Joint Product Costing

Introduction

Joint costs are the costs of a manufacturing process that produces two or more products simultaneously. When the products produced have "high total sales values compared with the total sales values of other products" (Horngren et al, 2006, p. 567) they are called joint products. There are several methods that can be used to allocate joint costs. Some of these methods include the physical-measure method, the net realizable value (NRV) method, and the sales value at split-off method. All of these methods are calculated based upon the split-off point, which is the "point in which the separate products are identifiable" (Faculty of Management University of Canberra, 1998).

Physical-Measure Method

"The physical-measure method allocates joint costs to joint products on the basis of the relative weight, volume, or other physical measure at the split-off point of total production of these products during the accounting period" (Horngren et al, 2006, p. 570). The physical-measure method is often used when "output prices are highly volatile or unpredictable, significant processing occurs between the split-off point and the first sales opportunity, or the market does not set product prices" (Hilton et al, 2003).

Net Realizable Value (NRV) Method

The NRV method "allocates joint costs to joint products on the basis of relative NRV - final sales value minus separable costs - of total production of the joint products during the accounting period" (Horngren et al, 2006, p. 572). If the product can be sold at split-off without further processing the NRV is the market value or sales price. If the product requires further processing prior to sale, then the NRV must be estimated as the sales value less estimated additional processing costs. This method is based upon the value of the actual quantity sold during the period. Assuming neither the apple juice nor the apple cider require further processing, the NRV method would yield the following results.

Sales Value at Split-off Method