Joint Product Costing
Kyle Ashcraft, CPA · 2019 CPA Exam Scores · 95 FAR · 98 BEC · 91 REG · 90 AUD
Joint product costing shows up whenever a company takes one input and turns it into several different outputs, and it's a well-tested topic on the BAR section of the CPA exam.
What is joint product costing?
In some industries, a company takes one common raw material and makes several different products from it — think of a petroleum processing company that takes crude oil and produces kerosene, gas, and propane. There are a lot of costs going into that processing, so how do you know how much to allocate to each end product? Joint product costing is the framework for allocating those shared costs.
Study tip: Joint product costing focuses on allocating joint costs to the final joint products. Joint products are all the outputs made from one input — until you separate them, you can't distinguish their individual costs.
There's a certain point, called the split-off point, where the single input actually separates into the multiple products. Before that point, the products are indistinguishable and you're accumulating joint costs. After that point, the products are distinguishable, and you can start allocating those joint costs to each one.
How does this work in practice?
Take a tree processing company that creates lumber and firewood from the same tree. Up until you separate the lumber from the firewood — cutting the tree down, transporting it, removing the bark — you've incurred joint costs. Once you reach the split-off point, the lumber and firewood become distinguishable, and the joint costs can be allocated to each one individually.
There are three methods for allocating those joint costs:
- Volume method
- Sales price at split-off method
- Net realizable value at split-off method
How does the volume method allocate joint costs?
The volume method looks at the total volume produced and allocates joint costs based on each product's share of that volume.
Example: You spent $5,000 in joint costs processing a tree. At the split-off point, you produce 6,000 pounds of wood total — 5,000 pounds of lumber and 1,000 pounds of firewood.
| Product | Volume | % of Total | Allocated Cost |
|---|---|---|---|
| Lumber | 5,000 lb | 83% | $4,150 |
| Firewood | 1,000 lb | 17% | $850 |
| Total | 6,000 lb | 100% | $5,000 |
How does the sales price at split-off method work?
This method assumes you could sell each product right at the split-off point, without putting any more cost into it, and allocates joint costs based on each product's share of that hypothetical sales value.
Example: At the split-off point, lumber could sell for $12,000 and firewood for $2,000 — a combined $14,000.
| Product | Sales Value | % of Total | Allocated Cost |
|---|---|---|---|
| Lumber | $12,000 | 86% | $4,300 |
| Firewood | $2,000 | 14% | $700 |
| Total | $14,000 | 100% | $5,000 |
How does the net realizable value method work?
This method assumes you'll have to spend more money on each product after the split-off point before you can sell it. Net realizable value (NRV) is the revenue you'll eventually generate, minus the costs still needed to finish and sell the product.
Example: You'll eventually sell the lumber for $20,000, but it needs $2,000 more in costs first — an NRV of $18,000. You'll eventually sell the firewood for $3,500, but it needs $400 more in costs — an NRV of $3,100. Combined, that's a total NRV of $21,100.
| Product | NRV | % of Total | Allocated Cost |
|---|---|---|---|
| Lumber | $18,000 | 85% | $4,250 |
| Firewood | $3,100 | 15% | $750 |
| Total | $21,100 | 100% | $5,000 |
What about by-products?
By-products come from the same input as the joint products, but they're not significant enough to be a main reason for processing that input — they don't generate much revenue on their own. Toothpicks, for example, might be a by-product of processing trees for lumber and firewood.
There are two common ways to account for by-products:
- Subtract the by-product's net realizable value from the total joint costs, then allocate the remainder among the joint products
- Record the by-product's sales value as other income on the income statement
Example: Toothpicks (the by-product) will eventually sell for $800, but need $200 more in costs first — an NRV of $600. Subtracting that from the $5,000 in total joint costs leaves $4,400 to allocate between the lumber and firewood.
All three joint-cost allocation methods split the same total dollar amount across products — they just use a different basis to do it. Volume uses physical quantity, sales price at split-off uses hypothetical sale value with no further processing, and net realizable value accounts for the additional costs still needed before each product can actually be sold.
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Kyle Ashcraft, CPA scored 90 or above on every section of the CPA exam in 2019, including a 98 on BEC. He is the founder and sole instructor of Maxwell CPA Review, a complete CPA review course covering all six sections, where he creates every lecture, textbook and study outline himself.