50. Joint Product Costing

Question 1

What factors distinguish joint products from by-products and how are the two treated in an accounting system?

Answer 1

Joint products: These are the main purpose for the value-added joint process in the organization. Organizations invest in the joint process to create the main joint products. Therefore, the accounting system is designed to allocate the joint process costs to the main joint products.
•By-products: These often result from joint production processes. They have some commercial value, but the value is not significant. The accounting system does not allocate joint process costs to by-products

Question 2

Describe why managers need to be careful when using joint cost allocations in the process of planning, controlling, and evaluating operations.

Answer 2

• Joint costs are part of the absorption costing system and the costs must be allocated, but there is no “optimal” method for allocating joint costs.
• Joint costs are fixed with respect to the individual activity in each joint product.
• The process of allocating joint costs may suggest to management that these costs are affected by individual project lines, but they are not!

Question 3

Describe cost allocation using the physical units method and cost allocation using the sales value at split-off method.

Answer 3

• Physical units method: This method is based on a simple logic that as more of a product is produced, it should bear more of the joint process costs.
• Split-off method: This method is based on the logic that the joint process adds value to the main products, so the value established at the point the products are identifiable and ready for sale should be the basis for the allocation. This method is only available if products are saleable at the split-off point.

Question 4

Describe cost allocation using the net realizable value (NRV) method and cost allocation using the constant gross profit (gross margin) method.

Answer 4

• Net realizable value (NRV) method: The logic in this method is that joint costs should be allocated based on the product’s ability to pay the costs, defined as the product’s NRV (final sales value of the product less any additional processing costs).
• Constant gross profit (gross margin) method: This method can be used to reduce the impact on product line profitability due to the allocation method used. Start with the overall gross profit percentage for the organization, then mathematically work backwards to ensure that each product line reports the same gross profit percentage

Question 5

There are two main methods used to handle the reporting of by-products. Briefly describe each method.

Answer 5

• One method establishes a separate product line in the organization’s profit report for the by-products. Under this method, the relatively lower performance of the by-product stands out in the overall report.
• The other (more popular) method offsets the joint process cost with the by-product revenue before computing the joint cost allocation. The decrease in cost will be allocated to the various products under whichever joint cost allocation method the organization uses.