16 Joint Cost Allocation

The Theory

Joint costs occur when a single process (a joint process) results in more than one product (joint products), such as raising dairy cows to produce milk, cheese, and butter. The cost of raising the cows is a joint cost of all three joint products. After the three products become separately identifiable (at the splitoff point), additional costs may occur that are unique to each product (separable costs); these costs can be traced to each product, but joint costs must be allocated among them using a cost allocation base, usually either:

• A measure of value, such as the sales value at splitoff or the net realizable value (final sales value less separable costs)
• A measure of volume, such as pounds, gallons, or units, at the splitoff point

Joint processes sometimes also result in byproducts, which are not intended to be products marketed and sold by the company to their regular customers or through regular channels, but which could be sold anyway. Byproducts are not allocated any joint costs themselves. The net realizable value of byproducts is usually accounted for in one of two ways:

• If accounted for at the time of production, the net realizable value of the byproduct is subtracted from joint costs before they are allocated to joint products.
• If accounted for at the time of sale, the net realizable value of the byproduct is recorded as “other income.”

The Method

First, if the company has a byproduct that is accounted for at the time of production, the net realizable value of the byproduct should be subtracted from joint costs.

Next, calculate the amount of the cost allocation base to be used to allocate the joint costs for each joint product. Common cost allocation bases include:

• The sales value of the products at the splitoff point: The amount the products could be sold for if they were not processed further
• The net realizable value (NRV) of the products: The final sales value of the products minus their separable costs
• A physical measure of the product at the splitoff point, such as gallons, pounds, or units

Cost allocation bases should be measured in total, not on a per-unit basis.

Next, allocate the joint costs to the joint products by dividing the amount of cost allocation base for each product by the total for all products, and multiplying that fraction by total joint costs.

Finally, once joint costs are allocated to the joint products, calculate the profitability of each joint product by subtracting the allocated joint cost for each product from its net realizable value. Find the company’s overall profitability by adding the profits from each main product together, and if the byproduct is accounted for at the time of sale, adding in the NRV of the byproduct.

Illustrative Example

Barker Dairy produces milk, cheese, and butter in a joint process. The cheesemaking process results in a byproduct—whey—which Barker Dairy can sell to a biotechnology firm, where it is used to create biodegradable plastics. Milk sells for $3.00 per gallon, cheese sells for $4.00 per pound, and butter sells for $4.50 per pound. One gallon of milk is required to make one pound of cheese, and two gallons of milk are required to make one pound of butter. Joint costs last year were $350,000 to produce 100,000 gallons of milk, 50% of which was sold as whole milk without further processing, 30% of which was processed into cheese at a cost of $0.50 per gallon, and 20% of which was processed into butter at a cost of $0.75 per gallon. For every pound of cheese produced, seven pounds of whey were produced as a byproduct, which could be sold for $0.70 per pound with no additional separable costs. Barker accounts for byproducts at the time of production.

Allocate joint costs to milk, cheese, and butter, first using sales value at splitoff as a cost allocation base, then using net realizable value, then using gallons at splitoff. Report the profitability of each product under each cost allocation base.

Sales Value at Splitoff

First, as the byproduct is accounted for at the time of production, subtract the net realizable value of the byproduct from joint costs before allocation:

• Cheese takes 30% × 100,000 = 30,000 gallons of milk
• The milk is processed into 30,000 ÷ 1 = 30,000 pounds of cheese
• The process also results in 30,000 × 7 = 210,000 pounds of whey
• The NRV of whey is 210,000 × $0.70 = $147,000
• The new joint costs are $350,000 – $147,000 = $203,000

Next, calculate the amount of the cost allocation base to be used to allocate the joint costs to each joint product:

• At splitoff, the product is simply milk, which can be sold for $3 per gallon
• Milk: 100,000 × 50% = 50,000 gallons × $3 per gallon = $150,000
• Cheese: 100,000 × 30% = 30,000 gallons × $3 per gallon = $90,000
• Butter: 100,000 × 20% = 20,000 gallons × $3 per gallon = $60,000

Next, allocate the joint costs to the joint products:

• Milk: $150,000 ÷ $300,000 × $203,000 = $101,500
• Cheese: $90,000 ÷ $300,000 × $203,000 = 60,900
• Butter: $60,000 ÷ $300,000 × $203,000 = 40,600
• Totals: $300,000 … = $203,000

Finally, calculate the profitability of each joint product:

• Revenue for milk: 50,000 gallons × $3 per gallon = $150,000
• Revenue for cheese: 30,000 pounds × $4 per pound = $120,000
• Revenue for butter: 20,000 ÷ 2 = 10,000 pounds × $4.50 per pound = $45,000
• Separable cost for cheese: 30,000 gallons × $0.50 per gallon = $15,000
• Separable cost for butter: 20,000 gallons × $0.75 per gallon = $15,000

	Milk	Cheese	Butter
Revenue	150,000	120,000	45,000
Separable cost	− 0	− 15,000	− 15,000
Net realizable value	150,000	105,000	30,000
Joint cost	− 101,500	− 60,900	− 40,600
Profit	48,500	44,100	(10,600)

Total company profit is $48,500 + $44,100 − $10,600 = $82,000.

