Derivates costing of single raw materials (41)

Some raw materials generate several products simultaneously. Crude oil and sugar cane, for example, can be extracted from which hundreds of derivates can be obtained.

Each of these derivates must be assigned a production cost, whether to define its sales price or to determine its profitability margin. But how can you do it without a suitable technical parameter for apportioning its joint cost?

There is no unquestionable method of resolving this impasse; there are only alternative calculations that have some relationship with the advantage obtained in processing this type of input.

Following this reasoning, Horngren, Foster, and Datar suggest the use of the following allocation criteria:

a. Total quantity produced
b. Constant profit margin
c. Sales value at the point of dismemberment
d. Estimated net revenue at the point of dismemberment

a. Criterion total quantity produced

The costing criterion based on the total quantity produced distributes the joint cost (raw material plus processing expenses until its dismemberment) depending on the total amount of derivates produced.

So, if a ton of soybeans costs $400.00 and yields 780 kg of soybean meal and 190 kg of soybean oil, the cost attributed to both the meal and the oil will be approximately $0.412 ($400.00 / 970 kg) per kilogram.

b. Criterion constant profit margin

The constant profit margin criterion distributes the joint cost (raw material plus processing cost up to the separation point) to maintain the same profit margin for all derivatives produced.

In other words, if the sale of soybean meal and soybean oil from the previous example generates a net profit of 10%, the full cost of the meal and oil will be their selling price minus this 10% margin.

c. Criterion sales value at the point of dismemberment

The allocation criterion based on the sales value at the dismemberment of the single raw material distributes the joint cost proportionally to the potential revenue (market value) of each derivate obtained regardless of its selling.

For example, if the crushing of 1 ton of soybeans which costs $400.00 plus $20.00 in processing generates 780 kg of soybean meal worth $275.00 (55% of the total sales value) and 190 kg of soybean oil worth $225.00 (45% of the total sales value), the cost allocated to the meal produced will be $231.00 ($0.296/kg) and to the oil $189.00 ($0.995/kg).

d. Criterion estimated net revenue at the point of dismemberment

The estimated net revenue at the split-off point criterion assigns the cost to each derivate of the single raw material in proportion to the estimated net revenue (revenue minus separable selling costs minus separable production costs).

This discretion is more used when there is no market value for each derivate after being broken down, as may be the case with bulk crude soybean meal and oil.

Calculation details using such criteria are found in Cost Accounting by Horngren, Foster, and Datar.

C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.