Chapter 16

Cost Allocation:
Joint Product & By Product
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Joint-Cost Basics

Joint costs

Splitoff point

Separable costs
Joint Production
Process
2

Output of Joint Product

The output of a Joint Production Process
Main

Product
Joint Products
By Products
Scraps

Joint Products and Byproducts

Main Products
Joint Products

Byproducts

High

Low

Sales Value
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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

Approaches to Allocating
Joint Costs
Two basic ways to allocate
joint costs to products are:

Approach 1:
Market based

Approach 2:
Physical measure
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Market-based Data
Methods of Market based Approach:

Sales value at split-off method

Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV
method

Physical Measure Method

Allocates joint costs to joint products on the

basis of the relative weight, volume, or other
physical measure at the split off point of total
production of the products during the
accounting period

Choosing a Method
The sales value at splitoff method is widely used. Why?

It measures the value

of the joint product
immediately.

It does not anticipate

subsequent management
decisions.

It uses a
meaningful basis.

It is simple.
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Sales Value at Splitoff Method

Uses the sales value of the entire production

of the accounting period to calculate

allocation percentage
Ignores inventories

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

Constant Gross Margin NRV Method

Allocates joint costs to joint products in an

way that the overall gross-margin percentage

is identical for the individual products
Joint Costs are calculated as a residual
amount

Constant Gross-Margin NRV Method

This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.

Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.

Constant Gross-Margin
Percentage NRV Method
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.

Accounting for Byproducts

Method A:
The production method recognizes byproducts
at the time their production is completed.
Method B:
The sales method delays recognition of
byproducts until the time of their sale.
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 Note :

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References:
Horngren, Charles T., Srikant M. Datar, and George Foster,

Cost Accounting: A Managerial Emphasis, 14th ed., 2011,

Pearson Education International, Upper Saddle River: New
Jersey(HO)

Raiborn, Cecily A., Michael Kinney, and Jenice Prather-

.Kinsey, Cost Accounting, 6thed., 2006, South WesternThomson Learning. (RK)

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Good luck and

..
God bless you

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