How to use the joint cost allocation calculator
- Enter the joint cost of the process that makes all the products together.
- Add one line for each product: its name, units, sales value at the split-off point, further processing cost and final sales value.
- Read the joint cost given to each product under the units, split-off and net realizable value methods.
- Compare the margin of each product under the three methods in the second table.
Formula
Share of product i = basis of product i / sum of the bases
Basis is units, sales value at split-off, or net realizable value (final sales value - further processing cost)
Allocated cost = joint cost x share, split to the cent by the largest remainder method
Margin = final sales value - further processing cost - allocated joint cost
The total margin does not depend on the method. Only the way it is spread over the products changes.
A $100,000 process with two products
Gasoline has 300 units, a split-off value of $600,000, $40,000 of further processing and a final value of $700,000. Diesel has 700 units, $400,000, $60,000 and $500,000. By units, Gasoline gets $30,000 and Diesel $70,000. By split-off value they get $60,000 and $40,000. The net realizable values are $660,000 and $440,000, which are also 60% and 40%, so that method gives $60,000 and $40,000 as well.
The margin of Gasoline is $630,000 by units and $600,000 by value, while Diesel moves from $370,000 to $400,000. The total is $1,000,000 either way, which is $1,200,000 of final sales less $100,000 of further processing and $100,000 of joint cost.
Why a joint cost has to be split
A refinery, a sawmill and a dairy all start with one input and one process that makes several products at once. The cost of that process cannot be traced to any single product, yet each product needs a cost for inventory, for the income statement and sometimes for a price list. Allocation is the accounting answer. It is a convention and not a measurement, so different methods give different product costs from exactly the same spending.
The units method is simple and ignores value, so a cheap by-product can carry the same cost per unit as the main product. The split-off method follows value at the point where the products separate, and it assumes that more valuable products earn more of the cost. The net realizable value method adjusts for the cost of finishing, which matters when one product needs a lot of extra work.
What the numbers can and cannot tell you
Use the margins to see how sensitive a product line is to the method, not to decide whether to keep a product. The joint cost is spent whether or not you sell one of the products, so the choice to process further should compare only the extra revenue with the extra cost. For other cost tools see the Gross Profit Method Inventory Estimator and the Sales Mix Break-Even Calculator. To write down stock that is worth less than it cost, use the Lower of Cost or NRV Inventory Calculator, and to check one product by itself the Profit Margin Calculator.
Assumptions and limits
- All products come out of one joint process, and the joint cost is the full cost of that process up to the split-off point.
- The sales values and further processing costs are your own estimates and stay the same for every method.
- The figures shown are examples. Use your own costs and values.
- By-products and scrap are treated like any other product. Enter them as a line if you want them to carry cost.
Frequently asked questions
Which method should I choose?
Many businesses use the net realizable value or split-off method because cost then follows value. Your accounting framework and your auditors may require a particular one.
Why do the columns add up exactly?
Each share is split to the cent with the largest remainder method, so the leftover cents go to the products with the largest fractions and the total stays equal to the joint cost.
Can a product have no further processing cost?
Yes. Enter 0 and its net realizable value equals its final sales value, which is the same as its split-off value if you sell it as it is.
What if a net realizable value is negative?
It is treated as zero for the allocation, so that product receives no joint cost, and at least one product must have a positive value.