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COMMON INPUT
Simultaneously
JOINT COSTS
converts a common
Costs to operate
input into several
joint processes JOINT PROCESS outcomes

FINAL FINAL
PRODUC PRODUC
TA TB

FINAL
PRODUCT SPLIT-OFF
One that is POINT
ready for sale Point at which
without further joint-products
processing appear
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COMMON INPUT
Simultaneously
JOINT COSTS
converts a common
Costs to operate
input into several
joint processes JOINT PROCESS outcomes

FINAL FINAL
PRODUC PRODUC
TA TB

INTERMEDIAT INTERMEDIAT
E E
PRODUCT A PRODUCT B
INTERMEDIATE PRODUCT
A product that requires further processing before it is salable
to the public.
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There are four basic steps in estimating profit
from joint products.
1. Identify all alternative sets and quantities of final
products possible from the joint process
2. Forecast the sales price of each product

3. Estimate the costs (if any) required to further

process joint products into salable products.

4. Choose the set of products with the overall

maximum profit.
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Net realizable value is the measure of a product¶s
contribution to profit after the split-off point.

What is the
What are the
potential additional
additional costs of
revenue after
further processing?
further processing?

Net realizable value (NRV)

= Sales value - further processing costs after split off
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National Wood Products has a sawmill in Georgia. The mill has a
monthly capacity of 4,700 mbf (1,000 board feet). For a month of
production, the mill acquires logs and cuts them into two grades of
lumber (1,000 mbf of Grade A Standard and 3,000 mbf of Grade B
Standard) at a cost of $1,400,000. The Grade A Standard can be
further processed into Grade A Special lumber at an additional cost
of $100,000. Forecasted Sales Price information is as follows:

Forecasted Sales Price

umber Type per mbf
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National Wood Products has a decision to make. They
can choose Option 1 and produce 1,000mbf of Grade A
Standard and 3,000 mbf of Grade B Standard.
Alternatively, Option 2 allows them to produce 1,000 mbf
of Grade A Special and 3,000 mbf of Grade B Standard.

Which option should National Wood Products choose?

Note: The decision hinges on making an

accurate determination of which option provides
the highest Net Realizable Value.
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Net realizable value (NRV)
= Sales value - further processing costs after split off
ost of
Sales rice urther
per bf Revenue rocessing NRV
ption   
 
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ption
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Computing the NPV of each set of products provides a
comparison of each products sales revenues to cost
after split-off

What is RELEVANT?

Revenues from
Allocation of the
processing beyond the
wood mill¶s
split-off and any
$800,000 joint
expenditures for
processing costs
additional processing
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MAIN PRODUCT
a joint output that
generates a significant
portion of of the net
realizable value

BY-PRODUCTS
outputs from a joint
process that are minor ÿ
 
 
 





in quantity and/or NRV 
  

when compared to the

main products
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Estimate the NRV at

split-off by deducting
Is further processing estimated added-
required? processing costs
Allocates joint
costs based from sales value
on the NRV of
each main
product
at split-off Can the main
Use market value
product be sold
or sales price for
at split-off without
allocation
further processing?
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SPECIALTY STANDARD
½

 LUMBER LUMBER TOTAL
SALES REVENUE ´




´




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LESS ESTIMATED



 FURTHER


 PROCESSING
COSTS 











   ESTIMATED NRV ´




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  PROPORTIONAL
SHARE OF NRV 





 


ALLOCATED
JOINT PROCESS
COST ´




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SPECIALTY COMMON
 LUMBER LUMBER TOTAL


 Sales Revenue ´




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Additional
Processing Costs 













NRV at Split-Off 


















Allocation of Joint
  Costs 














  Gross Margin ´



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  Gross Margin



















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Energy Example: BTU

Content content
Allocation is
based on a
physical measure
Example:
of the joint Volume
Gallons
products at split-
off point

Example:
Weight Pounds
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When is the physical measures

method used?

Output prices Significant The market

are highly processing does not set
volatile or occurs product
unpredictable between prices
the split-off
point and the
first sales
opportunity
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Allocation of $1,400,000 The same $1,400,000

joint process costs for could also be allocated
National Wood Products based on mbf of lumber
based on relative NRV. produced.

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$$$ use cause-effect
basis




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 . . . Can be
-+ .,  arbitrary

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Choose the joint-cost allocation method that maximizes regulated

profits of cost reimbursements

Do not base product or service production decisions on joint

margins (I.e., after joint-cost allocation) unless the choice is in
responses to regulatory opportunities

Clearly define how to allocate joint costs in contractual agreements

among parties that share outputs and joint costs of joint processes
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* ( *


By-products are minor products and alternative methods are not
likely to have a material effect on the financial statements for
either internal or external reporting

Whether to sell the by-product at split-off or process them

further usually depends on the highest NPR obtainable like a
major product

Consider
Two Deduct by-product
by-product
standard NRV from costs
NRV as other
methods as main product
revenue
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* ( *


Method 1: The NRV of the by-product treated as
other revenue

Used because Sales Revenue

by-product Main products $2,100,000
NRVs are
small and Other revenue 62,400
effects on Total revenue 2,162,400
income
are Cost of goods sold 1,500,000
immaterial Gross margin $662,400
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* ( *


Method 2: Deduct net realizable value related to the sale
of the by-products from the cost of the main product

Sales Revenue $2,100,000

Cost of goods sold
Cost of main products sold 1,500,000
Less NRV of by-products (62,400)
Adjusted Cost of goods sold 1,437,600
Gross margin $662,400
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* ( *



Method 2: Deduct net realizable value related to the sale

of the by-products from the cost of the main product
If all the main products produced in the period have not been sold,
the NRV of by-products should be prorated to the main product
inventories and cost of goods sold.

ra de ra de
pe cia lty ta nda rd
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  um be r um be r
hysica l Qua ntity M  









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By-Product Scrap and Waste

Sales value Cost of further

exceeds cost processing
of further exceeds sales
processing value

Sold as by-product
Dispose of
Look for new
 at  products
minimum cost
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