Cost Allocation Challenges

and Calculating Profitability

Joint Products

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Joint Cost Terminology
Joint costscosts of a single production process that
yields multiple products simultaneously
Splitoff pointthe place in a joint production
process where two or more products become
separately identifiable
Separable costsall costs incurred beyond the
splitoff point that are assignable to each of the now-
identifiable specific products

2012 Pearson Prentice Hall. All rights reserved.

Joint Cost Terminology
Categories of joint process outputs:
1. Outputs with a positive sales value
2. Outputs with a zero sales value
Productany output with a positive sales value, or an output that
enables a firm to avoid incurring costs
Value can be high or low

2012 Pearson Prentice Hall. All rights reserved.

Joint Cost Terminology
Main productoutput of a joint production process that yields one
product with a high sales value compared to the sales values of the other
outputs
Joint productsoutputs of a joint production process that yields two or
more products with a high sales value compared to the sales values of any
other outputs

2012 Pearson Prentice Hall. All rights reserved.

Joint Cost Terminology
Byproductsoutputs of a joint production process that have low sales
values compare to the sales values of the other outputs

2012 Pearson Prentice Hall. All rights reserved.

Reasons for Allocating Joint Costs
Required for GAAP and taxation purposes
Computation of inventoriable costs and cost of goods sold for financial
accounting and tax reporting
Internal analysis of divisional profitability
Cost-based contracting
Insurance settlements
Required for rate and price regulations
Litigation

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Joint Cost Allocation Methods
Market-basedallocate using market-derived data (dollars):
1. Sales value at splitoff
2. Net realizable value (NRV)
3. Constant gross-margin percentage NRV ( optional material)
Physical measuresallocate using tangible attributes of the products,
such as pounds, gallons, barrels, and so on

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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

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Joint Cost Illustration Data

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Joint Cost Illustration Overview
20,000
g sales
5,000 g
inventory

30,000
g sales

45,000 g
inventory

2012 Pearson Prentice Hall. All rights reserved.

Sales Value at Splitoff Illustration

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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

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Net Realizable Value Method
Overview

$8/g 12,000 g
$25/g
sales

8,000 g
inventory
$4/g

$22/g 45,000
g sales

5,000 g
inventory

2012 Pearson Prentice Hall. All rights reserved.

Net Realizable Value Method
Illustrated

2012 Pearson Prentice Hall. All rights reserved.

Net Realizable Value Method
Illustrated

2012 Pearson Prentice Hall. All rights reserved.