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Using technology to teach joint product costing.

Joint product costing (JPC) is an integral component of undergraduate and graduate cost and managerial accounting courses. Students often have difficulty grasping the complexities of cost allocation among products because joint product costing can be a complex and daunting undertaking. Its practical and conceptual intricacies can be confusing, particularly if professors use traditional learning methods, such as textbooks and lectures, to teach the concepts.

We propose using the JPC Simulator, a Flash-based simulation featuring interactive, graphical depictions, to teach the basic concepts of joint product costing. Through technologically based simulations, professors can supplement and enhance conventional instructional delivery methods. Our simulation provides a framework and technological means to teach joint product costing at diverse levels within the accounting curriculum.

We will walk you through all the activities involved in navigating a computer-based joint product costing simulation. To do so, we will present a simulation of a chemicals company that permits users to manipulate cost and production data among several chemical products. The simulation allows for the efficient understanding of the accounting complexities of joint products and byproducts. Our simulation restricts joint cost assignment to products to the net realizable value (NRV) basis. We also use alternative criteria, including physical attributes such as weight and volume.


As we step through the activities, you will become familiar with the chemical plant layout and products. In the first stage of interaction, you will be processing various chemical products from a single chemical compound commercially known as RHO. Initially, the RHO tank is empty. The plant consists of a series of holding tanks and processors connected together by pipes. To begin, let's examine the layout through the joint product split-off of RHO into Alpha and Beta (Figure 1). Later, the screen (i.e., stage of production) will make room for all of the products. Before enabling any interfaces, you assemble the entire plant.


The valve to the left of the RHO tank initiates processing by allowing the tank to fill with 100 gallons of RHO. Once the tank is full, a processor (i.e., the component with the gauge attachment) is enabled that, when activated, breaks down the RHO into two products: Alpha and Beta. An adjustable slide bar allows you to dictate how much of the RHO is processed into Alpha versus how much is processed into Beta. You can adjust the slide bar at any time, even after processing is done. (In fact, you can dynamically update at any time, thus allowing for subsequent complex sensitivity analysis.) After the system creates the Alpha and Beta batches, it activates additional processors to convert Alpha and Beta into still more products. Figure 2 features the Alpha side.


The plant can process Alpha further into Super Alpha, which yields a byproduct known as Zeta. This results in 88% of Alpha's volume being converted into Super Alpha and 12% into Zeta. After the processor produces Super Alpha, another processor converts Super Alpha into Ultra Alpha. There is no change in volume between Super Alpha and Ultra Alpha.

The processing associated with the subsequent processing of the other split-off main product, Beta, is considerably more complex and more realistic (see Figure 3).


The plant can process Beta into Super Beta. Observe that a slider is present (default value of 10%) that allows for recognizing a volume loss from Beta into Super Beta. Finally, you can create Ultra Beta by combining Super Beta with a compound called Omega. The volume of Ultra Beta depends on the mix ratio, which you can adjust at any time using the slide bar. (The default value is a 1:1 ratio.) Figure 4 depicts the entire manufacturing system.


So far we have presented the various compounds involved in this analysis tool along with the controls that are available for setting and/or modifying the quantities of each. Now consider the cost-corresponding elements and controls.

Chemical processing is not free unless you make it so. Each processor has a cost associated with it that you can adjust at any time using the slide bars that appear in the slightly more detailed schematic (see Figure 5).


You can adjust costs between $0 and $3,000. There are two types of controls on the cost adjusters: The slide bar in Figure 6 provides a ballpark level of adjustment, and the arrows at each end allow you to make adjustments in dollar increments.


Each chemical has a dollar value per gallon and a slide bar (see Figure 7) that allows you to set that value from $0 per gallon to $100 per gallon at any time (the Zeta value is up to $10 per gallon).


In summary, the simulator includes (1) a joint product; (2) main products; (3) multiple production stages; (4) byproduct, volume loss, and raw material mixing options; (5) processing cost options; and (6) exit value-pricing options. Understandably, all those features displayed together can be intimidating initially (see Figure 8).

Figure 8 does not, however, depict the entire simulator interface (hence the qualifying descriptor, manufacturing). The more important aspect of the complete simulator lies in explaining the data analysis section.

Before we reveal the analysis section, there are a few points worth mentioning. In fact, the first point is that the analysis does not appear until you process all of the chemicals from RHO to Ultra Alpha and Ultra Beta. The exception to this is when the Alpha/Beta split is such that the quantity of Alpha or Beta will be zero prior to processing the RHO. In this case, you do not have to process the zeroed side. A useful feature of this module is that, once you have processed all the chemicals, you can still adjust any of the chemical plant's cost and quantity settings and see the analysis data change dynamically.



