Joint and by Products Costing 11012019 PDF

Joint Products and
By-products Costing
Chapter 12
©2003 Prentice Hall Business

Integrated Publishing,
Cost AccountingCost Accounting
Chapter 12: Joint11/e, Horngren/Datar/Foster
Products and By-products Costing 16 - 1
Identify the splitoff point(s)
in a joint-cost situation.

Joint-Cost Basics
Joint costs Joint products
Byproduct Splitoff point
Separable costs

Joint-Cost Basics
Joint products – Multiple
Joint costs – Cost
Products generated by
incurred in a Joint
single process at the
Process (MultiProd)
same time.
Splitoff point - is the
Byproduct - is a minor Location in a production
process where jointly
result of aproduction process
Manufactured products
and which has minor sales are henceforth manufactured
separately
Separable costs – costs
incurred after the split-off point
in a production process that can
be assigned to specific products.
Joint-Cost Basics
Raw milk
Cream Liquid Skim

The dairy industry processes raw milk into an array of products including butter,
cheese, cream, yogurt, ghee, condensed milk, dried milk, ice cream, etc. and
produces various by-products including buttermilk, whey, ghee, and skim milk. ...
Whey is also used in the preparation of certain types of cheese like ricotta.
The dairy industry processes raw milk into an array of products including butter,
cheese, cream, yogurt, condensed milk, dried milk, ice cream, etc. and produces
various by-products including buttermilk, whey, ghee, and skim milk. ... Whey is
also used in the preparation of certain types of cheese like ricotta.
Ghee is a form of highly-clarified butter that is traditionally used in Asian cooking.

Ghee is made by melting regular butter. The butter separates into liquid fats and
milk solids. Once separated, the milk solids are removed, which means
that ghee has less lactose than butter.
Whey is the liquid remaining after milk has been curdled and strained. It is a
byproduct of the manufacture of cheese or casein and has several commercial uses.
Sweet whey is a byproduct produced during the manufacture of rennet types of hard
cheese, like cheddar or Swiss cheese.
Buttermilk is a fermented dairy drink. Traditionally, it was the liquid left behind
after churning butter out of cultured cream; most modern buttermilk is cultured,
however. It is common in warm climates where unrefrigerated fresh milk sours
quickly.

Distinguish joint products
from byproducts.

Joint Products and Byproducts
Main Products
Joint Products Byproducts
High Low
Sales Value

Explain why joint costs should be
allocated to individual products.

Why Allocate Joint Costs?
• to compute inventory cost and cost of goods sold – To meet the Financial
Reporting requirements for inventory valuation and income
measurement.
• for product cost determination & profitability analysis – Product cost
is important for mgt. control & for establishing the selling price.
• to determine cost reimbursement under contracts – It is important
especially when only a portion of the products is sold under
cost-plus contracts.
• for insurance settlement computations – Damage claims are calculated
based on the cost information of joint products or by-products
• for rate regulation – it is necessary when the prices of the specific
products are subject to government regulations.
• for litigation purposes – Proper cost allocation is necessary when cost of
joint products are the key input for judicial proceeding.
Allocate joint costs using
four different methods.

Approaches to Allocating
Joint Costs
Two basic ways to allocate

joint costs to products are:
Approach 1: Approach 2:
Market based Physical measure

Approach 1: Market-based Data
Sales value at splitoff method

Estimated net realizable value (NRV) method
Constant gross-margin percentage NRV method

Allocating Joint Costs Example
10,000 units of A at a
selling price of P10 = P100,000
Joint processing
cost is P200,000
10,500 units of B at a
selling price of P30 = P315,000
11,500 units of C at a
selling price of P20 = P230,00 Splitoff point
Allocating Joint Costs Example
A B C Total
Sales Value P100,000 P315,000 P230,000 P645,000
Allocation of
Joint Cost
100 ÷ 645 31,008
315 ÷ 645 97,674
230 ÷ 645 71,318
200,000
Gross margin P 68,992 P217,326 P158,682 P445,000
Sales Value at Splitoff
Method Example
Assume all of the units produced

of B and C were sold.
2,500 units of A (25%)
remain in inventory.
What is the gross margin
percentage of each product?

Method Example
Product A Revenues: 7,500 units × P10.00 P75,000

Cost of goods sold:
Joint product costs P31,008
Less ending inventory
P31,008 × 25% 7,752 23,256
Gross margin P51,744

Method Example
Product A:
(P75,000 – P 23,256) ÷ P75,000 = 69%
Product B:
(P315,000 – P97,674) ÷ P315,000 = 69%
Product C:
(P230,000 – P71,318) ÷ P230,000 = 69%

Estimated Net Realizable Value
(NRV) Method Example
Assume that ABC Company can process

products A, B, and, C further into A1, B1, and C1.
The new sales values after further processing are:
A1: B1: C1:

10,000 × P12.00 10,500 × P33.00 11,500 × P21.00
= P120,000 = P346,500 = P241,500
Additional processing (separable) costs are as follows:
A1: P35,000 B1: P46,500 C1: P51,500
What is the estimated net realizable value of each

product at the splitoff point?

