THe REviEw SCHOOL OF ACCOUNTANCY 5" FLR. CMFFIBLDG. R. PAPA COR. S. H. Lovora Sts. SAMPALOC, MANILA Contact Nos. (02)7343:988; (02)7350807; 00152303213; 09104391320 ADVANCED FINANCIAL ACCOUNTING & REPORTING Cost ACCOUNTING — JOINT PRODUCTS & By-PRopucTS Co-Products, Main Products, Joint Products, and By-Products Distinguished: Ti eee ts refer to the production of two or more products at the sane tine pur not emcssartly tron the sane’ processing operations of the same rev materials shecessar tly {eon the ae Pthose, mamitactacing operations in which companies simultoncusly srodaced tuo oF more products of significant sales value known as Joint Proaucts. Scine products refers to two of wore pradete manufactused simultaneously by = comon series of processing operations with each product Wjsessing wore than 3 Sominal value ia the form in which they ace produces my reodacts sefer to one of mote products of relatively small value thet ore produces sincltancously with o product of greater value known as the Main Products. Scrap and By-Products Compared occasionally, there is a problen to classify a product as a by-product or a8 @ scrap. The basic difference between the two is that by-products have a greater value than scrap. Also, scrap i generally sold insediately, whereas by-products nay undergo further processing after split-off point. Scrap is salable materials resulting from the manufocturing process and having @ Limitcd value. the classification of products Ss either joint products, by-products, of scrup may change as new uses of the products are discovered or old ones abandoned, Because of technological discoveries, a product AN “Ghenge ‘from @ bysproduct to a joint prodoct.. For example, in the petroleun Jalustsy, gasoline was originally = by-product of the main product kerosene. Buty after the iavontion of the automobile, gasoline becane the main product. Tn mony cases, uses have been found Cor by-products formerly considered as waste of scrap. For example, sevage plants have found ways to convert their waste into fertilizer. Another typical example is in the manufacturing of shirts, when employees Igy and cut the pattern, any excess fabric between the pattern pieces is scrap. The Gales fabric may have a minimal value or workers may throw it in the waste bin. sreeee, Setap occurs white producing shires, semufacturers could classify it a3 a Hine Groduce or by-product. However, it hay so Iatvie value that it is questicnable seine eee cEacturere should reter to this svisp as a product at all. Product markets whecher mantively “frequently se. product that may have a relatively small sales change rei Gay have high sales valve tomorrow. ‘Thexefore, management should qeedtentiy examine product classifications and evaluate vhen necessary. Say GRoREns methods illustrated previously for the treatment of scrap do not aitter significantly from the accounting methods for by-products. Joint Costs and Common Costs Distinguished ‘ao Getersine production costs for joint products and by-products, the distinction between Joine costs and common costs te necessary. While the objective of seers onreduction coats to 0 costing ceutes ia tne same for common costs and joint assigning Recdurther believe, that the two Lerms should not, be used interchangeably. gosta, i Sint cost 19 more restrictive, it nefere to costs incurred to simaltaneously DOE STS products. On the other hang, cumson costs refer to the sharing of cretiitien by two of more users. Connon costs differ from joint costs because we can Sees etna coste separately. Joint costs are the production costs incurred up to See iet where products are separately ideatified. Joint costs are indivisible and She Point wiered co products to properly determine the costs of such product. Common ase ee eiuieible which normally includes coat in the service department such as feliding xepair and maintenance, cafeteria, and utilities tthe Joint Costs, Split-off Point, and Further Processing Costs TPN cine Costa - costs incurred up to the point of separation. 