Joint-Process Costing

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Joint-ProcessCosting

• Chapter 9

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Joint processes

• Process that converts a single input into
  multiple outputs

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Joint processes

• Split-off point
• Input splits into two or more products
• Intermediate product
• Product that requires more processing before it
  can be sold
• Final product
• Product that is ready for sale

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Joint processes

• By-product
• Minor product resulting from the process
• Has some value, can be sold
• Scrap
• Not really a product
• Has possible minor value
• Recycling
• Waste
• No value
• May incur cost to dispose of it

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Joint processes

• Joint cost
• Cost to operate the process
• Further processing cost
• Cost incurred beyond the split-off point
• Benefits a particular product
• Sell as-is or process further?
• incremental revenue vs. incremental cost

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Allocation of joint costs

• Once incurred, joint costs are sunk costs
• Why allocate them to resulting products?
• Inventory valuation
• Contracts
• Casualty loss estimation
• Etc.
• Performance measurement
• Only allocated to main products

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Allocation of joint costs

• Allocation methods
• Net realizable value method
• Allocated proportionately to products based on
  their final sales value minus further processing
  costs, if any
• Physical measures method
• Allocated proportionately based on some physical
  measure of the products
• Weight, volume, length, etc.

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Joint cost allocation example

• Himshey Chocolate Company produces bulk chocolate
  which can be sold as is, or processed into bars
  and smooches
• Joint costs, including cocoa beans, milk, sugar,
  etc. are 1,200,000 to produce 1,000,000 pounds
  of chocolate

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Joint cost allocation example

• Output
• 100,000 pounds of bulk chocolate
• 600,000 pounds of bars
• 300,000 pounds of smooches
• 10,000 pounds of cocoa bean shells
• Further processing costs and selling prices
• Bulk chocolate 5,000 150,000
• Bars 60,000 800,000
• Smooches 45,000 900,000
• Shells 500 1,000

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Joint cost allocation example

• Net realizable value method

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Joint cost allocation example

• Physical measures method

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Accounting for by-products

• Minimal value, so accounting is not complex
• Method 1 Treat NRV of by-product as other
  revenue
• Method 2 Treat NRV of by-product as a reduction
  of the cost of the main products
• Allocate the cost reduction on the same basis as
  was used to allocate joint costs

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Accounting for scrap and waste

• Scrap
• NRV is usually negative
• Disposal cost is usually greater than the sales
  value
• NRV is an overhead cost or part of joint costs
• If NRV is positive, treat as by-product
• Waste
• No sales value
• Disposal cost is overhead or part of joint costs