AFM481 - Advanced Cost Accounting
Professor Grant Russell
Final Exam Material
Chapter 9: Joint Product and By-product Costing
Joint Products: In the process of making one product, one or more other products are created.
A main product has high sales value compared to the other joint products.
A by-product has low sales value compared to the other joint products.
Joint costs: costs incurred to jointly produce a group of goods (e.g. labour, insurance, property taxes)
Split-off point: point at which individual products are identified
Separable costs: costs incurred after the split-off point
E.g. The join costs of processing maple sap were $2,000,000.
Product Cases Sales Value at Separable Costs Selling Price
(Total 120,000) Split-off Point
Syrup 90,000 $24 per case $12 per case $38 per case
Sugar 20,000 $26 per case $16 per case $46 per case
Butter 10,000 $32 per case $14 per case $50 per case
Methods of Allocating Joint Costs to Main Products
1. Physical Output Method
Allocates join costs using the relative proportion of physical output for each main product
Expressed using the same physical measure.
Each main product is allocated a proportion of joint costs, based on that product’s physical
output (final product) divided by the total physical output of all main products.
Distortions are likely to occur when the incremental contribution (incremental revenue –
incremental costs) of some products is relatively high.
To Syrup = (90,000 cases / 120,000 total cases) * $2,000,000 join costs = $1,500,000
To Sugar = (20,000 cases / 120,000 total cases) * $2,000,000 joint costs = $333,333
To Butter = (10,000 cases / 120,000 total cases) * $2,000,000 joint costs = $166,667
2. Market-based Methods
1) Sales Value at Split-off Point
Joint costs are allocated based on the relative sales value of main products at the point where
joint production ends.
1. Syrup (90,000 cases * $24) = $2,160,000
Sugar (20,000 cases * $26) = $520,000
Butter (10,000 cases * $32) = $320,000
2. To Syrup ($2,160,000/$3,000,000) * $2,000,000 joint costs = $1,440,000 To Sugar ($520,000/$3,000,000) * $2,000,000 joint costs = $346,667
To Butter ($320,000/$3,000,000) * $2,000,000 joint costs = $213,333
2) Net Realizable Value (NRV)
Allocates join costs using the relative value of main products
NRV = Final Selling Price or Total Rev After Processing – Separable Costs
1. Syrup [90,000 cases * ($38 selling price - $12 separable costs)] = $2,340,000
Sugar [20,000 cases * ($46 selling price - $16 separable costs)] = $600,000
Butter [10,000 cases * ($50 selling price - $14 separable costs)] = $360,000
2. To Syrup = ($2,340,000/$3,300,000) * $2,000,000 joint costs = $1,418,182
To Sugar = ($600,000/$3,300,000) * $2,000,000 joint costs = $363,636
To Butter = ($360,000/$3,300,000) * $2,000,000 joint costs = $218,182
3) Constant Gross Margin NRV
Allocates joint costs so that the gross margin % for the main products are identical.
First, the combined gross margin % for main products is calculated.
o Combined Gross Margin = Sales - Joint Costs - Separable Costs
o Gross Margin % = Combined Gross Margin / Combined Sales
Second, joint costs are allocated to each main product to achieve a constant gross margin.
o Allocated Joint Costs
= Sales – Gross Margin (Desired Gross Margin % * Sales) – Separable Costs
Allocates joint costs so that all joint products appear to have equal profitability. It best reflects
the inseparability of the joint production process.
1. Calculate the combined gross margin %.
Syrup $38 selling price * 90,000 cases = $3,420,000
Sugar $46 selling price * 20,000 cases = $920,000
Butter $50 selling price * 10,000 cases = $500,000
Total Combined Sales $4,840,000
Less Combined Product Costs:
Joint Costs ($2,000,000)
Syrup $12 separable costs * 90,000 cases = ($1,080,000)
Sugar $16 separable costs * 20,000 cases = ($320,000)
Butter $14 separable costs * 10,000 cases = ($140,000)
Total Combined Product Costs ($3,540,000)
Combined Gross Margin $1,300,000
Combined Gross Margin % = $1,300,000 / $4,840,000 = 26.86%
2. Allocate the joint costs to achieve a constant gross margin of 26.86% Syrup Sugar Butter Total
Sales $3,420,000 $920,000 $500,000 $4,840,000
Less Gross Margin 918,595 247,107 134,298 1,300,000
(0.2686 * Sales)
Less separable 1,080,000 320,000 140,000 1,540,000
Allocated Joint $1,421,405 $352,893 $225,702 $2,000,000
Total gross margin is not affected by the joint cost allocation method. It only affects the relative gross
margins for the individual products. A product could give the appearance that it is sold at a loss, when
in fact the company profits from producing the joint product.
Processing a Joint Product Beyond the Split-off Point
The joint costs are irrelevant because they are sunk costs.
The product with the highest incremen