2) Bplit-off Point ~ occurs when each ssparate products having a sales value can be separately identifiable. 3. Fitther Processing Costa - are materials, iabor, and overhead necessary in Tigcessing the products after the spiit-off point until they are completed End becone salable as finished products. Characteristics of Joint Products and Co-Producte: forine products must be the primary objective of the’manufacturing operations 3: Te Saiue must be relatively high compared with the by-product resulting at the sane time, Fath may be defined briefly at on logical lie inthe occurrence of the imposible.* “Faith ba higher faculty than reason? The secret of life not ju to five, but to hve romething worth to ive for “Be not efrold of ie. Believe thet fife & worth Ivor ond you Bate wil help create the fot. Develop on otthuce of rattude, ond gle thanks for mvanehiag tc? hoppns te you, Knowing that every step fordord Sap toward achioulny something biger ona beste than your current suction AFAR-15Advanced Financial Accounting & Reporting page 2 Characteristics of By-Products ‘The products is incidental te operations, therefore, they are not the primary objective why there is 4 manufacturing operation. : Sales value of the Ly-product, is relatively low as conpared with the sales value of the main proau ef Allocating Joint Cost to Joint Products Market Value or Sales Value Method. Under this method,, joint cost are allocated according to the sales value of the individual products. Advocates of this method argue chat a direct relationship exist between cost and selling price. They contend that selling prices of products are determined primarily by the costs involved in producing that product, because, were it not for such costs, there would never be any sales. Another argument for using the narkat or séle3 value method of allocating joint costs is that, s¢ is neutral for it does nez aifect the profitability of the joint products. 2. Market Valuo or Salar Valve at Split-off Point Approach b. Wet Realizable Value Approach (sefer to Notes on page 3) c. Approxinated (Estimated) Net Realizsble Value Approach oF Hypothetical Market Valse Approach (refer to Notes on page 3) Average Unit Cost Method or Physical Output (Quantities/Measurement) Method. The basic assumption of ‘his motnod ts that products produced by a common Process should be charged a proportionate ghare of the total joint costs based on the nunber of unite produced. It is assumed that the products are homogenous and one product does not require more or less cost than any other product in the group. The disudvantage of this method is that the physical units used for allocating joint costs aay have no relationship to the revenue producing capacity of the individual products. Weighted average Mathod or Survey Method. The main advantage of this method is that it often yields @ more logical allocation than other methods. Its main disadvantage is that the determination of weights is often complicated and time-consuming, especially when many products are involved. Quantitative Unit Method based on same physical measurement such as, weight, Linear measure or voluse. This is normally used by industrial engineers using some scientific basis veh cons. quartz, or any other basis. of Costing (Allocating Joint Costs) By-Products : No Joint Costs is allocated to by-products. Since by-products are of minor importance, therefore, no cost of production is assigned to them. Any cevenue resulting from sales of by-product is credited to income or to cost of the main product. In some cases, costs subsequent to split-off point may be offset against the by- product revenue. For inventory costing, an independent value may be assigned to the by-product. The methods most commonly used: Method 1: Gross Revenue from seles of by-product is listed in the income statement 2: A. Treat Sales of By-Product as Income: A.1, Additional Soles Revenue Al2. Other Inco: Al3. A deduction from the Cost of Goods Sold of the Main Product Note: The net income derived from these three alternatives will yield the