Joint Product Costing
When one production process leads to the production of two or more finished products, joint products result. The products are not identical, but they share the same production process up to what is called the splitoff point. The splitoff point is the point at which the two products stop sharing the same process and become different, identifiable products.
The main issue with joint products is how to account for the joint costs (those costs incurred prior to the splitoff point) and how to allocate the joint costs to the separate products. Accurate allocation is needed primarily for financial reporting purposes and pricing decisions. The inventory cost of each unit of each joint product needs to be determined accurately so that the balance sheet will be accurate. Since the inventory cost of each unit becomes its cost of goods sold when it is sold, the amount of cost to be expensed to COGS for each unit sold is needed.
An example of joint products would be the processing of pineapple. As a pineapple goes through processing at the factory the rind is removed. The fruit is used to manufacture two products: bottled pineapple juice and canned pineapple slices, two separate products that arise from the same initial production process (removal of the rind). Therefore, the joint costs of the unprocessed pineapples (the direct materials) and of processing the pineapples to remove the rinds need to be allocated between the juice and the slices.
Joint costs may include direct materials, direct labor, and overhead. Costs incurred after the splitoff point may also include direct materials, direct labor, and overhead. The costs incurred after the splitoff point are separable costs and they are allocated to each product as they are incurred by that product.
Byproducts ⇒ are the low-value products that occur naturally in the process of producing higher value products. They are, in a sense, accidental results of the production process. The main differentiator between main products and joint products is the market value. If the product has a comparatively low market value when compared to the other products produced, it is a byproduct.
Methods of Allocating Costs to Joint Products
Several different measures may be used to allocate joint costs, but all the different methods use some sort
of ratio between the two or more products. The cost allocation is largely a mathematical exercise, but
candidates need to learn the different allocation bases are calculated.
The primary methods are:
- Relative Sales Value at Split off method
- Estimated Net Realizable Value (NRV) method
- Physical Measure and Average Cost methods
- Constant Gross Profit (Gross Margin) Percentage method