Chapter 11 Allocation for Joint Costs and Accounting for By-Products/Scrap

Joint costs occur before the split-off point in a production process

The primary distinction between by-products and scrap is the difference in sales value.
The point at which individual products are first identifiable in a joint process is
referred to as the split-off point
Joint costs include all materials, labor and overhead that are incurred before the
split-off point.
Two methods of allocating joint costs to products are physical measure allocation and
monetary allocation.
A decision that must be made at split-off is to sell a product or process it further.
Allocating joint costs based upon a physical measure ignores the revenue-generating
ability of individual products.
Monetary allocation measures recognize the revenue generating ability of each
product in a joint process.
Joint costs are allocated to main products, but not to by-products
Net realizable value equals product sales revenue at split-off minus any costs
necessary to prepare and dispose of the product.
If incremental revenues beyond split-off are less than incremental costs, a product
should be sold at the split-off point.
If incremental revenues beyond split-off exceed incremental costs, a product should
be processed further.
The net realizable value approach requires that the net realizable value of by-products
and scrap be treated as a reduction in joint costs allocated to primary products.
Net realizable value is considered to be the best measure of the expected contribution
of each product to the coverage of joint costs.
The net realizable value approach is used to account for scrap and by-products when
the net realizable value is significant.
Under the realized value approach, no value is recognized for by-products or scrap
until they are actually sold.
Not-for-profit entities are required to allocate joint costs among fund-raising, program,
and administrative functions.
1. A single process in which one product cannot be manufactured without producing
others is referred to as a joint process

Costs that are incurred in the manufacture of two or more products from a common
process are referred to as joint costs
3. Costs that are incurred after the split-off point in a production process are referred
to as separate costs
4. Three types of products that result from a joint process are joint products,
byproducts, scrap
5. Two incidental products of a joint process are by-products; scrap
6. The point at which individual products are first identifiable in a joint process is
referred to as the split-off point

7. Two methods of allocating joint costs to individual products are physical

measurement allocation; monetary unit allocation
8. Three monetary measures used to allocate joint costs to products are sales value at
split-off; net realizable value at split-off; approximated net realizable value at split-off

9. Sales revenue at split-off less disposal costs equals net realizable value.
1.If a company obtains two salable products from the refining of one ore, the refining
process should be accounted for as a(n) joint process.
2.Joint costs are allocated to joint products to obtain a cost per unit for financial
statement purposes.
Joint costs are allocated to which of the following products? No by-product, no scrap
Joint cost allocation is useful for product costing
Joint costs are useful for determining inventory cost for accounting purposes.
Which of the following components of production are allocable as joint costs when a
single manufacturing process produces several salable products? direct material,
direct labor, and overhead
Each of the following is a method to allocate joint costs except average unit cost.
Joint costs are most frequently allocated based upon relative sales value
When allocating joint process cost based on tons of output, all products will have the
same joint cost per ton
If two or more products share a common process before they are separated, the joint
costs should be assigned in a manner that assigns a proportionate amount of the
total cost to each product on a quantitative basis
Scrap is defined as a residual of the production process that has limited sales value.
Waste created by a production process is discarded rather than sold.
While preparing a salad, you remove the core of a head of lettuce. This core would be
classified as waste
Which of the following is/are synonyms for joint products? Main products or co-products
In a lumber mill, which of the following would most likely be considered a primary
product? 2 by 4 studs
Fisher Company produces three products from a joint process. The products can be sold at
split-off or processed further. In deciding whether to sell at split-off or process
further, management should ignore the joint cost in making the decision

By-products are not sufficient alone, in terms of sales value, for management to justify
undertaking the joint process.
Which of the following statements is true regarding by-products or scrap? Job order
costing systems may have instances where by-products or scrap result from the
production process.
Which of the following has sales value? By-product yes, waste no
Under an acceptable method of costing by-products, inventory costs of the by-product are
based on the portion of the joint production cost allocated to the by-product plus
any subsequent processing cost.
Which of the following is a false statement about scrap and by-products? By-products
and scrap are the primary reason that management undertakes the joint process
The split-off point is the point at which
output is first identifiable as individual products.
joint costs are allocated to joint products.
some products may first be sold.
A product may be processed beyond the split-off point if management believes that
its marketability will be enhanced.
the incremental cost of further processing will be less than the
incremental revenue of further processing.
Which of the following would not be considered a sunk cost? Building cost
The definition of a sunk cost is a cost that cannot be recovered regardless of what
happens.
The net realizable value approach mandates that the NRV of the by-products/scrap be
treated as a reduction of joint costs.
The net realizable value approach is normally used when the NRV is expected to be
significant
Approximated net realizable value at split-off for joint products is computed as final
selling price minus further processing and disposal costs.
Which of the following is a commonly used joint cost allocation method? approximated
sales value at split-off method
Incremental separate costs are defined as all costs incurred between split-off and the
point of sale.

