Market or Sales Value Method–Allocation of Joint Cost:
Learning Objectives:
Explain the market value method or sales value method of joint cost allocation between products.
Market or sales value method enjoys great popularity because of the argument that market value of any product is a manifestation of the cost incurred in its production. The contention is that if one product sells for more than another, it is because more cost was expended to produce it. Therefore, the way to prorate the joint cost is on the basis of the respective market values of the items produced. The method is really a weighted market value basis using the total market or sales value of each unit (quantity sold times the unit sales price).
Example:
Joint products A, B, C and D are produced at a total joint production cost of $120,000. Quantities produced are: A, 20,000 units; B, 15,000 units; C, 10,000 units; and D, 15,000 units. Product A sells for $0.25; B, for $3; C, for $3.5; and D, for $5. These prices are market or sales values for the products at the split-off point; i.e., it is assumed that they can be sold at a that point. Management may have decided, however, that it is more profitable to process certain products further before they are sold. Nevertheless, this condition does not destroy the usefulness of the sales value at the split-off point for the allocation of the joint production cost. The proration of this joint cost is made in the following manner:
Joint Products
No. of Units Produced
Market Value per Unit
Total Market Value
Ratio of Product Value to Total Market Value
Apportionment of the Joint Production Cost
A
20,000
$0.25
$5,000
3.125%
$3,750
B
15,000
$3.00
$45,000
28.125%
33,750
C
10,000
$3.50
$35,000
21.875%
26,250
D
15,000
$5.00
$75,000
46.875%
56,250
———-
———
———-
———
Total
60,000
$160,000
100.00%
$120,000
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The same results can be obtained if the total joint production cost ($120,000) is divided by the total market value of the four products ($160,000). The resulting 75 percent is the percentage of joint cost in each individual market value. By multiplying each market value by this percentage, the joint production cost will be apportioned as shown in the percentage chart.
Proponents of the market value method or sales value method stat that the joint cost should be assigned to products in accordance with their sales value because, were it not for such a cost, a sales value would not exist. Under this method, each Joint product yields the same unit gross profit percentage, assuming that the units are sold without further processing. This can is illustrated in the following example:
Total
A
B
C
D
Sales–Units
52,000
18,000
12,000
8,000
14,000
Ending inventory
8,000
2,000
3,000
2,000
1,000
Sales–Dollars
$138,5000
$4,500
$36,000
$28,000
$70,000
———–
———–
———–
———–
———–
Production Cost
$120,000
$3,750
$33,750
$26,250
$56,250
Less Ending inventory
16,125
375*
6,750
5,250
3,750
———–
———–
———-
———-
———-
Cost of Goods Sold
$103,875
$3,375
$27,000
$21,000
$52,5000
Gross Profit
$34,625
$1,125
$9,000
$7,000
$17,500
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Gross Profit Percentage
25%
25%
25%
25%
25%
*$3,750 production cost ÷ 20,000 units produced = $0.1875; $0.1875 × 2000 units in ending inventory = $375
Consideration of Cost After Split-Off Point:
Products not stable in their stage of completion at the split-off point and therefore without any market value require additional processing to place them in marketable condition. In such cases, the basis for allocation of the joint production cost is a hypothetical market value at the split-off point. To illustrate the procedure, the assumptions listed below are added to the preceding example:
Product
Ultimate Market Value per Unit
Processing Cost After Split-Off
A
$0.50
$2,000
B
$5.00
$10,000
C
$4.50
$10,000
D
$8.00
$28,000
To arrive at the basis of the apportionment, it is necessary to use a working back procedure whereby the after split-off processing cost is subtracted from the ultimate sales value to find a hypothetical market value. The following illustration indicates the steps to be taken.
Product
Ultimate Market Value Per Unit
Units Produced
Ultimate Market Value
Processing Cost After Split-Off
Hypothetical Market Value*
Apportionment of Joint Production Cost**
Total Production Cost
Total Production Cost Percentage***
A
$0.50
20,000
$10,000
$2,000
$8,000
$4,800
$6,800
68.00
B
$5.00
15,000
$75,000
$10,000
$65,000
$39,000
$49,000
65.30
C
$4.50
10,000
$45,000
$10,000
$35,000
$21,000
$31,00
68.80
D
$8.00
15,000
$120,000
$28,000
$92,000
$55,200
$83,200
69.30
———-
———-
———–
———–
————
————
———–
———
Total
$250,000
$50,000
$200,000
$120,000
$170,000
68.00
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*At the split-off point
**Percentage to allocate joint production cost (using the joint cost total determined)
Joint production cost / Hypothetical market value = $120,000 / $200,000 = 0.60 = 60%
60% Hypothetical market value = Apportionment of joint production cost
***The production cost percentage is calculated by dividing total production cost by the ultimate market value; e.g., $49,000 / $75,000 = 0.653 = 65% for product B, and $170,000 / $250,000 = 0.68 = 68% for all products combined
The following illustration uses the same number of units sold as was used in the preceding illustration.
Total
A
B
C
D
Sales-Units
52,000
18,000
12,000
8,000
14,000
Sales-Dollars
$217,000
$9,000
$60,000
$36,000
$112,000
———-
———
———
———
———
Cost of Goods Sold:
Joint production cost
$120,000
$4,8000
$39,000
$21,000
$55,200
Further processing cost
$50,000
$2,000
$10,000
$10,000
$28,000
———-
———-
———-
———-
———-
Total
$170,000
$6,800
$49,000
$31,000
$83,200
Less Ending inventory
22,211
680*
9795
6,192
5,544
———–
———-
———-
———–
———-
Cost of goods sold
$147,789
$5,120
$39,205
$24,808
$77,656
———–
———–
———-
———-
———-
Gross profit
$69,211
$2,880
$20,795
$11,192
$34,344
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Gross profit percentage
32%
32%
35%
31%
31%
*6,800 production cost / 20,000 units produced = $0.34; $0.34 2,000 units in ending inventory = $600
Since the statement has often been made that every Joint product should be equally profitable, the following modification of the sales value technique has been suggested. The overall gross profit percentage (32%) is used to determine the gross profit for each product. The gross profit is deducted from sales value to find the total cost, which is reduced by each product’s further processing cost to find the joint cost allocation for each product.
Total
A
B
C
D
Ultimate sales value
$250,000
$10,000
$75,000
$45,000
$120,000
Less 32% gross profit
80,000
3,200
24,000
14,400
38,400
———–
———–
————
———–
———-
Total cost
$17,000
$6,800
$51,000
$30,600
$81,600
Further processing cost
50,000
2,000
10,000
10,000
28,000
———–
————
———–
———–
———-
Joint cost
$120,000
$4,800
$41,000
$20,600
$53,600
If sales value, gross profit percentage, or further processing costs are estimated, the balance labeled “joint cost” would serve as the basis for allocating the actual cost to the four products.
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Abida Rehman