MANAGEMENT ACCOUNTING (2)

Chapter (16) Allocation of Joint Costs

Lecture (6)
 Joint Cost Illustration Overview

Costs of a single production process

that yields multiple products
simultaneously

A product is any output with a positive

sale value, or an output that
enables a firm to avoid incurring
costs
The place in a joint production
process where two or more products
become separately identifiable
 Net Realizable Value Method
Overview
all costs incurred beyond the splitoff point
that are assignable to each of the now-
identifiable specific products Final Product

Milk Powder Joint Product: outputs of a joint production

process that yields two or more products
Byproducts:outputs of a joint production
with a high sales value compared to the
process that have low sales values
sales values of any other outputs
compare to the sales values of the other
Examples of Joint Cost Situations
 Reasons for Allocating Joint Costs
• Computation of inventoriable costs and cost
of goods sold for financial accounting and tax
reporting
• Internal analysis of divisional profitability
• Insurance settlements
• Required for Pricing
 Allocation
Methods

Net Constant
Physical Sales Value at
Realizable Gross Margin
Measures Split Off
Value (NRV) NRV

Allocate using
tangible attributes
of the products,
such as pounds,
gallons, barrels,

Used in case Used in case Used in case of Used in case of

no further no further further further
processing processing processing processing 6
Question (1) : Allocation of Joint costs using Physical Measure Method and Sales
value at Split off.
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the
summer of 20X5, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending
inventories for the summer. Production and sales value information for the summer is as follows:

Sales Value
Product Cases at Split off Point
Catsup 100,000 $6 per case
Juice 150,000 8 per case
Canned 200,000 5 per case
Required:
Allocate the $420,000 to the three products using the Physical Measure Method and determine the Gross
Profit and Gross Profit Percentage from each product.
Catchup Juice Canned Total
Physical Measure of Total 100,000 150,000 450,000
200,000
Production
Weighting 100,000/450,000 150,000/450,000 200,000/450,000
100%
22% 33% 45%
Joint Costs Allocated 420,000 x 22% 420,000 x 33% 420,000 x 45%

$92,400 $138,600 $189,000

Production cost/Case 92,400/100,000 138,600/150,000 189,000/200,000
$0.924 $0.924 $0.945 7
 Catchup Juice Canned Total

Revenues 100,000 x $6 150,000 x $8 200,000 x $5

$2,800,000
$600,000 $1,200,000 $1,000,000

Less: Cost of
goods sold ($92,400) ($138,600) ($189,000) ($420,000)
 Joint Costs
Gross margin
$507,600 $1,061,400 $811,000 2,380,000

Gross Margin
Ratio
84.6% 88.45% 81.1%

Gross Margin Ratio = Gross Margin/ Sales

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 Allocation
Methods

Net Constant
Physical Sales Value at
Realizable Gross Margin
Measures Split Off
Value (NRV) NRV
Uses the sales value
of the entire
production of the
accounting period to
calculate allocation
percentage

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no further no further further further
processing processing processing processing 9
Question (1) : Allocation of Joint costs using Physical Measure Method and Sales
value at Split off.
Red Sauce Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes. During the
summer of 20X5, the joint costs of processing the tomatoes were $420,000. There was no beginning or ending
inventories for the summer. Production and sales value information for the summer is as follows:

Sales Value
Product Cases at Split off Point
Catsup 100,000 $6 per case
Juice 150,000 8 per case
Canned 200,000 5 per case
Required:
Allocate the $420,000 to the three products using the Sales Value at Split off and determine the Gross
Profit and Gross Profit Percentage from each product.
Catchup Juice Canned Total
Sales Value at Split off 600,000 1,200,000 2,800,000
1,000,000
Weighting 600,000/2,800,000 1200,000/2800,000 1000,000/2,800,000
100%
22% 43% 35%
Joint Costs Allocated 420,000 x 22% 420,000 x 43% 420,000 x 35%

$92,400 $180,600 $147,000

Production cost/Case 92,400/100,000 180,600/150,000 147,000/200,000
$0.924 $1.204 $0.735 10
 Allocation
Methods

