methods [Exhibits 16-3 and 16-6 for
symbols used]
1. Example 1: Simplest production setting in which joint products sold at splitoff point without
further processing

Cost Allocation: Joint Products and Byproducts

217

a. Sales value at splitoff method

i.

Allocates joint costs to joint products on basis of relative total sales value at the
splitoff point of total production of these products during the accounting period

ii. Assigns a weighting to each product which is percentage of total sales value
iii. Uses sales value of entire production of accounting period because joint costs
incurred on all units produced, not just those sold in period
iv. Enables product-line income statements to show individual product costs and grossmargins [Refer to Exhibit 16-4]
v. Follows benefits-received criterion of cost allocationcosts allocated to products in
proportion to their potential revenues
vi. Requires and uses market demand and selling prices for all products at splitoff point
straightforward and intuitive
b. Physical-measure method
i.

Allocates joint costs to joint products on basis of relative weight, volume, or

other physical measure at splitoff point

ii.

Uses total production of the products during the accounting period, not just those
sold in period

iii. Enables product-line income statements to show individual product costs and grossmargins [Refer to Exhibit 16-5]
iv. Has no relationship to the revenue-producing power of the individual product, hence
no relationship to benefits-received criterion
v. May require assistance from technical personnel outside of accounting because
comparable physical measures for all products not always straightforward
vi. Affects resulting allocation by choice of products to include in physical measure
computation as some output has zero sales valuegeneral guideline: include only
joint-products outputs in theweighting computations
2. Example 2: Products processed beyond the splitoff point to bring to marketable form or to
increase their value above their selling price at splitoff point [Exhibit 16-6]
a. Net realizable value (NRV) method
i.

Allocates joint cost to joint products on the basis of the relative NRV (final sales
value minus the separable costs)

ii. Uses total production of products during the accounting period, not just those sold in
the period
218 Chapter 16

iii. Enables product-line income statements to show individual product costs and gross
margins [Exhibit 16-7]
iv. Substitutes for sales value at splitoff method when market selling prices for one or
more products not available
v. Uses simplifying assumptions because companies frequently change the number of
subsequent steps beyond the splitoff point or if selling prices of joint products vary
frequently
vi. Exemplifies the benefits-received criterion of cost allocation
b. Constant gross-margin percentage NRV method
i.

Allocates joint costs to joint products in such a way that overall gross-margin
percentage is identical for individual products

ii. Entails three steps: [Exhibit 16-8]

Step 1: Compute the overall gross-margin percentage for all joint products taken
together (use final sales of total production, not the total sales of the period)

Step 2: Multiply overall gross-margin percentage and final sales values of each
product to calculate gross margin for each product, subtract gross margin for each
product from final sales value of each product to obtain total costs that each
product will bear

Step 3: Deduct the separable costs from the total costs that each product will bear
to obtain the joint-cost allocation

iii. Allocates negative amounts to some products to bring their gross-margin percentage
up to overall average
iv. Enables product-line income statements to show individual product cost and grossmarginsoverall gross-margin percentage identical for each of the individual
products [Exhibit 16-9]
v. Is different from other market-based methods in it is both a joint cost and a profit
allocation method
Do multiple choice 1 5.

Assign Exercises 16-16, 18, and 20, and Problems 16-26 and 16-2.7

G. Choosing a method
1. Use sales value at splitoff method when selling-price data available (even if further
processing done)
a. Measures the value of the joint product immediately at end of joint processbest
measure of benefits received relative to other methods of allocating joint costs

Cost Allocation: Joint Products and Byproducts

219

b. No anticipation of subsequent management decisions as required by NRV and constant

gross-margin percentage NRV methods
i.

Information required on specific sequence of further processing decisions

ii. Information required on the point at which individual products are sold

c. Availability of meaningful basis to allocate joint costs to products

i.

Market-based measures have meaningful basis (revenues)

ii. Physical measures methods lack meaningful basis

d. Simplicity
i.

Sales value at splitoff is simple

ii. NRV and constant gross-margin percentage NRV methods can be complex for
processing operations having multiple products and multiple splitoff points
Do multiple choice 6 and 7.
2. Use other methods when selling prices of all products at splitoff point not available
a. NRV method attempts to approximate sales value at splitoff by subtracting separable
costs incurred after splitoff point on each product from selling pricesassuming markup
or profit margin attributable to joint process and not to separable costs
b. Constant gross-margin percentage NRV method assumes all products have the same ratio
of cost to sales value (very uncommon in companies that produce multiple products that
have no joint costs)
c. Physical-measure method may be used in rate regulation [Surveys of Company Practice]
3. Purpose of joint-cost allocation important in choosing allocation method
H. Situations in which joint costs not allocated
1. Inventories carried at NRV recognizing income when production completed
2. Inventories carried at net realizable value minus estimated operating income margin
II. Irrelevance of joint costs for decision making
Learning Objective 6:
Explain why joint costs are irrelevant in a sell-or-process-further decision
A. Decision to sell at splitoff or process further

220 Chapter 16

1. Joint-cost allocations somewhat arbitraryno cause-and-effect relationship that identifies

resources demanded by each joint product that can be used as basis for pricing
2. Key concept of relevancejoint costs incurred up to the splitoff point whether product sold
at splitoff point or processed further [Chapter 11]
3. Do not assume all separable costs in joint-cost allocation always incremental costs
Do multiple choice 8.