Product A1: P120,000 – P35,000 = P85,000

Product B1: P346,500 – P46,500 = P300,000
Product C1: P241,500 – P51,500 = P190,000
How much of the joint cost is allocated
to each product?

To A1:
85 ÷ 575 × P200,000 = P29,565
To B1:
300 ÷ 575 × P200,000 = P104,348
To C1:
190 ÷ 575 × P200,000 = P66,087

Allocated Separable Inventory

joint costs costs costs
A1 P 29,565 P 35,000 P 64,565
B1 104,348 46,500 150,848
C1 66,087 51,500 117,587
Total P200,000 P133,000 P333,000

Constant Gross-Margin
Percentage NRV Method
This method entails three steps:
Step 1:
Compute the overall gross-margin percentage.
Step 2:
Use the overall gross-margin percentage
and deduct the gross margin from the
final sales values to obtain the total
costs that each product should bear.
Step 3:
Deduct the expected separable costs from the
total costs to obtain the joint-cost allocation.

What is the expected final sales value of total

production during the accounting period?
Product A1: P120,000
Product B1: 346,500
Product C1: 241,500
Total P708,000

Step 1:
Compute the overall gross-margin percentage.
Expected final sales value P708,000
Deduct joint and separable costs 333,000
Gross margin P375,000
Gross margin percentage:
P375,000 ÷ P708,000 = 52.966%
Step 2:
Deduct the gross margin.
Sales Gross Cost of
Value Margin Goods sold
Product A1: P120,000 P 63,559 P 56,441
Product B1: 346,500 183,527 162,973
Product C1: 241,500 127,913 113,587
Total P708,000 P375,000 P333,000
(P1 rounding)
Step 3:
Deduct separable costs.
Cost of Separable Joint costs
goods sold costs allocated
Product A1: P 56,441 P 35,000 P 21,441
Product B1: 162,973 46,500 116,473
Product C1: 113,587 51,500 62,087
Total P333,000 P133,000 P200,000
Approach 2: Physical
Measure Method Example
P200,000 joint cost
20,000 48,000 12,000

pounds A pounds B pounds C
Product A Product B Product C

P50,000 P120,000 P30,000
Explain why the sales value at
splitoff method is preferred
when allocating joint costs.

Choosing a Method
Why is the sales value at splitoff method widely used?
It measures the value It does not anticipate

of the joint product subsequent management
immediately. decisions.
It uses a
It is simple.
meaningful basis.
Choosing a Method
The purpose of the joint-cost allocation is

important in choosing the allocation method.
The physical-measure method is a more
appropriate method to use in rate regulation.

Explain why joint costs
are irrelevant in a
sell-or-process-further decision.

Irrelevance of Joint Costs
for Decision Making
Assume that products A, B, and C can be sold
at the splitoff point or processed further
into A1, B1, and C1.
Selling Selling Additional
Units price price costs
10,000 A: P10 A1: P12 P35,000
10,500 B: P30 B1: P33 P46,500
11,500 C: P20 C1: P21 P51,500
Irrelevance of Joint Costs
for Decision Making
Should A, B, or C be sold at the splitoff
point or processed further?
Product A: Incremental revenue P20,000
– Incremental cost P35,000 = (P15,000)
Product B: Incremental revenue P31,500
Product C: Incremental revenue P11,500
Account for byproducts
using two different methods.

Accounting for Byproducts
Method A: Production Method
The production method recognizes byproducts at the time
their production is completed. This method is used when
by-products are significant and require further processing
costs. By-products recognizes at its net-realizable value.
Method B: Sale Method
The sale method delays recognition of by-products
until the time of their sale. This method is used when
By-products are insignificant and do not require further
processing cost.
Example
Main Products Byproducts

(Yards) (Yards)
Production 1,000 400
Sales 800 300
Ending inventory 200 100
Sales price P13.00/yard P1.00/yard
No beginning finished goods inventory

Example
Joint production costs for joint

(main) products and byproducts:
Material P2,000
Manufacturing labor 3,000
Manufacturing overhead 4,000
Total production cost P9,000

Method A
Method A: The production method

What is the value of ending inventory
of joint (main) products?
P9,000 total production cost
– P400 net realizable value of the byproduct
= P8,600 net production cost for the joint products

Method A - Production Method
200 ÷ 1,000 × P8,600 = P1,720 is the value

assigned to the 200 yards in ending inventory.
What is the cost of goods sold?
Joint production costs P9,000
Less byproduct revenue 400
Less main product inventory end 1,720
Cost of goods sold P6,880
Method A – Production Method
Income Statement (Method A)

Revenues: (800 yards × P13) P10,400
Cost of goods sold 6,880
Gross margin P 3,520
What is the gross margin percentage?
P3,520 ÷ P10,400 = 33.85%

Method A – Production Method
What are the inventoriable costs?

