Cost and Management Accounting · Joint Products and By Products

Net Realisable Value and Further Processing Decisions

Q: What is the NRV method for joint products?

It apportions joint cost in the ratio of the net realisable value of each product at the split-off point. NRV is the final sales value less further processing and selling costs. It is useful when products need different amounts of further processing.

Q: How do I calculate NRV at the split-off point?

Take the final sales value of the product. Deduct the further processing cost and any selling and distribution cost after split-off. The balance is the estimated NRV at split-off.

Q: Why is joint cost ignored in the further processing decision?

The joint cost is already incurred by the time you reach the split-off point. It stays the same whether you sell at split-off or process further. Only the extra revenue and extra cost change the result.

Q: Can a product showing a loss after NRV apportionment still be processed further?

Yes. The loss may come from the share of joint cost, which is sunk. If the extra revenue from further processing is more than the extra cost, processing further still improves overall profit.

Updated 4 October 2026 · Fact-checked

The NRV method splits joint cost in proportion to each product's net realisable value at the split-off point. For products needing further processing, NRV = final sales value less further processing cost (and selling cost). To decide whether to process further, compare incremental revenue with incremental cost; joint cost is ignored.

Understand Net Realisable Value and Further Processing Decisions

Joint products come out of one process and cannot be told apart until the split-off point. The joint cost up to that point must be shared among the products. The NRV method does this by using what each product can earn, after the costs still to be spent on it.

If a product is sold at split-off, its NRV at split-off is simply its sales value. If it needs further processing, you do not have a market price at split-off. So you estimate it. Start with the final selling price, then deduct the further processing cost and any selling and distribution cost. This is the estimated NRV at the split-off point.

The joint cost is then shared in the ratio of these NRVs. A product with a higher NRV carries more joint cost. This follows the idea that products should bear cost according to their ability to bear it.

The second idea is the sell or process further decision. Once the split-off point is reached, the joint cost is already spent. It is a sunk cost and is the same whichever option you choose. So it is irrelevant. Only the extra revenue and the extra cost of processing matter.

Process further only if the extra revenue is greater than the extra cost. Note the two ideas are different. NRV apportionment is for costing and valuation. The further processing decision is for choosing the better option. Do not mix the two.

Key rules to remember

Estimated NRV at split-off: NRV = Final sales value − Further processing cost − Selling and distribution cost (after split-off); Use total value for the quantity sold, not per-unit price, unless the question gives units.
NRV at split-off (no further processing): NRV = Sales value at split-off − Selling and distribution cost, if any; Here NRV is just the market value at the split-off point, net of selling costs.
Joint cost apportioned: Joint cost share of a product = (NRV of the product ÷ Total NRV of all joint products) × Total joint cost; Use only joint cost to be apportioned. Reduce it by by-product credit if the question says so.
Further processing decision: Incremental profit = (Sales value after processing − Sales value at split-off) − Further processing cost; Process further if incremental profit is positive. Joint cost is ignored.
Decision rule: Process further if incremental revenue > incremental cost; sell at split-off if incremental revenue < incremental cost; If both are equal, you are indifferent on money grounds.

How to solve Net Realisable Value and Further Processing Decisions questions

Use this method for any question on NRV or further processing. First decide whether you are asked to apportion cost or to take a decision.

1Read the question and mark the split-off point. Note which products are sold at split-off and which are processed further.
2For each product, write the final selling value for the quantity sold. Use units × price.
3Deduct further processing cost and post-split-off selling cost from the final value. This gives the estimated NRV at split-off.
4Add the NRVs to get the total. Find the ratio of each product's NRV to the total.
5Apportion the joint cost in this ratio. Adjust first for any by-product income or abnormal loss, if given.
6For a decision question, ignore joint cost. Compute incremental revenue and incremental cost for each product.
7Compare the two. Process further only if the incremental profit is positive. State the decision clearly.
8If asked, prepare a statement of profit per product, showing apportioned joint cost, further cost, sales and profit.

Quickest way: NRV table and incremental check

When to use it: Use this for any exam question with two or three joint products and some further processing. It works for both the MCQs and the written answers.

Draw a table with columns: product, final sales value, further cost, NRV, joint cost share, profit.
Fill NRV first. Total it. Convert NRV into simple ratios, such as 3 : 2, before you multiply with joint cost.
For MCQs, check the ratio and the options. An option that apportions on sales value instead of NRV is usually a trap.
For decision questions, write one line per product: extra revenue − extra cost = gain or loss. Joint cost does not appear.
In written answers, show the formula, the table and a one-line conclusion. Step marks come from the NRV working and the clear decision.