Assign Exercises 16-19, 21, 22, and 23 and Problems 16-28 and 29.

B. Performance evaluation
1. Potential conflict between cost concepts used for decision making and cost concepts used for
evaluating performance of managers
2. Conflict less severe if used market-based methods of joint-cost allocation
III. Accounting for byproducts
Learning Objective 7:
Account for byproducts using two different methods
A. Presence of byproducts can affect allocation of joint costs although byproducts have much lower
sales value than joint or main products
B. Two methods of accounting for byproducts [Exhibits 16-10 and 16-11]
1. Method A: production methodbyproducts recognized at time production is completed
a. Byproduct recognized in financial statement when produced
b. Estimated NRV of byproduct produced offset against costs of main or joint products
c. Byproduct inventories at their selling price (variant of using estimated NRV reduced by
normal profit margin)
2. Method B: sale methodbyproducts recognized at time of sale [Concepts in Action]
a. Byproducts recognized in financial statement when soldgrouped with other sales (other
income) or deducted from cost of goods sold
b. Byproduct dollar amounts immaterial yet may permit earnings to be managed through
timing of sales
Do multiple choice 9 and 10.

Assign Exercises 16-17, 24, and 25 and Problems 16-31, 32, and 33.

Cost Allocation: Joint Products and Byproducts

221

CHAPTER QUIZ SOLUTIONS:

1.b 2.d 3.c 4.a 5.c 6.b 7.d 8.c 9.b 10.d

CHAPTER QUIZ
The following data apply to questions 15.
Brant Corporation manufactures two products out of a joint processScout and Andro. The joint
(common) costs incurred are $400,000 for a standard production run that generates 70,000 pounds of
Scout and 30,000 pounds of Andro. Scout sells for $9.00 per pound while Andro sells for $7.00 per
pound.
1. [CMA Adapted] If there are no additional processing costs incurred after the splitoff point, the
amount of joint cost of each production run allocated to Scout on a physical-quantity basis is
a. $300,000.

b. $280,000.

c. $120,000.

d. $100,000.

2. [CMA Adapted] If there are no additional processing costs incurred after the splitoff point, the
amount of joint cost of each production run allocated to Andro on a sales value at splitoff basis is
a. $300,000.

b. $225,000.

c. $175,000.

d. $100,000.

3. [CMA Adapted] If additional processing costs beyond the splitoff point are $1.00 per pound for
Scout and $2.33 13 per pound for Andro, the amount of joint cost of each production run allocated to
Andro on a physical quantity basis is
a. $300,000.

b. $280,000.

c. $120,000.

d. $100,000.

4. [CMA Adapted] If additional processing costs beyond the splitoff point are $1.00 per pound for
1
Scout and $2.33 3 per pound for Andro, the amount of joint cost of each production run allocated to
Andro on an estimated net realizable value basis is
a. $80,000.

b. $147,350.

c. $175,000.

d. $320,000.

5. Assume the same cost information as in question 4. The amount of joint cost of each production run
allocated to Scout using the constant gross-margin percentage NRV method is
a. $224,910.

b. $260,120.

c. $335,090.

d. $405,090.

6. [CPA Adapted] For purposes of allocating joint costs to joint products, the sales value at splitoff
method could be used in which of the following situations?
a.
b.
c.
d.

No costs beyond splitoff

Yes
Yes
No
No

222 Chapter 16

Cost beyond splitoff

No
Yes
Yes
No

7. Products G and H are joint products developed from the same process with each being processed
further. Joint costs are incurred until splitoff, the separable costs are incurred in further refining each
product. Sales values of G and H at splitoff are used to allocate joint costs. If the sales value of G at
splitoff increases and all other costs and selling prices remain unchanged, the gross margin of
a.
b.
c.
d.

G
increases
increases
decreases
decreases

H
increases
decreases
decreases
increases

8. [CPA Adapted] Tanner Company manufactures products Katran and Klare from a joint process.
Product Katran has been allocated $7,500 of total joint costs of $30,000 for the 1,500 units produced.
Katran can be sold at the splitoff point for $4 per unit, or it can be processed further with additional
costs of $2,000 and sold for $7 per unit. If Katran is processed further and sold, the result would be
a.
b.
c.
d.

a break-even situation.
an overall loss of $1,500.
a gain of $2,500 from further processing.
a gain of $1,000 from further processing.

9. [CPA Adapted] In accounting for byproducts, the value of the byproduct may be recognized at the
time of
a.
b.
c.
d.

Production
Yes
Yes
No
No

Sale
No
Yes
No
Yes

10. [CPA Adapted] Mohler Corporation manufactures a product that yields the byproduct, Jep. The only
costs associated with Jep are selling costs of $0.10 for each unit sold. Mohler accounts for sales of
Jep by deducting Jeps separable costs from Jeps sales and then deducting this net amount from the
major products cost of goods sold. Jeps sales were 200,000 units at $1.00 each. If Mohler changes
its method of accounting for Jeps sales of showing the net amount as additional sales revenue, the
Mohlers gross margin would
a.
b.
c.
d.

increase by $180,000.
increase by $200,000.
increase by $220,000.
be unaffected.

