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
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
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.
