Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

9Joint-Process

Costing

9-2

Single Input

Product 1

Product 2

Product 3

Joint Product Processes

A number of products are producedfrom a single raw material input.

A number of products are producedfrom a single raw material input.

9-3

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 costs – costs of processing joint products

prior to the split-off point. Final product – ready for sale without further

processing. Intermediate product – requires further processing

before sale.

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 costs – costs of processing joint products

prior to the split-off point. Final product – ready for sale without further

processing. Intermediate product – requires further processing

before sale.

Joint Product Processes

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Consider the following example of an oil refinery.We will assume only two

products, gasoline and oil.

Joint Product Processes

9-5

JointInput

CommonProduction

Process

Split-OffPoint

JointCosts

Joint Product Processes

Oil

Gasoline

Intermediate products

FinalSale

FinalSale

SeparateProcessing

SeparateProcessing Costs

SeparateProcessing

SeparateProcessing Costs

Final products

9-6

Learning Objective 1

9-7

The Decision Challenge: Which Joint Products to Produce

The usual objective in theproduction of joint products

is to maximize profits.

Identify finalproducts possible

from the jointprocess.

Forecast thesales price of

each finalproduct.

Estimate coststo further processjoint products into

final products.

Choose the setof products

with the overallmaximum profit.

9-8

Learning Objective 2

9-9

Decision to Sell Products at Split Off or Process Them Further Joint product costs incurred prior to the split-off

point are sunk costs — not affected by a decision to process further after the split-off point.

A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs.

Joint product costs incurred prior to the split-off point are sunk costs — not affected by a decision to process further after the split-off point.

A product should be processed beyond the split-off point only if if the incremental revenue exceeds the incremental processing costs.

Value is added only if theincremental value fromprocessing exceeds the

incremental processing costs.

9-10

Sawmill, Inc. cuts logs from which unfinished lumber and wood chips are the joint products.

Unfinished lumber is sold “as is” or processed further into finished lumber.

Wood chips can also be sold “as is” for landscaping or processed further into 4 × 8 composition boards.

Sawmill, Inc. cuts logs from which unfinished lumber and wood chips are the joint products.

Unfinished lumber is sold “as is” or processed further into finished lumber.

Wood chips can also be sold “as is” for landscaping or processed further into 4 × 8 composition boards.

Decision to Sell Products at Split Off or Process Them Further

9-11

Data about Sawmill’s joint products includes:

Per LogWood

Lumber Chips Sales value at the split-off point 140$ 40$ Sales value after further processing 270 50 Allocated joint product costs 176 24 Cost of further processing 50 20

Decision to Sell Products at Split Off or Process Them Further

9-12

Analysis of Sell or Process Further

Per LogWood

Lumber Chips Sales value after further processing 270$ 50$ Sales value at the split-off point 140 40 Incremental revenue 130 10 Cost of further processing 50 20 Profit (loss) from further processing 80$ (10)$

Decision to Sell Products at Split Off or Process Them Further

9-13

Should we process the lumber further and sell the wood chips “as is?”

Analysis of Sell or Process Further

Per LogWood

Lumber Chips Sales value after further processing 270$ 50$ Sales value at the split-off point 140 40 Incremental revenue 130 10 Cost of further processing 50 20 Profit (loss) from further processing 80$ (10)$

Decision to Sell Products at Split Off or Process Them Further

9-14

Learning Objective 3

9-15

To measure performance based on earnings To value inventory for financial statements To estimate casualty losses To determine and respond to rate regulation To specify and resolve contractual interests

and obligations

To measure performance based on earnings To value inventory for financial statements To estimate casualty losses To determine and respond to rate regulation To specify and resolve contractual interests

and obligations

Reasons for Allocating Joint Costs

9-16

Learning Objective 4

9-17

Monetarymeasure method

Joint costs areallocated based onthe relative values

of the products at thesplit-off point.

Joint costs are allocated based on a proportional measure

(weight, volume, etc.) of the joint products at the

split-off point.

Physicalmeasure method

Joint Cost Allocation Methods

9-18

Jointcosts

Allocation Allocation

If we allocate the joint costs of raising an animal to the two products based on weight, which product

would receive the largest cost allocation?

Hamburger, because there is more of it.

Allocating Joint Costs

9-19

If we allocate the joint costs of raising the animal to the two products based on sales value, would the

steak receive a greater portion of the cost allocation?

Yes, steak has a higher sales value than hamburger.

Jointcosts

Allocation Allocation

Allocating Joint Costs

9-20

Let’s look at an example illustrating the joint cost

allocation methods.

Joint Cost Allocation Methods

9-21

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.

