Terminology

1
Terminology

• Joint Costs
• Separable Costs
• Main Product and Byproduct
• Split-off point
• Physical Flow Method
• NRV at Split-off method
• Constant Gross Margin Method

2
Joint Cost Issues

• Cost of heating oil versus gasoline
• Computer chips cost of low grade and high grade
  chips
• What costs more? Passenger traffic or Freight
• Cut up a tree. What is the cost of the lumber and
  the sawdust?

3
Costing Cows
4
Meat Packing Example

• A 2000 lb Cow Costs 8000 (The Joint Cost)
• Slaughtering Yields 1500 lbs Hamburg 500 lbs
  Pork Chops
• After spending 1000 on separable costs, the
  Hamburg sell for 5 per lb or 7500 Total
  Ultimate Sales Revenue
• After spending 1000 on separable costs, the Pork
  Chops sell for 10 per lb or 5000 Total Ultimate
  Sales Revenue

5
Fact Summary
6
Allocated Joint Cost Using Physical Flows
7
Allocated Joint Cost Using NRV at Split-Off
8
Cost Per lb Changes by Allocation Method Used
9
Note Impact on Cost/lb

• High Price Pork Chop Subsidizes Low Priced
  Hamburg
• Ability to Pay
• Tax the Rich, Support the Poor

10
Allocated Joint Cost Using Constant GM
11
Constant GM Method Forces Each Product to Have
a 20 Gross Margin
12
Constant GM Method Forces Each Product to Have
a 20 Gross Margin
13
Constant GM Method Forces Each Product to Have
a 20 Gross Margin
14
Cost Per lb Changes by Allocation Method Used
15
What if SP of Hamburg Increase to 10/lb up from
5/lb
16
Allocated Joint Cost Using NRV at Split-Off But
Hamburg Shortage Increases SP to 10/lb
17
Compare Cost per lb using NRV Method (HamburgSP
5 Pork Chops 10) (HamburgSP 10 Pork
Chops 10)