A single production process may yield several different Three methods is usually used to allocate joint cost to
products. individual products:
When two or more product, both of significant value, • The physical measures method, such as weight
results from a single production process, they are called (i.e., kilograms) or volume (i.e., cubic feet)/
joint products. • The sales value at split-off point method
A joint product is different from a by-product, because a (relative sales value), set to yield a uniform rate
by-product has insignificant value compared to the main of gross profit.
product or products. • The adjusted sales value method (Net
For income and inventory costing purposes, the Realizable Value), considering additional
allocation of costs to joint products and by-products is processing costs.
necessary. • Methods for Allocating Joint Costs
• Joint Products Case 1:
Joint Products are individual products, each with Joses’s Diary Products purchases raw milk from
significant sales values, which are produced individual farms and processes it until the split-off
simultaneously from the same raw materials and/or point, when two products – cream and liquid skim-
manufacturing process . emerge. These two products are sold to a company,
• Joint Products which markets and distributes them to supermarket
The basic characteristic of joint products are: and other retail stores
• Manufacturing of joint products always has a Summary Data for April 2014 are:
split-off point (point of separation) in which • Raw milk processed, 55,000 gallons; 5,000
separate products emerge, which can be sold as gallons are lost in the production process due to
is or processed further. Cost incurred after split- evaporation, spillage, and the like, yielding
off point do not cause allocation problems since 12,500 gallons of cream and 37,500 gallons of
they can be identified with the specific liquid skim.
products. • The production data, sales and inventories are
• None of the joint products is significantly as follows.
greater in value than other joint products . This
characteristics distinguishes joint products from
by-products.
• Joint products require simultaneous common
processing. Processing of one of the joint
products results in the processing of all the
other joint products at the same time.
• Joint Costs and the Split-Off Point
Joint costs or common costs consist of direct materials,
direct labor, and manufacturing overhead incurred from
the start of the process up to the point of separation • Methods for Allocating Joint Costs
(split-off point). These costs are indivisible, because The following questions depict the relationships in the
they cannot be identified to any of the products being above illustration:
simultaneously produced. • How much of the P200,000 joint costs should be
Additional processing costs (sometimes called further allocated to the cost of goods sold of 10,000
processing costs or separable costs) are costs incurred gallons of cream and 15,000 of liquid skim?
by each product, after they emerged from the same raw • How much should be allocated to the ending
material. Additional processing costs consist also of inventory of 2,500 gallons of cream and 22,500
additional materials, direct labor, and manufacturing gallons of liquid skim?
overhead incurred after the split-off point. The joint production costs of P200,000 cannot be traced
• Joint Costs and the Split-Off Point to either product. That’s because the products are not
separated until the split-point. To determine the costs
of cream and liquid skim sold different allocation basis
can be used.
Physical Measures Method When the sales value is known at the split-off point, the
This method allocates joint costs to joint products on total joint cost is allocated among the joint products
the basis of the relative weight, volume, or other using the following formula:
physical measure at the split-off point of the production
process. The P200,000 joint costs produced 12,500
gallons of cream and 37,500 gallons of liquid skim.
Using the number of gallons produced as the physical *Units produced x unit sales value at split-off point.
measure, joint costs are allocated as follows:
Jose Dairy Products, Income Statement For April 2014 Jose Dairy Products Income Statement for April 2014