JOINT PRODUCTS AND BY PRODUCTS COSTING

Joint Products- refer to two or more products that are produced simultaneously by the same process up
to a split-off point.

Split-off point-is the stage at which the joint products become separate and identifiable. Any costs
incurred after the split-off point are separable costs.

By Products- are those products of relatively small total value that are produced simultaneously and
incidentally with the main product of greater value. Main Products are usually produced in greater
quantities than by-products. Some by-products have residual value while others turned into s scrap or
waste.
By-Products can be classified into two at split-off point:
1. those sold in their original form without need of further processing; and
2. those which require further processing in order to be saleable.

Common Costs-are those costs that cannot be identified with a particular joint product. Joint products
incur common costs until they reach the split off point.

Separable Costs- are costs that can be identified with a particular joint product. These costs are incurred
for a specific product after the split- off point.

Joint Costs represent the total of the materials, labor and overhead costs incurred up to the initial split-
off point. Joint Processing Costs should be allocated to the main products and by-products process.

Methods of Allocating Joint Costs

1. Quantitative or Physical unit method- this method allocates joint costs based on physical
measurement of the items produced such as weight, linear measure or volume. The total
quantities of all joint products must be stated in the same unit of measure before using this
method.
Formula Physical units of each product
X Total joint costs = Allocated Cost
Total units of all products
2. Sales Value at Split-off Method- this is the simplest method in which total joint cost is allocated
based on the total revenues to be generated from individual products produced. It measures the
value of the joint product immediately.

Formula Sales value of each product

X Total joint costs = Allocated costs
Total sales value of all products
At split off
The sales value is calculated by multiplying the units produced by the selling price at split-off
point

3. Net Realizable Value (or Adjusted Sales Value Method)

Formula Adjusted sales value of each product

X Total joint costs= Allocated costs
Total adjusted sales value of all products

The adjusted sale value is calculated by deducting the additional processing costs from the sales value.

ACCOUNTING FOR BY PRODUCTS

Joint costs are not directly traceable between the main products and by-products. By-products are also
produced incidentally from the common raw materials or manufacturing process to create the main
products. The following methods are used to account for the cost of by-products.

1. Sale Method- this is used when by-products are insignificant and do not require further
processing costs. The net revenue (sales less cost to sell) from by-products are treated as:
a. Additional revenue from sale of main product
b. Deduction from cost of goods sold
c. Other Income
 d. Deduction from total manufacturing cost
2. Production method- this method recognizes the by—products at the time their production is
completed. This method is used when by –products are significant and require further
processing costs. The production method recognizes the by-product at its net realizable value.

PRACTICAL EXERCISES

1. Assume that Peter Senen Company produces two liquid products from one process called Scent
A and Scent B. The joint processing costs of material, labor and overhead total P225,000,
producing 30,000 gallons of Scent A and 45,000 gallons of Scent B.
Products Gallons Produced Gallons Sold Selling Price
Scent A 30,000 25,000 P6.00
Scent B 45,000 20,000 4.00
Required:
1. Using the quantitative or physical unit method, allocate the joint costs
2. Calculate the unit cost for each product
3. Determine the gross profit for each product and the corresponding gross profit ratio.

Solution:

1. Gallons Produced Allocation Joint Cost

Scent A 30,000 30/75 X P225,000 P90,000

Scent B 45,000 40/75 X P225,000 135,000
Total 75,000 P225,000

Calculation of Unit cost:

Scent A (P90,000/30,000) P3.00
Scent B ( 135,000/45,000) P3.00

Calculation of gross profit

Scent A Scent B Total
Sales
Scent A (25,000X P6) P150,000
Scent B (20,000 X P4) P80,000 P230,000

Cost of goods sold

Production costs 90,000 135,000 225,000
Less: Ending inventory
Scent A ( 30,000-25,000
X P3) 15,000
Sent B (45,000-20,000
X P3) 75,000 90,000
P 75,000 P60,000 P135,000
Gross Profit P 75,000 P20,000 P95,000

Gross profit ratio 50% 25% 41.3%

2. Using data # 1 allocate the joint costs under sales value at split-off method, calculate the unit
cost for each product, and determine the gross profit and the gross profit ration for each
product.

Solution:

Gallons Produced Selling Price SV at Split-off Allocation Joint Cost

Scent A 30,000 P6.00 P180,000 18/36 X P225,000 P112,500

Scent B 45,000 4.00 180,000 18/36 X P225,000 112,500
Total 75,000 P360,000 P225,000
 Calculation of Unit cost:
Scent A (P112,500/30,000) P3.75
Scent B ( 112,500/45,000) P2.50

Calculation of gross profit

Scent A Scent B Total
Sales
Scent A (25,000X P6) P150,000
Scent B (20,000 X P4) P80,000 P230,000

Cost of goods sold

Production costs 112,500 112,500 225,000
Less: Ending inventory
Scent A ( 30,000-25,000
X P3.75) 18,750 18,750
Sent B (45,000-20,000
X P2.50) 62,500 62,500
P 93,750 P50,000 P 143,750
Gross Profit P 56,250 P30,000 P86,250

