cost 1 ch 4

CHAPTER 4: Cost Allocation: Joint Products
and Byproducts
Approaches to Allocating Joint Costs
 Two basic ways to allocate joint costs to products are:

• Approach 1:Market based
• Approach 2:Physical measure
 Approach 1: Market-based Data
• Sales value at split off method
• Estimated net realizable value (NRV) method
• Constant gross-margin percentage NRV method
Allocating Joint Costs Example
10,000 units of A at a
selling price of $10 = $100,000
Joint processing
cost is $200,000
10,500 units of B at a
selling price of $30 = $315,000
11,500 units of C at a
selling price of $20 = $230,00 Splitoff point
Allocating Joint Costs Example
A B
Sales Value $100,000 $315,000 $230,0
Allocation of
Joint Cost
100 ÷ 645 31,008
315 ÷ 645 97,674
230 ÷ 645
Gross margin $ 68,992 $217,326 $158,6

Assume all of the units produced of B and C were sold.
2,500 units of A (25%)remain in inventory.
What is the gross margin percentage of each product?

Sales Value at Splitoff Method Example
Product A Revenues: 7,500 units × $10.00 $75,000
Cost of goods sold:
Joint product costs $31,008
Less ending inventory
$31,008 × 25% 7,752
Gross margin
Sales Value at Splitoff Method
Example
Product A:
($75,000 – $ 23,256) ÷ $75,000 = 69%
Product B:
($315,000 – $97,674) ÷ $315,000 = 69%
Product C:
($230,000 – $71,318) ÷ $230,000 = 69%
Assume that Oklahoma Company can process
products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1: B1: C1:
10,000 × $12.00 10,500 × $33.00 11,500 × $21.00
= $120,000 = $346,500 = $241,500
Estimated Net Realizable Value
(NRV) Method Example
Additional processing (separable) costs are as follows:
A1: $35,000 B1: $46,500 C1: $51,500
What is the estimated net realizable value of each

product at the split off point?
Product A1: $120,000 – $35,000 = $85,000
Product B1: $346,500 – $46,500 = $300,000
Product C1: $241,500 – $51,500 = $190,000
How much of the joint cost is allocated
to each product?
To A1:
85 ÷ 575 × $200,000 = $29,565
To B1:
300 ÷ 575 × $200,000 = $104,348
To C1:
190 ÷ 575 × $200,000 = $66,087
Allocated Separable
joint costs costs
A1 $ 29,565 $ 35,000 $
B1 104,348 46,500 1
C1 66,087 51,500 1
Total $200,000 $133,000 $3
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage and deduct the
gross margin from the final sales values to obtain the total
costs that each product should bear.
Step 3:
Deduct the expected separable costs from the total costs to
obtain the joint-cost allocation.
What is the expected final sales value of total production
during the accounting period?
Product A1: $120,000

Product B1: 346,500
Product C1: 241,500
Total $708,000
Step 1: Compute the overall gross-margin percentage.
Expected final sales value $708,000

Deduct joint and separable costs 333,000
ss margin $375
Gross margin percentage: $375,000 ÷ $708,000 = 52.966%
Step 2:Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods s
Product A1: $120,000 $ 63,559 $ 56,441
Product B1: 346,500 183,527 162,973
Product C1: 241,500 127,913 113,587
Total $708,000 $375,000 $333,000
Step 3:Deduct separable costs.

Cost of Separable Joint co
goods sold costs allocated
Product A1: $ 56,441 $ 35,000 $ 21,441
Product B1: 162,973 46,500 116,473
Product C1: 113,587 51,500 62,087
Total $333,000 $133,000 $200,000
$200,000 joint cost
20,000 48,000 12,000

Kilogram A Kilogram B Kilogram C
Product A Product B Product C

$50,000 $120,000 $30,000
Accounting for Byproducts
The production method

The production method recognizes byproducts
at the time their production is completed.
The sales method
The sale method delays recognition of
byproducts until the time of their sale.
Cont.
Journal entries under the production method

 To record cost of goods completed:
Byproduct Inventory 400
Finished Goods 8,600
Work in Process 9,000
Journal entries under the sales method

 To record the sale of the byproduct:
Cash or Accounts Receivable 300
Revenues

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CHAPTER 4: Cost Allocation: Joint Products

 Two basic ways to allocate joint costs to products are:

Gross margin $ 68,992 $217,326 $158,6

What is the gross margin percentage of each product?

A1: $35,000 B1: $46,500 C1: $51,500

What is the estimated net realizable value of each

Product A1: $120,000

Expected final sales value $708,000

Step 3:Deduct separable costs.

20,000 48,000 12,000

Product A Product B Product C

The production method

Journal entries under the production method

Journal entries under the sales method

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