NRV

FinalSalesValue

AddedProcessing

Costs–=

Monetary Measure MethodNet Realizable Value

9-22

Jointinput

Commonproduction

process

Split-offpoint

Jointcosts Oil

Gasoline

Intermediate products

Finalsale

Finalsale

Separateprocessing

Separateprocessing costs

Separateprocessing

Separateprocessing costs

Final products

Monetary Measure MethodNet Realizable Value

9-23

Commonproduction

process

Split-offpoint

Oil

Gasoline Separateprocessing

Separateprocessing

Monetary Measure MethodNet Realizable Value

Salesvalue

$500,000

Separateprocessing costs

$500,000

SeparateProcessing Costs

$200,000

Joint material

cost = $275,000

Joint conversioncost = $225,000

Salesvalue

$1,200,000

9-24

Product

Oil Gasoline Total

Sales value 500,000$ 1,200,000$ 1,700,000$Less additional processing costs ? ? ?Estimated NRV at split-off point ? ? ?

Proportionate share:?

?

Allocated joint costs:?

?

Monetary Measure MethodNet Realizable Value

9-25

Product

Oil Gasoline Total

Sales value 500,000$ 1,200,000$ 1,700,000$Less additional processing costs 200,000 500,000 700,000 Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$

Proportionate share:?

?

Allocated joint costs:?

?

Monetary Measure MethodNet Realizable Value

9-26

Product

Oil Gasoline Total

Sales value 500,000$ 1,200,000$ 1,700,000$Less additional processing costs 200,000 500,000 700,000 Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$

Proportionate share: $300,000 ÷ $1,000,000 30% $700,000 ÷ $1,000,000 70%

Allocated joint costs:?

?

Monetary Measure MethodNet Realizable Value

9-27

Product

Oil Gasoline Total

Sales value 500,000$ 1,200,000$ 1,700,000$Less additional processing costs 200,000 500,000 700,000 Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$

Proportionate share: $300,000 ÷ $1,000,000 30% $700,000 ÷ $1,000,000 70%

Allocated joint costs: $500,000 × 30% 150,000$ $500,000 × 70% 350,000$

Monetary Measure MethodNet Realizable Value

9-28

Product

Oil Gasoline Total

Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$Less allocated joint costs 150,000 350,000 500,000 Gross margin 150,000$ 350,000$ 500,000$

Gross margin as a percent of sales?

??

Monetary Measure MethodNet Realizable Value

9-29

Product

Oil Gasoline Total

Estimated NRV at split-off point 300,000$ 700,000$ 1,000,000$Less allocated joint costs 150,000 350,000 500,000 Gross margin 150,000$ 350,000$ 500,000$

Gross margin as a percent of sales $150,000 ÷ $300,000 50.0% $350,000 ÷ $700,000 50.0% $500,000 ÷ $1,000,000 50.0%

The net realizable value method results inequal gross margin percentages for all products.

Monetary Measure MethodNet Realizable Value

9-30

The physical measure method may be used when Output product prices are highly volatile.

Many additional processes occur between the split-off point and the first point of marketability.

Market prices are unavailable for products provided via cost-plus contracts.

The physical measure method may be used when Output product prices are highly volatile.

Many additional processes occur between the split-off point and the first point of marketability.

Market prices are unavailable for products provided via cost-plus contracts.

Physical Measure Method

9-31

Jointinput

Commonproduction

process

Split-offpoint

Jointcosts Oil

Gasoline

240,000 gallons

360,000 gallons

Physical Measure Method

9-32

Commonproduction

process

240,000 gallons

360,000 gallons

Joint material

cost = $275,000

Joint conversioncost = $225,000 Oil

Gasoline

Split-offpoint

Physical Measure Method

9-33

Product

Oil Gasoline Total

Output quantities in gallons 240,000 360,000 600,000 Proportionate share:

??

Allocated joint costs:?

?

Physical Measure Method

9-34

Product

Oil Gasoline Total

Output quantities in gallons 240,000 360,000 600,000 Proportionate share: 240,000 ÷ 600,000 40% 360,000 ÷ 600,000 60%

Allocated joint costs:?

?

Physical Measure Method

9-35

Product

Oil Gasoline Total

Output quantities in gallons 240,000 360,000 600,000 Proportionate share: 240,000 ÷ 600,000 40% 360,000 ÷ 600,000 60%

Allocated joint costs: $500,000 × 40% 200,000$ $500,000 × 60% 300,000$

$275,000 joint material cost plus$225,000 joint conversion cost

Physical Measure Method

9-36

Which joint cost allocationmethod should we use?

We get a different resultwith each method.

Choosing Among Joint Cost Allocation Methods

Joint costs are truly common costs.

It is impossible to separatethe portion of joint costs

attributable to one producton a cause and effect

basis.

9-37

That makes the choice of methods somewhat arbitrary.

Regardless of the method we choose, we really need to be careful using allocated

costs for decision-making purposes.

