Joint Product Costing

Joint costs are the costs of a manufacturing process that produces two or more products simultaneously. When the products produced have "high total sales values compared with the total sales values of other products" (Horngren et al, 2006, p. 567) they are called joint products. There are several methods that can be used to allocate joint costs. Some of these methods include the physical-measure method, the net realizable value (NRV) method, and the sales value at split-off method. All of these methods are calculated based upon the split-off point, which is the "point in which the separate products are identifiable" (Faculty of Management University of Canberra, 1998).

Physical-Measure Method

"The physical-measure method allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the split-off point of total production of these products during the accounting period" (Horngren et al, 2006, p. 570). The physical-measure method is often used when "output prices are highly volatile or unpredictable, significant processing occurs between the split-off point and the first sales opportunity, or the market does not set product prices" (Hilton et al, 2003).

Net Realizable Value (NRV) Method

The NRV method "allocates joint costs to joint products on the basis of relative NRV - final sales value minus separable costs - of total production of the joint products during the accounting period" (Horngren et al, 2006, p. 572). If the product can be sold at split-off without further processing the NRV is the market value or sales price. If the product requires further processing prior to sale, then the NRV must be estimated as the sales value less estimated additional processing costs. This method is based upon the value of the actual quantity sold during the period. Assuming neither the apple juice nor the apple cider require further processing, the NRV method would yield the following results.

Sales Value at Split-off Method

The sales value at split-off method "allocates joint costs to joint products on the basis of the relative total sales value at the split-off point of the total production of these products during the accounting period" (Horngren et al, 2006, p. 569). This method is based upon the value of the entire production during the accounting period

Reasons for Allocating Joint Product Costs

There are many reasons for allocating joint product costs. Some of these reasons include:

1) Inventory costing and computation of cost of goods sold for external and internal reporting

2) Insurance settlement calculation on damage claims

3) Cost reimbursement under contracts when products are sold to two or more customers

4) Analysis of customer profitability (Faculty of Management University of Canberra, 1998)

Conclusion

"There is no universally "correct" approach to apportionment of joint...costs. Each method has its strengths and weaknesses" (Upchuch, 2005). Management must choose a reasonable allocation method based upon professional judgment. Some things that should be considered include the simplicity of the method, which allocation base is more reliable for the specific products produced, and which method is in the best interest of the company.

References

Faculty of Management University of Canberra. (1998). "Joint product costs." University of Canberra website. URL: http://www.canberra.edu.au/uc/lectures/mantech/accounting/sem981/unit4827/lecture6/index.htm.

Hilton, R. W., Maher, M., & Selto, F. (2003). "Cost management: Strategies for business decisions." (2^nd ed.). McGraw Hill website. URL: http://highered.mcgraw-hill.com/sites/dl/free/0072474343/45539/Hilton09.ppt.

Horngren, C. T., Datar, S. M., & Foster, G. (2006). "Cost accounting. A managerial emphasis." (12^th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.

Upchuch, A. (2005). "Cost accounting principles and practice." Pearson Education website. URL: http://wps.prenhall.com/ema_uk_he_upchurch_costacct_1/0,4698,223191-,00.html.