Common mistakes in Net Realisable Value and Further Processing Decisions

Including the joint cost in the further processing decision.
Students feel every cost must be covered by the final price.
Fix: Joint cost is sunk at the split-off point. Compare only extra revenue and extra processing cost.
Using final sales value instead of NRV to apportion joint cost.
Students confuse the NRV method with the sales value at split-off method.
Fix: Deduct further processing and post-split-off selling costs from the final value first. Then apportion.
Forgetting selling and distribution costs in the NRV.
The question lists them in a separate line and they get missed.
Fix: Read every cost given. Deduct all costs incurred after the split-off point.
Using per-unit figures against total cost, or mixing units sold with units produced.
Quantities and prices are given in different forms.
Fix: Convert everything to totals for the same quantity before you subtract. Check processing loss, if any.
Deciding on the basis of profit after joint cost share.
After NRV apportionment, a product may show a loss, so students drop it.
Fix: A product that shows a loss after allocation may still add value. Test the incremental gain, not the allocated profit.
Not deducting by-product income before apportioning joint cost.
By-product details appear late in the question.
Fix: Check the question for by-products. If the treatment says credit to the joint process, reduce the joint cost first.

Worked examples

Example 1

A process gives two joint products, X and Y, at a joint cost of ₹3,60,000. X is sold at the split-off point for ₹2,40,000 in total. Y needs further processing costing ₹60,000 and is then sold for ₹2,40,000 in total. There are no other costs. Apportion the joint cost on the NRV method and find the profit on each product.

Show the solution

NRV of X at split-off = ₹2,40,000, as it is sold without further processing.
Estimated NRV of Y = ₹2,40,000 − ₹60,000 = ₹1,80,000.
Total NRV = ₹2,40,000 + ₹1,80,000 = ₹4,20,000. Ratio X : Y = 24 : 18 = 4 : 3.
Joint cost to X = ₹3,60,000 × 4 ÷ 7 = ₹2,05,714 (rounded).
Joint cost to Y = ₹3,60,000 × 3 ÷ 7 = ₹1,54,286 (rounded).
Profit on X = ₹2,40,000 − ₹2,05,714 = ₹34,286.
Profit on Y = ₹2,40,000 − ₹1,54,286 − ₹60,000 = ₹25,714.
Check: total profit = ₹34,286 + ₹25,714 = ₹60,000. Total sales ₹4,80,000 − joint cost ₹3,60,000 − further cost ₹60,000 = ₹60,000. It matches.

Answer: Joint cost: X ₹2,05,714 and Y ₹1,54,286. Profit: X ₹34,286 and Y ₹25,714. Total profit ₹60,000.

Example 2

Product P is a joint product. At the split-off point it can be sold for ₹50 per kg. If processed further at a cost of ₹18 per kg, it can be sold for ₹65 per kg. Joint cost allocated to P is ₹40 per kg. 10,000 kg are available. Should P be processed further?

Show the solution

Ignore the allocated joint cost of ₹40 per kg. It is sunk and the same under both options.
Incremental revenue per kg = ₹65 − ₹50 = ₹15.
Incremental cost per kg = ₹18.
Incremental result per kg = ₹15 − ₹18 = −₹3, a loss.
For 10,000 kg, the loss from processing further = 10,000 × ₹3 = ₹30,000.
Check by total profit. At split-off: ₹50 − ₹40 = ₹10 per kg, so ₹1,00,000. After processing: ₹65 − ₹40 − ₹18 = ₹7 per kg, so ₹70,000. The difference is ₹30,000 lower.

Answer: Do not process further. Selling at split-off gives ₹30,000 more profit than processing further.

Exam tips

Read the question first for the words 'estimated NRV', 'apportion' or 'decision'. They tell you which method to use.
Always show the NRV working as a small table. Examiners give step marks for each NRV figure.
In a decision question, write that joint cost is irrelevant. This one line often carries a mark.
Check that your total profit after apportionment ties to total sales less total costs. It catches most errors.
For MCQs, test each option quickly: compute NRV, find the ratio and match. There is no negative marking, so always attempt every MCQ.

Practice questions from Joint Products and By Products