Cost Allocation:

Joint product and

By-Product Costing

Prepared By:
Muhammad Usman
CHAPTER SUMMARY

• This chapter describes the joint

production processes and their outputs—
joint products and by-products. Several
methods are developed to allocate joint
costs to joint products. By-products are
not usually allocated any of the joint
costs. Instead, no cost methods are
frequently used to account for by-
products.
 JOINT PRODUCTS AND BY-PRODUCTS
JOINT PRODUCTS:
When two are more products are produced from the same basic raw material
and are of almost equivalent value, it is known as joint product.
 EXAMPLE:
In refining of crude oil, both petrol and diesel is obtained.

By PRODUCTS:
By product are incidental products resulting from the processing of another
product.
 EXAMPLE:
In processing of sugarcane both sugar and molasses is obtained

Main Products By Products

Joint Products

High Sales Value Low

JOINT PRODUCTS AND BY-PRODUCTS

• A by-product has a relatively low sales value compared

with the sales value of a joint or main product.
Revenue from byproducts generally reduces the costs of the
joint products.

• Some outputs of the joint production process have zero

sales value.
No journal entries are made to record the processing of such
outputs with zero sales value.
 WHAT IS JOINT COSTING

 Joint costing
When by a process more than one product is produced, the
material and conversion cost incurred prior to split of stage is know
as joint cost.
Split-off
Point Separable
Product A
Costs A
Joint
Costs
Product B Separable
Costs B
• SPLIT OFF POINT
Split-off point is the juncture in the process when separate
identifiable products emerge.
• SEPARABLE COST
Separable costs are costs incurred beyond the split-off point
and are assignable to separate products.
 Why Allocate Joint Costs?

Allocate joint costs to products for:

• inventory costing and cost of goods sold
calculations.
• cost reimbursement under contracts
• customer profitability analysis
• insurance settlement computations
• rate regulation situations
METHODS OF APPORTIONMENT OF JOINT COST

There are the five methods of apportionment of joint cost:

•Sale Value at split off point

•Reverse cost method
•Net realizable value method(NRV)
•Physical unit method
•Contribution margin method
  Sale value at split off method

What does this method mean:

If the product would not have been further processed
and sold at split of stage then the sale value it would
have realized would from the basis for apportionment
of joint cost.
For example:
Crude oil sold out in the market before further
process of refining.
 REVERSE COST MEHTOD

• A method of allocating the joint cost of joint

product on basis of estimated profit if there is not
given the value of sale at split of point.
For example:

Sale - profit - admin and selling expense = total factory

cost - cost of single product produced
 NET REALIZE VALUE METHOD (NRV)

• Allocates joint costs to joint products on the basis of

relative NRV of total production of the joint products
For Example:
NRV = Final Sales Value – Separable Costs
 PHYSICAL UINT 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

 CONSTANT GROSS MARGIN 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.
CONCLUSION

• To calculate the cost of joint product is difficult but

with the help these method the apportionment of
joint cost can be made, the most suitable method
for the apportionment of joint cost is,
Net Realize Value Method(NRV).
Thank you
very much