Appendix: Joint Cost Allocation
When two or more products are produced simultaneously by the same process up to
a “split-off” point, they are called joint products. The split-off point is the point
at which the joint products become separate and identifiable. For example, oil and
natural gas are joint products. When a company drills for oil, it gets natural gas as
well. The costs of exploration, acquisition of mineral rights, and drilling are incurred
to the initial split-off point. Such costs are necessary to bring crude oil and natural
gas out of the ground, and they are common costs to both products. Of course,
some joint products may require processing beyond the split-off point. For example,
crude oil can be processed further into aviation fuel, gasoline, kerosine, naptha, and
other petrochemicals. The key point is that the direct materials, direct labor, and
overhead costs incurred up to the initial split-off point are joint costs that can be
allocated to the final product only in some arbitrary manner. Exhibit 7-14 depicts
the joint production process.