MS5

• Joint process


  One during which one product cannot be manufactured without producing others
• Industries where joint processes are common

  • Food
  • Extractive
  • Agricultural
  • Chemical
• The process of producing first-quality merchandise and factory seconds in a single operation can be viewed as a joint process
• Joint cost

  Costs incurred for material, labor, and overhead during a joint process
• Joint products


  Primary outputs of a joint process that have substantial revenue-generating ability
• By-products


  Incidental outputs of a joint process that have a higher sales value than scrap
• Scrap


  Incidental outputs of a joint process that have a lower sales value than by-products
• Waste

  Residual output from a joint process that has no sales value
• Over time, a product classification may change because of technology advances, consumer demand, or ecological factors
• New joint products may be developed from a product, as illustrated in the ever-growing list for soybeans
• Some products originally classified as by-products can be reclassified as joint products, and some joint products can be reduced to the by-product category
• Even products originally viewed as scrap or waste can be upgraded to joint product status
• Split-off point


  The point at which joint process outputs are first identifiable as individual products
• Joint cost includes all direct material, direct labor, and overhead costs incurred up to the split-off point
• If joint output is processed beyond the split-off point, additional costs will be incurred and must be assigned to the specific products for which those costs were incurred
• Management decision points in a joint production process

  1. Decide whether total expected revenue from selling the joint output "basket" of products is likely to exceed total expected processing cost

  2. Compare the income from this use of company resources to that provided by the best alternative use

  3. Determine how to classify joint process outputs

  4. Decide whether to sell (any or all of) the joint output at split-off or to process it further
• If joint products are salable at split-off, further processing should be undertaken only if the value added to the product, as reflected by the incremental revenue, exceeds the incremental cost
• If a primary product is not salable at split-off, additional costs must be incurred to make that product salable
• Nonprimary output should be processed further only if additional processing provides a net monetary benefit
• Physical measure allocation

  An easy, objective way to prorate joint cost at the split-off point using a common physical characteristic of the joint products
• Physical measures provide an unchanging yardstick of output
• Physical measure allocation ignores the revenue-generating ability of individual joint products
• It would be circular logic to allocate joint cost using selling prices that were set based on the cost to produce the output
• Allocating joint cost based on a physical measure ignores the revenue-generating ability of individual joint products
• Products that weigh the most or that are produced in the largest quantity will receive the highest proportion of joint cost allocation—regardless of their ability to bear that cost when they are sold
• Monetary measure allocation


  Recognizes the relative revenue generation of each product
• A problem with monetary measure allocations is that the basis used is dynamic due to fluctuations in general and specific price levels
• Steps to prorate joint cost to joint products using monetary measure allocation

  1. Choose a monetary allocation base

  2. List each joint product's base values

  3. Add the values to obtain total

  4. Divide each individual value by the total to obtain numerical proportions

  5. Multiply the joint cost by each proportion to obtain the allocation for each product

  6. Divide each product's prorated joint cost by the number of product units to obtain a cost per unit
• Sales value at split-off allocation


  Assigns joint cost to joint products based on the relative split-off point sales values for the products
• Net realizable value (NRV) at split-off allocation


  Assigns joint cost based on the net realizable values of the joint products at the split-off point
• Approximated net realizable value (NRV) at split-off allocation


  Uses simulated NRVs for the joint products at split-off to calculate the joint cost allocation
• Approximated NRV at split-off is considered the "best" method of joint cost allocation because it captures the intended level of separate processing, costs of separate processing, expected selling costs, and expected selling price of each joint product
• Joint costs in service businesses and NFP organizations relate to marketing and promotion issues rather than to production processes
• Allocation of joint costs in service businesses and NFPs

  • Can use either a physical or monetary allocation base
  • For NFPs, the allocation method must be rational, systematic, and result in reasonable allocations
• For NFPs, high fund-raising costs may harm credibility with donors and jeopardize standing with charity regulators
• Tests for NFPs to allocate joint activity costs to categories other than fund-raising

  • Purpose test
  • Audience test
  • Content test
• If a majority of compensation or fees for anyone performing a part of the activity is tied to contributions raised, the activity automatically fails the purpose criterion and all costs must be charged to fund-raising
• Net realizable value (NRV) approach

  Reduces joint product cost for the net realizable value created by the by-product's sale
• NRV approach


  1. Debit NRV to inventory

  2. Credit Work in Process Inventory—Joint Products or Cost of Goods Sold for the joint products
• Realized value approach


  No value is recognized for the by-product until it is sold