Choosing Among Joint Cost Allocation Methods

9-38

Do not base product or service production decisions on joint margins (I.e., after joint-cost allocation) unless the choice is in

response to regulatory opportunities.

Do not base product or service production decisions on joint margins (I.e., after joint-cost allocation) unless the choice is in

response to regulatory opportunities.

Choose the joint-cost allocation method that maximizes regulatedprofits or cost reimbursements.

Choose the joint-cost allocation method that maximizes regulatedprofits or cost reimbursements.

Clearly define how to allocate joint costs in contractual agreementsamong parties that share outputs and joint costs of joint processes.

Clearly define how to allocate joint costs in contractual agreementsamong parties that share outputs and joint costs of joint processes.

Choosing Among Joint Cost Allocation Methods

9-39

Learning Objective 5

9-40

What Are By-Products?

Their sales value is minimal.

Do not allocate joint costs to by-products

Do not allocate joint costs to by-products

They are incidental to a production process.

ExamplesLumber production:

wood chipsFertilizer production:

methane gas

9-41

Two commonly used methods of accounting for by-products are . . .

Realized Value ApproachBy-product NRV is treated as other revenue.

Net Realizable Value ApproachBy-product NRV is deducted from joint production costs before allocation.

1 2

Accounting for By-Products

9-42

By-products

Majorproduct

Majorproduct

Commonproduction

process

Split-offpoint

Jointinput

Jointcosts

Accounting for By-Products

Relatively lowvalue or quantity

when compared tomajor products

9-43

Salesvalue

$100,000

Separateprocessing

Separateprocessing costs

$400

Joint material

cost = $50,000

Joint conversioncost = $50,000

Salesvalue$1,500

Salesvalue

$70,000

By-products

Majorproduct

Majorproduct

Commonproduction

process

Split-offpoint

Accounting for By-Products

9-44

By-ProductAccounting Method

2 1Major product revenue 170,000$ 170,000$ Other revenue ? ? Total revenue ? ?Cost of sales: Joint production costs ? ? Less by-product NRV ? ? Adjusted cost of sales ? ?Gross margin ? ?

Accounting for By-Products

Major product revenue = $100,000 + $70,000

9-45

By-ProductAccounting Method

2 1Major product revenue 170,000$ 170,000$ Other revenue 0 1,100 Total revenue 170,000 171,100 Cost of sales: Joint production costs ? ? Less by-product NRV ? ? Adjusted cost of sales ? ?Gross margin ? ?

Accounting for By-Products

By-product NRV = $1,500 – $400 = $1,100

9-46

By-ProductAccounting Method

2 1Major product revenue 170,000$ 170,000$ Other revenue 0 1,100 Total revenue 170,000 171,100 Cost of sales: Joint production costs 100,000 100,000 Less by-product NRV ? ? Adjusted cost of sales ? ?Gross margin ? ?

Accounting for By-Products

Joint production costs = $50,000 material + $50,000 conversion

9-47

By-ProductAccounting Method

2 1Major product revenue 170,000$ 170,000$ Other revenue 0 1,100 Total revenue 170,000 171,100 Cost of sales: Joint production costs 100,000 100,000 Less by-product NRV 1,100 0 Adjusted cost of sales 98,900 100,000 Gross margin 71,100$ 71,100$

Accounting for By-Products

9-48

By-Products: Some Complications

The preceding example assumes the by-product has been sold.

If the by-product is unsold . . .

Using method 2, the $1,100 by-product NRV is deducted from finished goods inventory or work-in-process inventory if unfinished.

Using method 1, the $1,100 by-product NRV is placed in a by-product inventory account.

The preceding example assumes the by-product has been sold.

If the by-product is unsold . . .

Using method 2, the $1,100 by-product NRV is deducted from finished goods inventory or work-in-process inventory if unfinished.

Using method 1, the $1,100 by-product NRV is placed in a by-product inventory account.

9-49

Waste is a by-product with negative NRV. (Cost of disposal exceeds sales value)

Waste is disposed of at minimum cost.

Waste disposal cost is charged to manufacturing overheadand applied to otherproducts as part of themanufacturing overheadallocation process.

Waste is a by-product with negative NRV. (Cost of disposal exceeds sales value)

Waste is disposed of at minimum cost.

Waste disposal cost is charged to manufacturing overheadand applied to otherproducts as part of themanufacturing overheadallocation process.

Disposal of Scrap or Waste

9-50

Learning Objective 6

9-51

Allocation of Joint Costs – Other Economic Value Methods

In addition to net realizable value Relative sales value at split-off

Further processing costs not considered

Constant gross margin percentage Use total sales value of all products Compute overall gross margin for process Set the same gross margin for all products Allocate joint costs so as to achieve that

uniform gross margin

9-52

End of Chapter 9