Joint-Cost Basics

Learning Objective 1 Identify the splitoff point in a joint-cost situation and distinguish joint products from byproducts

Joint costs are the costs of a production process that yields multiple products simultaneously. Distillation of coal yields coke, natural gas, and other products. The costs of distillation are joint costs. The splitoff point is the juncture in a joint production process when two or more products become separately identifiable, for example, when coal becomes coke, natural gas, and other products. Separable costs are all costs—manufacturing, marketing, distribution, and so on—incurred beyond the splitoff point that are assignable to each of the specific products identified at the splitoff point. At or beyond the splitoff point, decisions relating to the sale or further processing of each identifiable product can be made independently of decisions about the other products.

As the examples in Exhibit 17-1 show, the production processes in many industries simultaneously yield two or more products, either at the splitoff point or after further processing. In each of these examples, no individual product can be produced without the accompanying products appearing, although in some cases the proportions can be varied. Joint costing allocates the joint costs to the individual products that are eventually sold.

Exhibit 17-1

Examples of Joint-Cost Situations

Table shows the example of joint cost situations, which shows the industry and the separable products at the Splitoff Point.

Details of the industry and separable products in the table are as follows:

  1. Agricultural and food processing industries

    1. Cocoa beans

      • Separable products at the Splitoff Point: Cocoa butter, cocoa powder, cocoa drink mix, tanning cream

    2. Lambs

      • Separable products at the Splitoff Point: Lamb cuts, tripe, hides, bones, fat

    3. Hogs

      • Separable products at the Splitoff Point: Bacon, ham, spare ribs, pork roast

    4. Raw milk

      • Separable products at the Splitoff Point: Cream, liquid skim

    5. Lumber

      • Separable products at the Splitoff Point: Lumber of varying grades and shapes

    6. Turkeys

      • Separable products at the Splitoff Point: Breast, wings, thighs, drumsticks, digest, feather meal, poultry meal

  2. Extractive Industries

    1. Coal

      • Separable products at the Splitoff Point: Coke, gas, benzol, tar, ammonia

    2. Copper ore

      • Separable products at the Splitoff Point: Copper, silver, lead, zinc

    3. Petroleum

      • Separable products at the Splitoff Point: Crude oil, natural gas

    4. Salt

      • Separable products at the Splitoff Point: Hydrogen, chlorine, caustic soda

  3. Chemical Industries

    • Raw LPG (liquefied petroleum gas)

    • Separable products at the Splitoff Point: Butane, ethane, propane

    1. Crude oil

      • Separable products at the Splitoff Point: Gasoline, kerosene, benzene, naphtha

  4. Semiconductor Industry

    1. Fabrication of silicon-wafer chips

      • Separable products at the Splitoff Point: Memory chips of different quality (as to capacity), speed, life expectancy, and temperature tolerance.

The outputs of a joint production process can be classified into two general categories: outputs with a positive sales value and outputs with a zero sales value.* For example, offshore processing of hydrocarbons yields oil and natural gas, which have positive sales value; the processing also yields water, which has zero sales value and is recycled back into the ocean. The term product describes any output that has a positive total sales value (or an output that enables a company to avoid incurring costs, such as an intermediate chemical product used as input in another process). The total sales value can be high or low.

When a joint production process yields one product with a high total sales value, compared with the total sales values of other products of the process, that product is called a main product. When a joint production process yields two or more products with high total sales values relative to the total sales values of other products, those products are called joint products. In contrast, products of a joint production process that have low total sales values relative to the total sales value of the main product or of joint products are called byproducts.

Consider some examples. If timber (logs) is processed into standard lumber and wood chips, standard lumber is a main product and wood chips are the byproduct because standard lumber has a high total sales value compared with wood chips. If, however, the logs are processed into fine-grade lumber, standard lumber, and wood chips, fine-grade lumber and standard lumber are joint products and wood chips are the byproduct. That’s because both fine-grade lumber and standard lumber have high total sales values relative to wood chips.

Distinctions among main products, joint products, and byproducts are not so clear-cut in practice. Companies use different thresholds for determining whether the relative sales value of a product is high enough for it to be considered a joint product. Consider kerosene, obtained when refining crude oil. Based on a comparison of its sales value to the total sales values of gasoline and other products, some companies classify kerosene as a joint product whereas others classify it as a byproduct. Moreover, the classification of products—main, joint, or byproduct—can change over time, especially for products such as lower-grade semiconductor chips, whose market prices may increase or decrease by 30% or more in a year. When prices of lower-grade chips are high, they are considered joint products together with higher-grade chips; when prices of lower-grade chips fall considerably, they are considered byproducts. In practice, it is important to understand how a specific company chooses to classify its products. Concepts in Action: Big Data Joint Products and Byproducts Create New Business Opportunities describes how companies are categorizing new data-based businesses as joint products or byproducts.