Joint Product Processes A number of products are produced from a single raw material input.

in some industries, a number of products are produced from a single raw material input. o Joint products products resulting from a process with a common input. o Split-off point the stage of processing where joint products are separated. o Joint costs costs of processing joint products prior to the split-off point. o Final product ready for sale without further processing. o Intermediate product requires further processing before sale. Consider the following example of an oil refinery. We will assume only two products, gasoline and oil. The Decision Challenge: Which Joint Products to Produce The usual objective in the production of joint products is to maximize profits. Identify final products possiblefrom the joint process. Forecast thesales price of each final product. Estimate costs to further process joint products into final products. Choose the set of products with the overall maximum profit. 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. Value is added only if the incremental value from processing exceeds the incremental processing costs. Reasons for Allocating Joint Costs To To To To To measure performance based on earnings value inventory for financial statements estimate casualty losses determine and respond to rate regulation specify and resolve contractual interests and obligations

Joint Cost Allocation Methods: Physical measure method : Joint costs are allocated based on a proportional measure (weight, volume, etc.) of the joint products at the split-off point.

Monetary measure method : Joint costs are allocated based on the relative values of the products at the split-off point. Monetary Measure Method Net Realizable Value 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 = Final Sales Value Added Processing Costs The net realizable value method results in equal gross margin percentages for all products. Physical Measure Method: 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. Choosing Among Joint Cost Allocation Methods: Joint costs are truly common costs. It is impossible to separate the portion of joint costs attributable to one product on a cause and effect basis. 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. Choose the joint-cost allocation method that maximizes regulated profits or cost reimbursements. 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. Clearly define how to allocate joint costs in contractual agreements among parties that share outputs and joint costs of joint processes. 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