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WHAT IS JOINT COST

INDUSTRY
Agriculture and food processing industries Cocoa beans Raw milk Extractive industries Coal Coke, gas, benzol, tar, ammonia Cocoa butter, cocoa powder, cocoa drink mix, tanning cream Cream, liquid skim

SEPERABLE PRODUCTS AT THE SPLIT-OFF POINT

Salt
Chemical industry Raw LPG Crude oil

Hydrogen, chlorine, caustic soda

Bustane, ethane, propane Gasoline, kerosene, benzene, naphtha

WHAT IS JOINT COST

When joint production process yields one product with a high total sales value compared with total sales value of other products of the process, that product is called a Main product.
When a joint production process yields two or more products with high total sales value compared with the total sales values of other products, if any those products are called Joint products.

The products of a joint production process that have low total sales value compared with the total sales value of the main product or of a joint products are called Byproducts.

WHAT IS JOINT COST

Joint costs are costs of a production process that yields multiple products simultaneously. Eg., Distillation of coal yields coke, natural gas and other products. Costs of distillation are joint costs.
Split off point is the juncture in a joint production process when two or more products become separately identifiable. Point at which coal becomes coke, natural gas and other products. Separable costs are all costs manufacturing, marketing, distribution and so on incurred beyond the split off point that are assignable to each of the specific products identified at the split off point. At the split off point, decisions relating to the sale or further processing of each identifiable product can be made independently of decisions about the other products.

APPROACHES TO ALLOCATING JOINT COSTS

Two approaches are used to allocate joint costs.


Approach 1: Allocate joint costs based on 1) Sales at split off method. 2) NRV method. 3) Constant gross margin percentage NRV method.

Approach 2: Allocate joint costs using physical measures such as weight, quantity or volume of the joint products

APPROACHES TO ALLOCATING JOINT COSTS


Sales at split off method. It allocates joint costs to joint products on the basis of relative total sales value at the split off point.

NRV method. In many cases products are processed beyond the split off point to bring them to a marketable form to increase their value above their selling price at split off point. It allocates joint cost to joint products on the basis of relative NRV(Final sales value minus separable costs.
Constant gross margin percentage NRV method. Overall gross margin is computed first. Then gross margin and separable costs are deducted from the final sales value to arrive at joint cost. Allocate joint costs using physical measures such as weight, quantity or volume of the Joint products. Allocation based on weights

APPROACHES TO ALLOCATING JOINT COSTS SALES VALUE AT SPLIT OFF POINT Cream

Liquid skim 1200000

Revenues (20000*80)(30000*40)
Costs Joint costs - Production (ratio of 25K*80 and 75K*40) 2000 3000 Ending inventory

1600000

-1600000

-2400000

320000 -1280000 320000

1440000 -960000 240000

Gross margin

APPROACHES TO ALLOCATING JOINT COSTS NRV METHOD Buttercream Revenues (20000*250)(50000*220) Separable costs NRV Weights Joint cost allocated Cost per litre (39L/20k) 5000000 2800000 2200000 0.275 1100000 195 Condensed Milk 11000000 5200000 5800000 0.725 2900000 162

Revenue Cost Profit Ending inventory

3000000 2340000 660000 1560000

9900000 7290000 2610000 810000

APPROACHES TO ALLOCATING JOINT COSTS


GROSS MARGIN METHOD

Revenue Buttercream Condensed milk


Less: Costs Gross margin %

5000000 11000000

16000000 12000000 4000000 0.25 Buttercream Condensed milk 11000000 2750000 8250000 5200000 3050000 165

Revenues (20000*250)(50000*220) Less: Gross margin Total cost Separable costs Joint cost allocated Cost per litre

5000000 1250000 3750000 2800000 950000 187.5

Revenue Cost Profit Ending inventory Gross margin

3000000 2250000 750000 1500000 0.25

9900000 7425000 2475000 825000 0.25

APPROACHES TO ALLOCATING JOINT COSTS

Further processing cream into buttercream (250*20000) - (80*25000) Incremental cost


Incremental revenue

3000000

2800000
200000

Further processing liquid skim into condensed milk (220*50000) - (40*75000) Incremental cost Incremental revenue

8000000

5200000 2800000

NESTLE CASE (16.22)

NESTLE
Sales at split off point choclate powder liquor base Sales units at split off Sales value Weights Joint cost allocated Revenue Less: Costs Joint cost -175000 -325000 500 210000 0.35 175000 400000 milk chocolate liquor base 750 390000 0.65 325000 850000

Separable cost Gross margin


GM %

-212500 12500
0.03125

-437500 87500
0.102941

NESTLE
NRV Method choclate powder liquor base Revenue Less: Costs Separable cost NRV at split off point Weightage Joint cost allocated Revenue Less: Costs Joint cost Separable cost Gross margin GM % 400000 milk chocolate liquor base 850000

-212500 187500 0.3125 156250


400000 -156250 -212500 31250 0.078125

-437500 412500 0.6875 343750


850000 -343750 -437500 68750 0.080882

NESTLE
Gross margin method Total revenue Less: Cost Margin Margin %
choclate powder liquor base Revenue Less: Gross margin Less: Costs Separable cost Joint cost allocated 400000 32000 368000 -212500 155500 1250000 1150000 100000 0.08 milk chocolate liquor base 850000 68000 782000 -437500 344500

Revenue Less: Costs Joint cost Separable cost Gross margin GM %

400000
-155500 -212500 32000 0.08

850000
-344500 -437500 68000 0.08

ACCOUNTING FOR BY-PRODUCTS Production method Byproducts are recognized at time production is completed. The NRV of the byproduct produced is offset against the costs of the main product. Sales method byproducts are recognized at time of sale.