same amount. B.A deduction from the Total Production Cost of the Main Product. Note: The met inceme derived from this alternative will not yield the zanv amount of net income computed under A above, Method 2: Net Revenue from sales of by-product (gross selling price less the cost ct marketing and administrative expenses and any additional processing costs). Presentation in the income statement similar to the treatment in Method 1 above. With Joint Cost Allocated to by-products. Inventory costs of the by-product are based on the allocated cost plus any subsequent processing cost. Incladed in this category are the following methods Method 3: Replacement Cost Method. This method credits production cost of the main products at the current market or placement rate. Method 4: Market Value or Reversal Cost Method. 15Advanced Financial Accounting & Reporting page 3 Note: To avold conflicting views of respected book authors, the following should be observed: 1. At all fimes, if problem is silent use sales (markef) value at spit-off point. 2. if there Is disposal cost ct spiit-oit point (separate costs if sold at split-off) the following should be observed: 8 Net Reaiizable Valve is not the same with Approximated (Estimated) Net Realizable Method (Hypothetical Market Value Method) 3. If there is no disposal/separate cost at split-off point the following should be observed: = Net Realizable Valve is the same with Approximated (Estimated) Net Realizable Method (+ ypothetical Market Value Method) 7 Kilimanjaro Company produces fous products, of 224,000 at the split-off point. Date LL, MM and NN) follow: which have a manufacturing cost ttaining to these products (KK, Separate Costs after Split-Off Disposal/ Separate ultimate/ (pounds) sales price Separate costs if Final sale Weight units per unit at cost at processed price per Factor Produced split-off split-off* further Total unit Per Unit KK 20,000 P 12.00 Piz,050 P22,000 P 40,000 P 15.00 3.0 LL 32,000 3.50 28,900 11,000 25, 000 5.00 5.5 mat 36,000 6.00 15,000 14,000 30, 000 8.00 5.0 NN _24,000 5.50 |_ 12,009 9,000 _ 21,000 7.00 6.0 z,.000 Feo 0CG — BS6.000 P116, 000 marketing costs regardless when soli ot spilt-otf point. Allocating the joint cost using: |, Physical measure/average ‘unit cost/production output method, determine the: 1. The average unit cost amounted to: a. None c Pl b. P0.40 d, P2 2. The share in joint cost for Product KK amounted to: a. None cc. P20,000 b. P 8,000 d. P40,000 I. Weighted average method or Survey method, determine the: 3. The joint cost per weight factor a. None cc. P04 b. 0.32 d. P20 4. The share in joint cost for Product LL amounted to: a. None cc. P 70,400 b. Pa0.000 d. P176,000 IN. Soles/market valve at spit-off point approach, determine the: 55. The percentage of joint cos! to soles volve: a. 32% ©. 100% b. 40% d. 600% 6.The share in joint cost for Product MM amounted to: a. None cc. P70,400 b. P69,120 a. P72,000 IV. Net realizable valve at spit-off point approach, determine the: . 7. The percentage of joint costs to nel realizable valve (NRV) at spit-off: a. 3% c. 40% b. 35% d. 600% 8. The share in joint cost for Produc! NN amounted to: a, None c. PA2.240 b. 42,000 d.P48,000 V. Approximated (estimated) net reatizable value at spit-off or hypothetical market valveAdvanced Financial Accounting & Reporting page 4 10.The unit cost for Product KK amounted to: a. PASSA cc. PSA b. PA74 d. P6.00 U1 Joint Cost Allocation and Gross Profit Computation -Market Value Method Nokia Company manufactures three differen! products from a single raw material. A summary of production costs shows: reduction costs shows: _ ‘Output in kilograms 440,000, Sales in kilograms “400,000 Sales price per kilogram = —istal cost | Production Costs: Materials _ P__90,000 Direct labor 20,000 30,000, 80,000 Variable factory OH x 10,000, 16.000 _ 45,000 Fixed factory OH | _15,000 | 34,000 | _30,000 115,000 total 20.000 | p64,000 | 74000 |p. 330.000 All separable costs have been assigned to products but the joint costs has not been allocated. 