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Chapter 9 Joint Product and By-Product Costing. Key Topics: Joint processes and common costs Main products and byproducts Allocation methods Choosing a method Using joint cost allocation information Decisions to process further Choosing a method Uses of joint costing information.

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Chapter 9Joint Product and By-Product Costing

Key Topics:

  • Joint processes and common costs

    • Main products and byproducts

  • Allocation methods

  • Choosing a method

  • Using joint cost allocation information

    • Decisions to process further

    • Choosing a method

    • Uses of joint costing information


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Joint Processes and Common Costs

  • Jointly produce more than one product

  • Joint (common) costs cannot be traced to individual products

  • Joint production ends at the split-off point

  • Individual products might or might not be processed beyond the split-off point



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Allocation Methods

  • Physical output

  • Sales at split-off point

  • Net realizable value

  • Constant gross margin NRV


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Physical Output Method

  • Allocate joint costs in proportion to the physical output for each main product

  • Examples of physical measures: meters, pounds, gallons

  • All main products must be expressed in the same physical measure


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Sales at Split-Off Method

  • Allocate joint costs in proportion to the sales value for each main product at the point where joint production ends

  • Not always possible to measure sales value at the split-off point


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Net Realizable Value Method

  • Allocate joint costs in proportion to the net realizable value for each main product, taking into account the final selling price and separable costs

  • Same as the sales value at split-off method if there is no additional production beyond the split-off point


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Constant Gross Margin NRV Method

  • Allocate joint costs so that the gross margin for all main products is the same

    • First, calculate combined gross margin for all main products

    • Second, calculate joint cost allocation that will result in the same gross margin for all main products, taking into account the final selling price and separable costs





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Choosing a Method

Major Goal

Avoid distortion of individual main product values


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Uses of Joint Cost Information

  • Financial statements

  • Income tax returns

  • Government regulatory reports

  • Other external reports


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Estimations (Uncertainties) in Allocations

  • Physical quantities

  • Sales value at split-off point

  • Sales prices if processed further

  • Separable costs

  • Joint costs are irrelevant for many types of decisions


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