CHAPTER 17

Joint Costs

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Learning Objective 4

17-2

Joint Product Cost Allocation

Product

Joint Product
Costs

Product

Product
17-3

Joint Product Cost Allocation

Concept:
In some industries, a number of products are

produced from a single raw material input.

Key terms:
Joint products products resulting from a process

with a common input.

Split-off point the stage of processing where

joint products are separated.

Joint product cost costs of processing joint

products prior to the split-off point.

17-4

Joint Product Cost Allocation

Consider the following
example of an oil
refinery.
We will assume only
two products,
gasoline and oil.

17-5

Joint Product Cost Allocation

Joint
Product
Costs
Joint
Input

Oil

Joint
Production
Process

Final
Sale

Separate
Processing Costs

Gasoline

Split-Off
Point

Separate
Processing

Separate
Processing

Final
Sale

Separate
Processing Costs
17-6

Learning Objective 5

17-7

Allocating Joint Costs

Physical-Units
Method

Joint Product
Costs

RelativeSales-Value
Method
Net-RealizableValue Method
17-8

Allocating Joint Costs

17-9

Allocating Joint Costs

Lets look at an
example illustrating
the joint cost
allocation methods.

17-10

Physical-Units Method
Joint conversion
cost = $225,000

Joint material
cost = $275,000

Oil

240,000 gallons

Joint
Production
Process

Gasoline

360,000 gallons

Split-Off
Point
17-11

Physical-Units Method
Product
Oil
Output quantities in gallons
Proportionate share:
240,000 600,000
360,000 600,000
Allocated joint costs:
$500,000 40%
$500,000 60%

240,000

Gasoline
360,000

Total
600,000

40%
60%
$ 200,000
$ 300,000

$225,000 joint conversion cost plus

$275,000 joint material cost
17-12

Relative-Sales-Value Method
Joint conversion
cost = $225,000

Joint material
cost = $275,000

Oil

$200,000
sales value at
split-off point

Gasoline

$600,000
sales value at
split-off point

Joint
Production
Process

Split-Off
Point
17-13

Relative-Sales-Value Method
Product
Oil
Sales value at split-off point
Proportionate share:
$200,000 $800,000
$600,000 $800,000
Allocated joint costs:
$500,000 25%
$500,000 75%

Gasoline

Total

$ 200,000 $ 600,000 $ 800,000

25%
75%
$ 125,000
$ 375,000

$225,000 joint conversion cost plus

$275,000 joint material cost
17-14

Net-Realizable-Value Method
If products require further processing
beyond the split-off point before they
are marketable, it may be necessary to
estimate the net realizable value (NRV)
at the split-off point.

Estimated
NRV

Final
Sales
Value

Added
Processing
Costs
17-15

Net-Realizable-Value Method
Joint conversion
cost = $225,000

Joint material
cost = $275,000

Oil

Joint
Production
Process

Separate
Processing Costs
$200,000
Gasoline

Split-Off
Point, Sales
Value Unknown

Sales
Value
$500,000

Separate
Processing

Separate
Processing

Sales
Value
$1,200,000

Separate
Processing Costs
$500,000
17-16

Net-Realizable-Value Method
Product
Oil
Sales value
Less additional processing costs
Estimated NRV at split-off point
Proportionate share:
$300,000 $1,000,000
$700,000 $1,000,000
Allocated joint costs:
$500,000 30%
$500,000 70%

Gasoline

Total

$ 500,000 $ 1,200,000 $ 1,700,000

200,000
500,000
700,000
$ 300,000 $ 700,000 $ 1,000,000
30%
70%
$ 150,000
$ 350,000

17-17

By-Products
Joint
Costs

Joint
Input

Joint
Production
Process

Major
Product

Major
Product

By-products

Relatively low
value or quantity
when compared to
major products

Split-Off
Point
17-18

Two commonly used

methods of accounting
for by-products are . . .

By-Products

1. By-product NRV is
deducted from cost of
joint process before
allocation.

2. By-product NRV is
deducted from cost of
main product.
17-19