Cost Allocation: Joint Products and Byproducts

223

WRITING/DISCUSSION EXERCISES
1. Identify the splitoff point in a joint-cost situation
Discuss the interesting situation of having products that come from a common
production process begin the cost assignment process with the allocation of indirect
costs rather than a cost assignment process that begins with direct costs and then adds
the indirect costs. Costing systems studied prior to this chapter began the cost assignment process
with direct costs of material and manufacturing labor. Manufacturing overhead was then added through
the allocation process to those traced costs. With joint costs, the costing process begins with the
allocation of costs.
2. Distinguish joint products from byproducts
Why is the distinction between joint products and byproducts considered changeable?
The designations of joint or main product versus those of byproduct are relative to the products sales
value. The definition of positive sales value for designation as a joint product is not what changes. The
sales value is subject to change. Managers can take an active role in bringing about such changes.
Output from a joint process can be converted into product by research specifically meant to make it
happen, by marketing opportunities, or by being alert to changes in technology, the marketplace, or
customers questions and requests. The opposite can occura product can diminish in sales value to the
point it becomes a byproduct or must be combined with other products to keep from becoming simply
output.
3. Explain why joint costs should be allocated to individual products
Can some companies choose to avoid allocating joint costs? The section in the chapter,
Avoiding Joint Cost Allocation, refers to inventory values of individual products and the accounting for
end-of-period inventories. Inventory costing is among the reasons given for the need to allocate joint
costs among individual products. If a company can properly account for their inventory of products
without allocating the joint costs of those products, the company may do so. Other reasons are noted as to
why joint costs are allocated. At some point, a situation would probably occur that would necessitate the
allocation of a joint cost.
4. Allocate joint costs using four different methods
Does it make a difference which method of joint cost allocation is used?
In looking at the differences in individual product per unit cost and profitability [Exercise 16-16 and
Exhibits 16-4, 5, 7, 9], one can see that the method chosen for allocation does make a difference. The
more important question is For what purpose is the cost being allocated? In Exercise 16-16, the
purpose was cost reimbursement and the difference was in the amount that the insurance company would
pay for the loss. For purposes of deciding whether to sell at splitoff or process further, the allocation
amounts are irrelevant and do not make a difference. In any situation in which the individual product cost
is used, the allocation method would make a difference.

224 Chapter 16

5. Explain why the sales value at splitoff method is preferred when allocating joint costs
Why does the benefits-received criterion work so well for the sales value at splitoff
method of allocating joint costs? The criterion for guiding cost-allocation decisions is selected
according to the purpose of the allocation. The purpose of allocating joint costs is to cost a product
something that has positive sales value. The purpose of the product is to generate revenue or benefit to
the company through its sales value.
6. Explain why joint costs are irrelevant in a sell-or-process-further decision
If a manager had only one income statement to use to make the decision to drop a
product, would that manager make the same decision about which product to drop, all
other factors kept constant and equal, if the information was from Exhibits 16-4, 5, 7, or
9? If the manager only had the information from the income statements in Exhibits 16-4, 5, 7, or 9 to
use to make such a crucial decision, s/he would probably not make the same decision from looking at
Exhibit 16- 4 as from looking at the income statements shown in Exhibit 16-5. A manager is aided by
having knowledge of accounting and the role of cost allocation. The accountant has an obligation to
convey information to the manager that is relevant to the decision at hand. The allocation of the joint cost
is irrelevant to such a decision and should not be included.
7. Account for byproducts using two different methods
Discuss the concept of materiality, especially as it pertains to accounting for byproducts.
Should a company adopt guidelines for defining materiality for income statement items?
Materiality is an important concept but one that is difficult to reduce to specific numbers. Materiality is
based upon judgment. Judgment can be developed through education and the influence of those in top
management who determine the tone of the organization. Companies (especially those engaged in
auditing) can define materiality in terms of percentage of operating income, for example, both as to the
individual item and in the aggregate for purpose of established guidelinesbut only for the purpose of a
general guide. Materiality is a concept necessary to the preparation of financial statements and their
usefulness for making decisions. Statements full of details are not as useful as statements that report only
those items and amounts that make a difference. An item or amount is deemed immaterial if the reporting
or lack of reporting would not affect the decisions of an informed reader of the financial report.

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SUGGESTED READINGS
Balachandran, B. and Ramakrishnan, R., Joint Cost Allocation: A Unified Approach, The Accounting
Review (January 1981) p.85 [12p].
Cheatham, C. and Green, M., Teaching Accounting for Byproducts, Management Accounting (Spring
1988) p.14 [2p].
Lowenthal, F., Multiple Splitoff Points, Issues in Accounting Education (Fall 1986) p.302 [7p].
Stout, D. and Wygal, D., Making Byproducts a Main Product of Discussion: A Challenge to Accounting
Educators, Journal of Accounting Education (1989) p.219 [15p].

226 Chapter 16