Main product: 200 ÷ 1,000 × P8,600 = P1,720
Byproduct: 100 × P1.00 = P100

Journal Entries Method A
Work in Process 2,000

Materials Inventory 2,000
To record direct materials used in production

Various Accounts 7,000
To record conversion costs in the joint process
Byproduct Inventory 400

Finished Goods 8,600
To record cost of goods completed
Cost of Goods Sold 6,880
To record the cost of the main product sold
Cash or Accounts Receivable 10,400

Revenues 10,400
To record the sale of the main product

Method B
Method B: The sale method
What is the value of ending inventory of
joint (main) products?
200 ÷ 1,000 × P9,000 = P1,800
No value is assigned to the 400 yards of
byproducts at the time of production.
The P300 resulting from the sale of
byproducts is reported as revenues.
Method B – Additional Revenue
Income Statement (Method B)

Revenues: Main product (800 × P13) P10,400
Byproducts sold 300
Total revenues P10,700
Cost of goods sold:
Joint production costs 9,000
Less main product inventory 1,800 P 7,200
Method B
What is the gross margin percentage?

P3,500 ÷ P10,700 = 32.71%
What are the inventoriable costs?
Main product: 200 ÷ 1,000 × P9,000 = P1,800
By-product: -0-

Journal Entries Method B






Revenues 10,400
Cash or Accounts Receivable 300
Revenues 300
To record the sale of the byproduct

Method B
200 ÷ 1,000 × P9,000 = P1,800
byproducts is reported as deduction to COGS.
Method B – Deduction from COGS

Cost of goods sold:
Less main product inventory 1,800
Cost of Goods Sold P 7,200
Less: Byproducts sold 300 P 6,900






Revenues 10,400
Cost of Goods Sold 300

Method B
200 ÷ 1,000 × P9,000 = P1,800
byproducts is reported as other income.
Method B – Other Income

Cost of goods sold:
Less main product inventory 1,800 7,200
Other Income: Byproducts Sold 300
Net Income P 3,500






Revenues 10,400
Other Income 300

Method B
200 ÷ 1,000 × P8,700 = P1,740
byproducts is reported as ded. to Prod. Cost
Accounting for Byproducts Method B –
Deduction to Production Cost

Cost of goods sold:
Less: Byproducts Sold 300
Net Manufacturing Cost 8,700






Revenues 10,400
Work In Process 300

Method A
Method A – Net Realizable Value
200 ÷ 1,000 × P8,600 = P1,720
The P400 Net Realizable Value of byproducts
is reported as deduction to Production Cost
Method A – at Net Realizable Value
Income Statement
Cost of goods sold:
Less: Byproducts NRV(400x1) 400
Net Manufacturing Cost 8,600



Journal Entries NRV


Journal Entries NRV
Revenues 10,400
By products Inventory 100
Work In Process 400

Thank you!


Joint and by Products Costing 11012019 PDF

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Joint and by Products Costing 11012019 PDF

Uploaded by

Copyright:

Available Formats

Joint Products and

©2003 Prentice Hall Business

©2003 Prentice Hall Business

Joint costs Joint products

Byproduct Splitoff point

©2003 Prentice Hall Business

Cream Liquid Skim

Ghee is a form of highly-clarified butter that is traditionally used in Asian cooking.

©2003 Prentice Hall Business

©2003 Prentice Hall Business

©2003 Prentice Hall Business

©2003 Prentice Hall Business

©2003 Prentice Hall Business

Two basic ways to allocate

©2003 Prentice Hall Business

Sales value at splitoff method

©2003 Prentice Hall Business

Assume all of the units produced

©2003 Prentice Hall Business

Product A Revenues: 7,500 units × P10.00 P75,000

©2003 Prentice Hall Business

©2003 Prentice Hall Business

Assume that ABC Company can process

A1: B1: C1:

Additional processing (separable) costs are as follows:

A1: P35,000 B1: P46,500 C1: P51,500

What is the estimated net realizable value of each

©2003 Prentice Hall Business

Product A1: P120,000 – P35,000 = P85,000

©2003 Prentice Hall Business

©2003 Prentice Hall Business

Allocated Separable Inventory

©2003 Prentice Hall Business

©2003 Prentice Hall Business

What is the expected final sales value of total

©2003 Prentice Hall Business

P200,000 joint cost

20,000 48,000 12,000

Product A Product B Product C

©2003 Prentice Hall Business

It measures the value It does not anticipate

The purpose of the joint-cost allocation is

©2003 Prentice Hall Business

©2003 Prentice Hall Business

©2003 Prentice Hall Business

Main Products Byproducts

©2003 Prentice Hall Business

Joint production costs for joint

©2003 Prentice Hall Business

Method A: The production method

©2003 Prentice Hall Business

200 ÷ 1,000 × P8,600 = P1,720 is the value

Income Statement (Method A)

©2003 Prentice Hall Business

What are the inventoriable costs?

©2003 Prentice Hall Business

Work in Process 2,000

Work in Process 7,000

Byproduct Inventory 400

Cash or Accounts Receivable 10,400

©2003 Prentice Hall Business

Income Statement (Method B)

What is the gross margin percentage?