Joint product cost apportionment using net realizable sales value method: introduction; steps; advantages and disadvantages and examples

1.1 Introduction

There are THREE main methods which can be used to apportion the costs. These methods are, namely;

i). Physical unit Basis.

ii). Sales Value Basis.

iii). Sales Value Less Post Separation Cost Basis.

This article only focuses on the net realizable sales value basis or method.

Net realizable sales value is as good as sales less post separation cost basis or notional sales value method. So, as the name suggests, this method or approach involves separation of the costs by use of a notional profit. Notional profit is a profit estimation that is made for the purpose of apportioning cost over joint products which need further processing cost for them to become saleable.

NB1: This method is applicable where at the split off point, the different products are NOT yet reached the saleable status.

NB2: This method is applicable where at the split off point, the different products are saleable.

1.2 General Step by Step Guidelines for Apportioning cost using net realizable sales method

The following 4 steps will guide you in apportionment of costs and also in the determination of final profits if these circumstances exist.

STEPS 1: Establish Notional Sales (estimated sales) for cost apportionment purposes

Identify the most suitable notional profits

STEP 2: Apportion cost at the split off point using the notional sales proportions (weights)

This goal can be achieved by

STEP3: Determination of Final sales value

Since the aim of the whole process of separation of those products is to determine the final net profits associated with this specific product, then final sales value is computed at this stage. With the specific selling price for each product, determine the sales value.

STEP 4: Determine the profit for each product

After determining the sales value for each product, subtract the apportioned cost for that particular product from the corresponding sales value for each product. Do the same for all products.

Formula: Profit=Sales less Apportioned Cost less subsequent processing cost for each product.

1.2.1 Diagrammatic Notional Sales Value Less Post Separation Cost Method

A case of further processing of a joint product which at the split off point has not reached saleable level can be presented diagrammatically as indicated in Figure 1.1 below

1.2.2 Example 

Legitimate co. ltd uses some imported raw materials to manufacture a certain type of glue which at some point in the processing stages is separated in to THREE categories of G-1 which is glue for manufacturing shoes, G-2 which is glue for repairing car punchers and G-3 which is glue for metallic joineries. The total joint cost was $1,600,000 for the month of May 2022. The following data is the summary of production details for the three products as follows;

Advantages of net realizable sales value method in joint product costing

The following are some of the advantages of using net realizable method of valuing joint products;

  1. Suitable when the products at the point of split-off are not marketable. In other words, the method is well suiting if at the point of splitting the joint product there is need of further processing.
  2. Cost absorption consideration-the method factors the logic that the product being valued has the ability to absorb the corresponding costs.
  3. Maintenance of profit margin levels-this method makes it possible to retain the same level of product profitability at all times. This assures the management to plan for the future operational activities.

Disadvantages of net realizable sales method in joint product costing

The following are some of the disadvantages of using net realizable method of valuing joint products;

  1. A lot of data is needed to process the monetary value of the joint product.
  2. Estimation of sales value-the method assumes a notional sale value so as to deal with the aspect of split-off. The estimated sales value to be used may be biased due to human error during estimation.

About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.