This recording covers joint products and by-product costing (byproduct costing) where cost allocated at split off point using relative sales value or net realizable value.
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[vc_video link=”https://youtu.be/3hD-qv9Dt8A” title=”Joint Cost Allocation Methods | Relative Sales Value”]
[vc_video link=”https://youtu.be/J5rbhP09qYs” title=”Joint Products and ByProducts Costing | CPA Exam BEC Questions”]
In some industries, two or more products, known as joint products, are produced from a single raw material input. For example, in the petroleum refining industry a large number of joint products are extracted from crude oil, including gasoline, jet fuel, home heating oil, lubricants, asphalt, and various organic chemicals. The point in a manufacturing process where joint products (such as gasoline and jet fuel) can be recognized as separate products is referred to as the split-off point. Quite often joint products can be sold at the split-off point or they can be processed further and sold for a higher price. A decision as to whether a joint product should be sold at the split-off point or processed further is known as a sell or process further decision. To make these decisions, managers need to follow a three step process. First, they should always ignore all joint costs, which include all costs incurred up to the split-off point. These costs should be ignored because they remain the same under both alternatives—whether the manager chooses to sell a joint product at the split-off point or process it further. The second step is to determine the incremental revenue that is earned by further processing the joint product. This computation is performed by taking the revenue earned after further processing the joint product and subtracting the revenue that could be earned by selling the joint product at the split-off point. The third step is to take the incremental revenue from step two and subtract the incremental costs associated with processing the joint product beyond the split-off point. If the resulting answer is positive, then the joint product should be processed further and sold for a higher price. If the answer is negative, then the joint product should be sold at the split-off point without any further processing.