Before we introduce the allocation methods, let's start with the terms used in this costing method.

Joint costs – these are the cost elements (direct materials, direct labor and manufacturing overhead) used in the joint process. Joint costs are not identifiable with any of the joint products, as such they need to be allocated among the joint products (and with by-products, if any).

Split-off point – this is the end of the joint process. It is called split-off point because it is at this point that the joint products can be identified and separated from each other. After the joint process, we get to see how many of each product were produced. And so, we really need to allocate the joint costs to ensure correct valuation of the products.

Sales value at split-off – what we need to understand is that some products can be sold at split-off point while others need to be processed a bit more.

Regardless of that, all products have a sales value at split-off. The sales value is the selling price. If the given is selling price per unit, you have to multiply this with the units produced to get the total sales value at split-off.

Net Realizable value – Remember your inventory valuation? Well, net realizable value is equal to the selling price minus disposal cost (or cost to sell).

The real complication in Joint and By-product Costing is the allocation of the Joint costs depending on the policy or choice of the company.

Let us now introduce our allocation methods.

So, we have three methods:

The first one is the physical measurement method. The joint costs is allocated based on the units produced.

Simple example. We have two products at the end of the process. Product A is 1,000 units, and Product B is 500 units. What is important here is that they are measured by the same measurement. If the units are expressed in kilograms, then production for both A and B should be expressed in kilograms. Production can be expressed in units (generic term), kilograms, barrels, liter, pounds, etc. So, if the Joint Costs amount to P30,000, it would be allocated to Products A and B, as follows:

Product A = (P30,000 x 1,000/1,500) = P20,000

Product B = (P30,000 x 500/1,500) = P10,000

You simply add the units produced and use that as your divisor, (1,000 + 500) = 1,500.

Seems really simple, right?

The second one is the Sales value at split-off method. If you would remember from earlier, sales value at split-off is your total sales to be generated from the joint products. When the given information are the units produced and the selling price per unit, you have to multiply these two to get the product’s sales value at split-off. You compute for the sales value of all joint products and allocate based on each product’s sales value.

Simple Example: Product A is 1,000 units with a selling price per unit of P10. Product B is 500 units with a selling price per unit of P12.

We have to compute first for the total sales value of each product. That would be:

Product A = 1,000 x P10 = P10,000

Product B = 500 x P12 = P6,000

Total sales value = P16,000

To allocate the Joint Costs of P30,000 using the sales value at split-off:

Product A = P30,000 x (10,000/16,000) = P18,750

Product B = P30,000 x (6,000/16,000) = P11,250

Still simple, right?

Next, we have our net realizable value at split-off method. Again, the net realizable value is computed as [number of units x (selling price per unit – cost to sell).

Simple Example:

Product A is 1,000 units, selling price is P10 and the cost to sell is P3.

Product B is 500 units, selling price is P12 and the cost to sell is P3.50.

To compute for the NRV, that would be:

Product A = [1,000 x (P10 – P3)] = P7,000

Product B = [500 x (P12 – P3.50)] = P4,250

Total NRV = P11,250

To allocate the joint costs amounting to P30,000, the computation would be:

Product A = P30,000 x 7,000/11,250 = P18,667

Product B = P30,000 x 4,250/11,250 = P11,333

Got them? Alright, let’s try these with a sample problem.

Hit Complete and see next section. :)