To understand the data analysis aspect of the simulator, you first must process some chemicals, which is the only way the data-analysis component will appear. Figure 9 displays the processing of Alpha.


There are several steps that must be performed to arrive at the end product, Ultra Alpha. Figure 9 reflects the following activities:

Step 1. The user clicked on the valve to obtain 100 gallons of RHO. (There are no adjustments to the default cost-per-gallon of $50, so the total cost of RHO is $5,000. At any time, however, the user may return to the slide bar and use it to revise the cost of RHO.)

Step 2. The user clicked on the processor (icon with gauge) without adjusting the split-off default ratio (50:50). The user did not adjust the processing cost of the split-off (default, $1,500).

Step 3. The user adjusted the exit value (i.e., unit selling price) of Alpha from the default value of $50 per gallon downward to $14. Additionally, the processing cost of Alpha into Super Alpha was revised downward from the default of $1,500 to $312.

Step 4. The user activated the processor and obtained these results: 12% of the 50 gallons (or six gallons) of Alpha were transformed into the byproduct, Zeta. Also, Zeta's cost ($5 default exit value) was reduced to $3 per gallon. The remaining 44 gallons became Super Alpha. The user revised its exit value to $65 per gallon.

Step 5. The user clicked the processor that converts Super Alpha into Ultra Alpha and adjusted the cost of processing to $1,176 and the exit value of Ultra Alpha to $77 per gallon. Because revisions of the control mechanisms are dynamic values, it is not important that those revisions relating to Ultra Alpha be made before or after clicking the processor.


In similar fashion, we presume the user processed Beta into Super Beta and then converted it into Ultra Beta by making the following revisions to the control mechanisms:

* Revised processing costs (from their default values of $1,500, conversion to Super Beta, and then Ultra Beta) to $744 and $582.

* Adjusted loss in volume in converting to Super Beta from 10% to 12%.

* Adjusted mixing ratio (Omega and Super Beta) from 1:1 to 2:3. The cost per gallon of Omega is set constant at $25 per gallon. Hence, the total cost of Omega is as follows: 50% (100 gallons of RHO) 5 88% x (2/3) x $25 = $725, as displayed.

The end result of those adjustments is 73 gallons of Ultra Beta composed of 44 gallons of Super Beta and 29 gallons of Omega. Figure 10 depicts the results of the conversion.

Now that the system has processed all the chemicals, the analysis section appears above the product-conversion processes in Figure 11. There are three interrelated subsections that we will refer to as the distribution display, the cost/value beads, and the processing decisions. On the far left are the joint cost-distribution calculations. The first column indicates on which chemicals the data is based; the chemicals are represented by the selected beads, Ultra Alpha and Ultra Beta (the two with glowing highlights that we cannot capture here). The second column shows the NRV of the selected chemicals. The NRV is the amount of that chemical produced less the processing costs that precede it for that processing chain.


For example, the NRV for Ultra Alpha ($1,918) is a result of taking the exit value of Ultra Alpha (44 gallons 5 $77/gallon = $5,045) minus the cost to produce it ($1,176) and minus the cost to produce Super Alpha (processing, $312 less Zeta, $18, or net of $294) that preceded it. Usually, when conditions are such that both chemicals selected for analysis yield negative NRV values, an alert is given. While it might be feasible, it is neither a reasonable nor desirable financial situation. NRV values exclude joint costs. The joint costs that must be distributed in accordance with Generally Accepted Accounting Principles (GAAP) consist of all costs up to the split-off point, that is, $6,500--the value of the RHO ($5,000) and the cost to process Alpha and Beta ($1,500). In this approach to assigning costs, the NRV values are used to divide the joint costs between the two selected products. To do so, you multiply the joint costs by the ratio of each NRV to the sum of both NRVs. The last column in the distribution display shows the joint costs allocated to each chemical product. Hence, $3,575 and $2,925 are joint costs assigned to Alpha and Beta, respectively.


GAAP requires full-absorption costing, so manufacturers must somehow assign joint product cost (if any) to the final products. How? As stipulated at the outset, this module's scope is restricted to the net realizable value criterion.

The root of an NRV for, say, Alpha is its exit value as a final product. First, what is the final product? Is it Alpha? Super Alpha? Ultra Alpha? Answer: It is the point at which the entity either expects to sell the product after further processing (if any) or the first point at which stage the product, as a practical matter, exhibits a meaningful exit value. Admittedly, the choice of exit value is to some extent arbitrary yet up to management. Hence, you are permitted to play what-if games and select from any of the Alpha product line.