1. The amount of joint costs attributable to materials a. None c.P $3,000 b. P27,000 a. F 90,000 2. The amount of joint costs attributable te direct labor: a. None cc. P.53,000 b. P-27,000 @. P.80,000 3. The amount of joint costs attributable 10 variable factory overhead: a. None cc. 28,000 b. P17,000 d.PA5,000 4.The amount of joint costs atfributabie to fixed factory overhead: @. None cc. P 79,000 b. P36,000 d. P115,000 5. Determine the amount of oint costs to be allocated: ‘a. None cc. P170,000 b. P160,000 d. 330,000 For items 6 - 11, using Market Value Method in cilocating joint cost: 6. The percentage of joint cost to market value needed to allocate the joint cost: a. 12% c. 48% b. 40% a. 50% 7. The unit cost assigned to Product G: a. None cc. PO.40 b. PO25 d. O50 8. The amount of sales of Product's to be reported in the income statement amounted to: a. None c. P180,000 b. P136,000 d. P200,000 9. The cost of goods sold of Product M amounted fo: a. None c. P148,125 b. P.82,000 d. P158,000 10. The total gross profit amounted to: a. None cc. P155,575 b. P-82,000 d. P157,000 11. The total cost assigned fo ending inventory amount! to: @. None cc. P155.575 b. P28.075 d. P157,000 +The smallest deed Is better than the grandest intention** AFAR-15Advanced Financial Accounting & Reporting page 5 Il - Joint Cost Allocation - Market Vulue Method; By-Product Cost Allocation - Market Value or Revers) Cost Method . Ericsson Company manviactured joints products X and Y os well as by-product Z. ‘Cumulative joints cost data for the period show 204,000, representing 20,000 completed units process through the Refining Department at cn average cost of P10.20. Costs are assigned to X and Y by tho market value method, which considers furine: processing costs in subsequent ‘operations. To Seromine ine cost allocation 10 Z, the marke! voive (reversal cost) method is used. Additional [ - ~ x y ‘Quantity processed - 8,000_| 10,000 Sales price per unit P20 | P 25 Further processing cost per uni 5 iz ‘Markefing & administrative exp 5 = ‘Operating profit per unit, 5 : 1. The joint costs allocated fo by-product Z amounted to: 3. Zero cP 4,000 b. P2,000 d. P12,000 2. The joint costs allocated to joint products ~ X and ¥ amounted fo: 9. Zero c. 200,000 b. P-4,000 d. 204,000 3, The joint costs allocated to joint products - “and ¥ amounted to: 9. Zero . P200,000 b. P-4,000 3. P204,000 4. The joint costs allocated to joint product x a. Zero ¢. P120,000 b. 80,000 3. 209,000 5, tt the by-product Z is treated s other income, the joint cost allocated to by-product ampunted to: a. Zero ) Ge) @x7 LAB _¢ 2 z FE Tnite Ultimate fotal Uitimats Separabie liyp.MV or Wof Je. C. Share in Product Produced MV/unit Market Valuy Coste Not AV tow Je. Cost x 8,000 20.00 40, 000 120, 000 213 80,000, ¥ 10,000 25.00 __180,,000 2/3 120,000 39300, 000 00,000 3 of at. Cost to Mv: Pz09,060/"200,000 or 275 the joint costs of P240,000 were allocated as follows: By-product Z 4,000 Joint Products: x 80,000 y 120,000 204,000 Nos. 10 - 13: Requirements 1 and 2: By-Products Main x 3 Product Total sales 0003, 500 75,000 84,500 less: Cost of Goods Sold —— — Joint Coats (Requiresent: 1) 3,250 1,630 32,620 37,500 Further Processing Costs 3,100 900___11,500 13,500 Total Production Coste “4,350 2,530 44,120 "51, 000 Gross Profit 1,650 970 30,880 33,500 Less: Operating expenses-mktg. 4 350 007,300 profit (158 for A-and 128 for 8) 420_—24.880_26.200 Noa. 14-17 (A x B) (Cc - D) (G/E) (Bx F) A__B— 2 E E Waits “Gitinate” Total Ultimate Separeble iyp.W or Wot Jt. , Share in Product Produced MV/anit Market Value Costs Net_RY tomy ge. Cost 30,000 1.50 45, 000 45,000 808 36,000 B 30,000 3.20 36,00 30, 000 80% 24,000 c 60,000 3.15 189,000 75,000 808 120,000 "350,000 8 of Jt. Cost to MVHPiZ0, 000/2190, 000«608 (D+ G) (H/Ay (x9) (A-d) *#x T 8 r 3 x L total Cost Unit Cost Units Sold cos(ucxUs) BT 6 36, 000 1,208 20,000 24,000 12,000 $ 90,000 3.0000 30,000 90,000 - " __1741,000 215009 45,000 43,500 390,000, 55.500 14. (a) P45,000 16. (a) F9,00C 15. (b) P120,000 17. (a) P1z, 000 AFAR-15b