Joint-Process Costing

Chapter 9

Joint processes
Process that converts a single input into multiple outputs
Common input

Intermediate product

Intermediate product

Final product

Intermediate product

Final product

Final product

Final product

Joint processes
Split-off point
Input splits into two or more products
Intermediate product

Product that requires more processing before it can be sold

Final product

Product that is ready for sale

Joint processes
By-product Minor product resulting from the process Has some value, can be sold Scrap Not really a product Has possible minor value Recycling Waste No value May incur cost to dispose of it

Joint processes
Joint cost
Cost to operate the process

Further processing cost

Cost incurred beyond the split-off point Benefits a particular product

Sell as-is or process further?

incremental revenue vs. incremental cost

Allocation of joint costs

Once incurred, joint costs are sunk costs
Why allocate them to resulting products?
Inventory valuation Contracts Casualty loss estimation Etc. Performance measurement

Only allocated to main products

Allocation of joint costs

Allocation methods
Net realizable value method
Allocated proportionately to products based on their final sales value minus further processing costs, if any

Physical measures method

Allocated proportionately based on some physical measure of the products Weight, volume, length, etc.

Joint cost allocation example

Himshey Chocolate Company produces bulk chocolate which can be sold as is, or processed into bars and smooches
Joint costs, including cocoa beans, milk, sugar, etc. are $1,200,000 to produce 1,000,000 pounds of chocolate

Joint cost allocation example

Output
100,000 pounds of bulk chocolate 600,000 pounds of bars 300,000 pounds of smooches 10,000 pounds of cocoa bean shells

Further processing costs and selling prices

Bulk chocolate: $5,000; $150,000 Bars: $60,000; $800,000 Smooches: $45,000; $900,000 Shells: $500; $1,000

Joint cost allocation example

Net realizable value method
Sales revenue Bulk chocolate $ 150,000 $ 5,000 145,000 $ Bars 800,000 60,000 740,000 $ Smooches $ 900,000 45,000 855,000 $ $ Total 1,850,000 110,000 1,740,000

Further processing costs Net realizable value at split-off $ Percent of total net realizable value Allocation of joint costs Gross margin

8.33% 100,000 45,000

42.53% 510,345 229,655

49.14% 589,655 265,345 $ $

100.00% 1,200,000 540,000

Joint cost allocation example

Physical measures method
Pounds of output Percent of total weight Allocation of joint costs Sales revenue Allocation of joint costs Bulk chocolate 100,000 10.00% $ 120,000 $ $ 150,000 120,000 5,000 25,000 $ Bars Smooches 600,000 300,000 60.00% 30.00% 720,000 $ 360,000 $ 800,000 720,000 60,000 20,000 $ 900,000 360,000 45,000 495,000 $ $ Total 1,000,000 100.00% 1,200,000 1,850,000 1,200,000 110,000 540,000

Further processing costs Gross margin $

Accounting for by-products

Minimal value, so accounting is not complex
Method 1: Treat NRV of by-product as other revenue Method 2: Treat NRV of by-product as a reduction of the cost of the main products
Allocate the cost reduction on the same basis as was used to allocate joint costs

Accounting for scrap and waste

Scrap
NRV is usually negative
Disposal cost is usually greater than the sales value NRV is an overhead cost or part of joint costs

If NRV is positive, treat as by-product

Waste
No sales value
Disposal cost is overhead or part of joint costs