Each bead corresponds to one of the main joint products--Alpha or Beta--and is labeled and patterned in the same manner as the chemical tanks for easy association. If you want to change the basis for the Alpha's and/or Beta's NRV in the data display, simply click the cost/value bead for the chemical desired, and the distribution display automatically updates.

The cost/value beads section includes additional data that is relevant to the analysis. For instance, the number of gallons of each chemical appears on the beads at all times. The selected beads (the ones with glowing highlights that we cannot capture here) display the total dollar value of the quantity produced of that chemical and the total costs associated with it, which include the distributed joint costs.

Processing costs appear between the beads. The cost to create Super Alpha decreases by the value of Zeta produced, while the cost to create Ultra Beta increases by the value of Omega consumed. Processing decisions are the primary final focus of the analysis.

Determining the book value of Ultra Alpha consistent with GAAP using NRV is critical. First, we have assigned the joint product cost of $3,575 to Alpha (see above supporting discussion). To that we must add the processing cost of conversion into Super Alpha and Zeta. That is a net of $294 ($312 minus $18, Zeta). Finally, there is the additional conversion cost into Ultra Alpha of $1,176. Hence, the carrying value of 44 gallons of Ultra Alpha is $5,045.


The processing decisions offer you a challenge when used as intended, but they also serve as an effective analysis tool, depending on the situation. There are four processing decisions that you should consider:

Decision 1. Alpha into Super Alpha and Zeta?

Decision 2. Super Alpha into Ultra Alpha?

Decision 3. Beta into Super Beta?

Decision 4. Super Beta into Ultra Beta?

The profit maximization criterion requires incremental analysis (i.e., change in revenue versus change in cost). The challenge is to try to determine the economic rationality of processing one chemical into the next with the cost and value settings you predetermine. If the result is a positive value, then it is a sound decision to go ahead with processing; if the result is negative, then unless other driving factors are at play, you should avoid further processing.

To view the results relative to, say, Decision 1 (that is, keep Alpha or process further into Super Alpha and Zeta), simply click on the appropriate process button. The data supporting each decision appear along with the decision to process or not. Figure 12 shows what displays when we click the button pertaining to Decision 1. We added the red lines with arrowheads to help track the various values.


What would the incremental revenue be if we converted Alpha into Super Alpha and Zeta? First, observe what the revenue would be after the conversion. Super Alpha would yield 44 gallons at $65 ($2,860). Alpha would bring in $700 (50 gallons at $14). Hence, the incremental revenue would be $2,160 ($2,860 minus $700).

The conversion cost from Alpha into Super Alpha is $312. From that value we can deduct $18, the modest cost recovery of selling Zeta (six gallons at $3 per gallon). Hence, the net additional cost would be $294. So, how did we do? The incremental revenue of $2,160 minus the incremental cost of $294 yields an incremental profit of $1,066.



We discussed the various components of the joint product costing simulator, using assumed values to step the reader through all the activities involved in its navigation. In the data analysis section, we discussed the procedures involved in applying NRV to cost assignment to satisfy GAAP and also the procedures to analyze the costs for decision making (sell or process further). Current texts on the subject tend to ignore or neglect many technical and theoretical applications of joint product costing. This is unfortunate, although understandable, if the reason lies in the tedium associated with calculating solutions to joint product costing problems. Perhaps computer-based simulations could make teaching and learning much more efficient in this area.

This simulation helps users understand the concepts and mechanics of joint product costing. Preliminary testing of the approach suggests students enjoy and learn the concepts easily. In fact, once the students have spent a minimum amount of time navigating the simulator, most have demonstrated their ability to solve variations of the simulator's structural design easily. To establish its validity as a learning aid, we need to conduct further testing of this simulator. We will share the software with those interested in using it in the classroom or staff training.


Roger B. Daniels, Ph.D., is an associate professor of accounting in the School of Business at the College of Charleston in Charleston, S.C. You can reach him at (843) 568-1589 or

A. James McKee, Ph.D., is a visiting professor of accounting at Fort Lewis College in Durango, Colo. His professional experience includes working for Price Waterhouse, General Electric, and consulting with the American Institute of Certified Public Accountants (AICPA). You can reach James at (843) 768-2189 or

* If you would like a copy of the JPC Simulator, please contact the authors.
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Author:Daniels, Roger B.; McKee, A. James
Publication:Management Accounting Quarterly
Geographic Code:1USA
Date:Sep 22, 2009
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