Gross profit ratio 37.5% 37.50% 37.50%

3. In addition to the information in No.1. During the month , market researchers determined that
the product Scent B would have a better market and would generate higher margin if processed
further in powder form which can be sold in individual packages at P15 per pound. Therefore,
Peter Senen transferred Scent B to the next department and incurred additional processing
costs of P15,000. A total of 25,000 pounds of powder were produced and 15,000 pounds were
sold. Scent A was transferred to the stockroom.
Required:
a. Allocate the joint costs using the net realizable value method; calculate the unit
cost, the gross profit and the gross profit ratio for each product.
b. Prepare Journal Entries to record the allocation of joint costs at split off point

Solution:

Units Selling Sales Additional Allocated Total

Produced Price Value Processing NRV Allocation Cost Product Cost
Scent A 30,000 P6.00 P180,000 P- P180,000 18/54 P75,000 P75,000
Scent B 25,000 15.00 375,000 15,000 360,000 36/54 150,000 165,000
Total 55,000 P555,000 P15,000 P540,000 P225,000 P240,000

Calculation of Unit cost:

Scent A (P75,000/30,000) P2.50
Scent B ( 165,000/45,000) P6.60

Calculation of gross profit

Scent A Scent B Total
Sales
Scent A (25,000X P6) P150,000
Scent B (15,000 X P15) P225,000 P375,000

Cost of goods sold

Production costs 75,000 165,000 240,000
Less: Ending inventory
Scent A ( 30,000-25,000
X P2.50) 12,500 12,500
Sent B (25,000-15,000
X P2.50) 66,000 66,000
P 62,500 P99,000 P 161,500
Gross Profit P 87,500 P126,000 P213,500

Gross profit ratio 58.3% 56.0 % 56.9%

 Journal Entries:

1. Work-in Process-Department B P150,000

Finished Goods ( Scent A) 75,000
Work in Process-Department A P225,000
To allocate the joint costs at split-off point

2. Work in Process-Department B 15,000

Materials, payroll, applied overhead 15,000
To record the additional processing costs after split –off

3. Finished Goods (Scent B ) 165,000

Work in process- department B 165,000
To record the cost of goods manufactured.

4. Peter Senen manufactures main product Deodorant, which also yields by-product Men’s Lotion
under the same manufacturing process. The following shows the production report for the
period.

Units Produced Units Sold Ending Inventory

Deodorant-Main 4,000 3,500 500
Men’s Lotion –By Product 500 500 100
Total 4,500 4,000 600

Selling Price per unit of Deodorant P90 per unit

Net Realizable Value of Men’s Lotion 20 per unit
Total Manufacturing Costs
Direct Materials P70,000
Direct Labor 50,000
Overhead 80,000
Selling and Administrative Expenses P80,000

Required:
a. Prepare income statement under each of the following treatment for by-products:
1. Net Revenue from by product is treated as additional revenue
2. Net Revenue from by product is treated as deduction from cost of goods sold
3. Net Revenue from by product is treated as other income
4. Net Revenue from by product is treated as a deduction from total manufacturing cost
5. By product is recognized at net realizable value.
b. Prepare Journal entries under each of the following method:
1. Net revenue from by product is treated as additional revenue (sales method)
2. By product is recognized at net realizable value (production method.

Solution:

1. Net revenue from by=product is treated as additional revenue.

Sales
Deodorant (3,500 X P90) P315,000
Men’s Lotion -BP ( 400 X P20) 8,000 P323,000
Cost of Goods Sold
Total production costs P200,000
Less: Ending Inventory
(500/4000 X P200,000) 25,000 175,000
Gross Profit P148,000
Selling & Administrative expenses 80,000
Net Income P 68,000
2. Net revenue from by-product is treated as deduction from cost of goods sold.

Sales P315,000
Cost of goods sold
Total production costs P200,000
Less: Ending Inventory
(500/4000 X P200,000) 25,000
Cost of goods sold P175,000
Less: Net revenue from BP 8,000 167,000
Gross Profit P148,000
Less: Selling and administrative expense 80,000
Net income P 68,000

3. Net revenue from by product is treated as other income

Sales P315,000
Cost of goods sold
Total production costs P200,000
Less: Ending Inventory
(500/4000 X P200,000) 25,000 175,000
Gross Profit P140,000
Less: Selling and administrative expense 80,000
Operating income P 60,000
Net revenue from BP 8,000
Net income P 68,000

4. Net revenue from by product is treated as deduction from total manufacturing cost

Sales P315,000
Cost of goods sold
Total production costs P200,000
Less; Net revenue from BP 8,000
Net Manufacturing cost P192,000
Less: Ending Inventory
(500/4000 X P192,000) 24,000 168,000
Gross Profit P147,000
Less: Selling and administrative expense 80,000
Net income P 67,000

5. By Product is recognized at net realizable value

Sales P315,000
Cost of goods sold
Total production costs P200,000
Less; Net realizable value of BP 10,,000
(500 X P20)
Net Manufacturing cost P190,000
Less: Ending Inventory
(500/4000 X P190,000) 23,750 166,250
Gross Profit P148,750
Less: Selling and administrative expense 80,000
Net income P 68,750

Ending Inventory

Deodorant-Main Product (500/4000 X P190,000) P23,750

Men’s Lotion- By Product (100 x P20) 2,000