Net Constant
Physical Sales Value at
Realizable Gross Margin
Measures Split Off
Value (NRV) NRV
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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Question (2) : Allocation of Joint costs using Net Realizable Value (NRV)
Sales Value
Product Cases at Split off Point Separable Costs Selling Price
Hot Sauce 100,000 $6 per case $3.00 per case $28 per case
Tomato with 150,000 8 per case 5.00 per case 25 per case
Carrot Juice
Canned with 200,000 5 per case 2.50 per case 10 per case
spices
Required:
Allocate the $420,000 to the three products using the Net Realizable Value Method and determine the Gross Profit and
Gross Profit Percentage from each product.
Hot Sauce Tomato with Carrot Canned with spices Total
Juice
Final Sales Value of
total production $28 x 100,000 $25 x 150,000 $10 x 200,000
during the
$8,550,000
accounting period
$2,800,000 $3,750,000 $2,000,000
Deduct: Separable $3 x 100,000 $5 x 150,000 $2.5 x 200,000
costs ($1,550,000)
($300,000) ($750,000) ($500,000)
Net Realizable Value $2,500,000 $3,000,000 $1,500,000 $7,000,000

Weight 2,500,000 3,000,000 1,500,000

36% 43%
7,000,000 7,000,000 7,000,000 21%
Joint Costs
420,000 x 36% 420,000 x 43% 420,000 x 21%
Allocated
$88,200 12
$151,200 $180,600
 Allocation
Methods

Net Constant
Physical Sales Value at
Realizable Gross Margin
Measures Split Off
Value (NRV) NRV
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
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Question (3) : Allocation of Joint Costs using the Constant Gross Margin NRV
Method
Carmen Corporation processes a single material into three separate products A, B, and
C. During September, the joint costs of processing were $300,000. Production and
sales value information for the month were as follows:
Units Final Sales
Product Separable Costs
Produced Value per Unit
A 10,000 $25 $125,000
B 15,000 30 250,000
C 12,500 24 125,000
Required:
Determine the amount of joint cost allocated to each product if the constant gross-margin percentage NRV method
is used
Step (1) Constant Gross Margin

Final Sales Value of Total Production

10,000 x 25 + 15,000 x 30 + 12,500 x 24
during the accounting period
$ 1000,000
Deduct:
 Separable Costs 125,000 + 250,000 + 125,000 = 500,000
 Joint Costs 300,000
$800,000
Gross Margin $200,000
Gross Margin Percentage
20% 14
Final Sales Value of Total A B C
Production during the 250,000 450,000 300,000
accounting period (15,000 x 30) (12,500 x 24)
(10,000 x 25)

Deduct: 0.2 x 250,000 0.2 x 450,000 0.2 x 300,000

 Gross Margin
(50,000) (90,000) (60,000)
Total Production Costs 200,000 360,000 240,000
Deduct: Separable Costs 125,000 250,000 125,000
Joint costs should be
allocated 75,000 110,000 115,000

$300,000 Joint costs

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 A B C Total
Revenues
250,000 450,000 300,000 1,000,000
Less: Cost of goods
sold

 Joint Costs (75,000) (110,000) (115,000) (300,000)

 Separable Costs
(125,000) (250,000) (125,000) (500,000)
(200,000) (360,000) (240,000) (800,000)
Gross Margin
50,000 90,000 60,000 200,000
Gross Margin
Percentage 20% 20% 20% 20%

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 Method Selection
• If selling price at splitoff is available, use the sales value
at splitoff method. It is the best that links revenue
generating powerful products to reasonable costs
• If selling price at splitoff is not available, use the NRV
method.
• If simplicity is the primary consideration, physical-
measures method.
• If you need to improve the profitability of the low
performing lines , then use the Constant gross margin.
 End of Lecture (6)
Covered today
• Difference between Joint costs and Separable
costs
• Difference between Main, Joint and byproducts.
• Why Allocating Joint Costs
• Methods of Allocating Joint Costs.
– Sales Value at Split off
– Physical Measure
– Net Realizable Value (NRV)
– Constant Gross Margin NRV percentage

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