Incremental revenues and costs need to be considered when using which allocation
method? No physical measure, no sales value at split-off
Relative sales value at split-off is used to allocate joint cost
For purposes of allocating joint costs to joint products using the relative sales value at
split-off method, the costs beyond split-off do not affect the allocation of the joint
costs.
Not-for-profit organizations are required by the AICPA to allocate joint costs.
SHORT ANSWER
1. Briefly discuss the four decisions that management must make concerning joint
processes.
ANS:
The four decisions that managers must make regarding joint processes are as
follows. They must try to determine what joint costs, selling costs, and separate
processing costs are expected to occur when certain products are manufactured.
Next, management must decide on the best use of resources that are available.
Managers must next classify, as joint products and/or by-products/scrap, the output
of production. The last decision that must be made is whether some or all of the
products will be processed further or sold at split-off. This decision is made based on
the incremental costs that would be incurred to process further and the incremental
revenue if processed further. Joint production costs are irrelevant to this decision.
DIF: Moderate

OBJ: 11-3

2. Briefly discuss the six steps in the allocation process.

ANS:
The six steps are as follows:
1. Choose the basis on which to allocate joint cost.
2. List all values that comprise the basis.
3. Add up all the values in the list (#2).
4. Determine the percentage of the total each item in #2 is.

5. Multiply the percentage by the cost being allocated.

6. For valuation purposes, divide the prorated cost by equivalent units
of production.

DIF: Moderate

OBJ: 11-4

3. Discuss briefly the three monetary measurement techniques of joint cost allocation.
ANS:
The sales value at split-off method assigns costs based only on the weighted
proportions of the total sales values of the joint products without consideration of
disposal costs at the split-off point. To use this method, all products must be salable
at the split-off point. The net realizable value method assigns costs based on the
product's proportional net realizable value at the split-off point. Net realizable value
is equal to product sales revenue at split-off minus any costs necessary to prepare
and dispose of the product.

Approximated net realizable value at split-off method requires that a simulated net
realizable value at split-off be calculated. This is equal to final sales price minus
incremental separate costs. Incremental separate costs refer to all costs that are
incurred between split-off and the point of sale.
DIF: Moderate

OBJ: 11-4

4. Briefly discuss the restrictions and requirements on service organizations and not
for-profits that relate to joint cost allocation.
ANS:
Service and not-for-profit organizations incur costs that may be considered joint in
nature, such as advertising and printing of multipurpose documents. Service
organizations are not required to allocate these costs to the items worked on,
delivered, or advertised but may choose to do so for a better matching of revenues
and expenses. Not-for-profits are required by the AICPA to allocate these costs
among the activities of fundraising, accomplishing an organizational program, or
conducting an administrative function.
DIF: Moderate

OBJ: 11-6

5. Briefly discuss the net realizable value at split-off point method of allocating joint
costs.
ANS:
The net realizable value at split-off method assigns joint costs based on each
product's proportional NRV at the split-off point. NRV is equal to sales price minus
costs that are necessary to prepare and dispose of the product. To use this method,
all products must be salable at the split-off point.
DIF: Moderate

OBJ: 11-4

6. Why is the net realizable value of scrap used to lower estimated overhead costs in
setting a predetermined overhead rate in a job order costing situation in which
scrap is expected on most jobs?
ANS:
The net realizable value of scrap is used in this way because the amount received
from the sale of scrap is considered to be a reduction of the total cost incurred in
the production process. This process is similar to the treatment of sales values of
assets purchased and then sold in a "basket" of goods. The estimated cost of scrap
is used in setting overhead rates; therefore, when the scrap is sold the amount
received should be a reduction of total overhead.