Net Realizable Value

First, as the byproduct is accounted for at the time of production, subtract the net realizable value of the byproduct from joint costs before allocation:

• Cheese requires 30% × 100,000 = 30,000 gallons of milk
• The milk processed into 30,000 ÷ 1 = 30,000 pounds of cheese
• The process also results in 30,000 × 7 = 210,000 pounds of whey
• The NRV of whey is 210,000 × $0.70 = $147,000
• The new joint costs are $350,000 – $147,000 = $203,000

Next, calculate the amount of the cost allocation base to be used to allocate the joint costs for each joint product:

• NRV = final sales value – separable costs
• Milk: 100,000 × 50% = 50,000 gallons × $3 per gallon = $150,000
• Cheese: 100,000 × 30% = 30,000 gallons ÷ 1 = 30,000 pounds × $4 per pound – 30,000 gallons × $0.50 per gallon = $105,000
• Butter: 100,000 × 20% = 20,000 gallons ÷ 2 = 10,000 pounds × $4.50 per pound – 20,000 gallons × $0.75 per gallon = $30,000

Next, allocate the joint costs to the joint products:

• Milk: $150,000 ÷ $285,000 × $203,000 = $106,842.11
• Cheese: $105,000 ÷ $285,000 × $203,000 = 74,789.47
• Butter: $30,000 ÷ $285,000 × $203,000 = 21,368.42
• Totals: $285,000 … = $203,000

Finally, calculate the profitability of each joint product and the company overall:

	Milk	Cheese	Butter
Net realizable value	150,000.00	105,000.00	30,000.00
Joint cost	− 106,842.11	− 74,789.47	− 21,368.42
Profit	43,157.89	30,210.53	8,631.58

Total company profit is $43,157.89 + $30,210.53 + $8,631.58 = $82,000.

Gallons at Splitoff

First, as the byproduct is accounted for at the time of production, subtract the net realizable value of the byproduct from joint costs before allocation:

• Cheese takes 30% × 100,000 = 30,000 gallons of milk
• The milk is processed into 30,000 ÷ 1 = 30,000 pounds of cheese
• The process also results in 30,000 × 7 = 210,000 pounds of whey
• NRV of whey: 210,000 × $0.70 = $147,000
• New joint costs: $350,000 – $147,000 = $203,000

Next, calculate the amount of the cost allocation base to be used to allocate the joint costs for each joint product:

• Milk: 100,000 × 50% = 50,000 gallons
• Cheese: 100,000 × 30% = 30,000 gallons
• Butter: 100,000 × 20% = 20,000 gallons

Next, allocate the joint costs to the joint products:

• Milk: 50,000 ÷ 100,000 × $203,000 = $101,500
• Cheese: 30,000 ÷ 100,000 × $203,000 = 60,900
• Butter: 20,000 ÷100,000 × $203,000 = 40,600
• Totals: 100,000 … = $203,000

Finally, calculate the profitability of each joint product and the company overall:

• Revenue for milk: 50,000 gallons × $3 per gallon = $150,000
• Revenue for cheese: 30,000 pounds × $4 per pound = $120,000
• Revenue for butter: 20,000 ÷ 2 = 10,000 pounds × $4.50 per pound = $45,000
• Separable cost for cheese: 30,000 gallons × $0.50 per gallon = $15,000
• Separable cost for butter: 20,000 gallons × $0.75 per gallon = $15,000

	Milk	Cheese	Butter
Revenue	150,000	120,000	45,000
Separable cost	− 0	− 15,000	− 15,000
Net realizable value	150,000	105,000	30,000
Joint cost	− 101,500	− 60,900	− 40,600
Profit	48,500	44,100	(10,600)

Total company profit is $48,500 + $44,100 − $10,600 = $82,000.

Lecture Examples

Jibblejabble uses a production process that results in two joint products, widgets and pidgets, and one byproduct, flidgets. Jibblejabble begins with 2,000 pounds of input and processes it at a cost of $20,000, which yields 1,000 pounds of A, 800 pounds of B, and 200 pounds of flidgets. A could be sold without further processing for $14 per pound, but instead it is further processed into widgets at a cost of $17,000. B could be sold without further processing for $10 per pound, but instead it is further processed into pidgets at a cost of $16,000. Widgets can be sold for $30 per pound, pidgets for $35 per pound, and flidgets for $8 per pound.

1. Assume that the flidgets are accounted for at the time of sale. Allocate the joint costs using the sales value at splitoff as a cost allocation base.
2. Assume that the flidgets are accounted for at the time of production. Allocate the joint costs using the net realizable value as a cost allocation base.
3. Assume that the flidgets are accounted for at the time of production. Allocate the joint costs using pounds at splitoff as a cost allocation base.