73 9.1 Joint Costs and By Products
Joint Costs and By Products
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Last updated
- Dec 28, 2020
Learning Objectives
- Analyze the impact that joint costs have on decision making.
Question: When two or more products are produced from a single input, these products are called joint products14. The cost of this single input and the related manufacturing process costs are called joint costs15. For example, lumber companies often must deal with joint products (different types of lumber) resulting from one input (a log). How do the concepts of joint products and joint cost help a lumber company establish a cost for each of its products?
- Answer
The Physical Quantities Method
Question: The physical quantities method17 allocates joint costs based on a physical measure of output. Assume Oregon Lumber produces 600,000 board feet of Grade A lumber and 200,000 board feet of Grade B lumber during June. How would Oregon Lumber use this information to allocate $250,000 in joint production costs to each grade of lumber?
- Answer
The Sales Value Method
Question: A different approach to allocating
- Answer
Deciding Whether to Process Further
Question: Assume Oregon Lumber Company has the option of processing Grade B lumber further into a finished product by sanding the lumber and painting it with primer. This option is presented in Figure 9.20. The sanded and painted Grade B lumber sells for $0.45 per board foot rather than $0.30 for the unfinished Grade B lumber. The additional cost to sand and paint the Grade B lumber is $0.05 per board foot. Should Oregon Lumber process Grade B lumber further into finished lumber?
Figure 9.11.20 : – Further Processing of Oregon Lumber Company’s Grade B Lumber, © Thinkstock
Key Takeaway
Two or more products made from a single input are called joint products. The costs of the single input and related manufacturing process costs must be allocated to each of the joint products. The physical quantities method allocates joint costs based on a physical measure of output (e.g., pounds or yards of material). The sales value method allocates joint costs based on the relative sales value for each of the joint products. Regardless of the allocation method used, total joint costs and total profit remain the same. Companies must often decide whether to process a joint product further. If as a result of processing the product further, additional sales revenue exceeds additional costs, the wise decision is to process further.
Review problem 9.1
Fresh Veggies, Inc., purchased 10,000 pounds of fresh apples from a local grower for $4,000. The apples were separated into high-quality Grade A apples (3,000 pounds) and lower-quality Grade B apples (7,000 pounds). Fresh Veggies sells Grade A apples for $0.80 per pound and Grade B apples for $0.50 per pound.
- Allocate joint costs to each product using the physical quantities method (pounds), and calculate the profit or loss for each product.
- Allocate joint costs to each product using the relative sales value method, and calculate the profit or loss for each product.
- Assume Grade B apples can be processed further into dried apple slices for an additional $0.20 per pound. Customers are willing to pay $0.65 per pound for dried apple slices. Should Fresh Veggies, Inc., process the Grade B apples further?
- Answer
Definitions
- Two or more products produced from a single input.
- The cost of inputs required to produce joint products.
- The point at which identifiable joint products emerge from the production process.
- A method that allocates joint costs based on a physical measure of output.
- A method that allocates joint costs based on the relative sales value of each product at the split-off point.
