The split-off point in cost accounting and production refers to the juncture in a manufacturing process where multiple products are derived from a single input or process. Until the split-off point, the costs incurred are joint costs because they cannot be directly traced to any one of the final products. Once products have reached the split-off point and are separable, any subsequent costs can be directly traced and are termed “separable” or “post-split-off” costs.
Understanding the split-off point is crucial in cost allocation, especially when determining how to distribute the joint costs among the final products.
Example of the Split-Off Point
Let’s delve into a detailed example involving the petroleum industry, which is known for its multiple products derived from a single input – crude oil.
Example: Crude Oil Refining
A refinery processes crude oil to produce three main products:
The cost of purchasing and transporting the crude oil to the refinery is $1,000,000. This cost is considered a joint cost because, at this stage, it’s not tied to any specific product – all products arise from the crude oil.
After processing the crude oil, the three products reach the split-off point. Beyond this point, each product may have additional processing or packaging costs.
- Gasoline needs further refining and additives, costing an additional $200,000.
- Diesel requires additives and filtration, costing an additional $100,000.
- Lubricants require further distillation and packaging, costing $50,000.
Joint Cost Allocation:
Let’s assume the refinery decides to allocate joint costs based on the relative sales value at the split-off point. If the sales values at the split-off point are:
- Gasoline: $800,000
- Diesel: $600,000
- Lubricants: $200,000
The total sales value at the split-off point is $1,600,000.
Using the relative sales value, the joint cost allocation would be:
- Gasoline: ( 800,000 / 1,600,000 ) x 1,000,000 = $500,000
- Diesel: ( 600,000 / 1,600,000 ) x 1,000,000 = $375,000
- Lubricants: ( 200,000 / 1,600,000 ) x 1,000,000 = $125,000
- Gasoline: $500,000 (joint costs) + $200,000 (post-split-off costs) = $700,000
- Diesel: $375,000 (joint costs) + $100,000 (post-split-off costs) = $475,000
- Lubricants: $125,000 (joint costs) + $50,000 (post-split-off costs) = $175,000
This example demonstrates the importance of the split-off point and how joint costs can be allocated among multiple products. The method used to allocate these costs can significantly impact the apparent profitability of each product, so it’s essential to choose an allocation method that best reflects the economic realities of the production process.