Chapter 14

Accounting for Joint Products

and By-Products

A single production process may yield several different products. For

example, petroleum industries produce gasoline, kerosene, and diesel from
the refining of crude oil. When two or more product, both ofsignificant value,
results from a single production process, they are called joint products. A
has
joint product is different from a by-product, because a
by-produet
insignificant value compared to the main product or products. For ncome
and inventory costing purposes, the allocation of costs to joint products and
by-products is necessary. This chapter will discuss the accounting
procedures for joint and by-products under a process costing.

JOINT PRODUCTs
sales val-
Joint Products are individual products, from the significant
each with
simultaneously same raw materials
ues, which a r e produced
basic characteristics of joint products
and/or manufacturing process. The
are
has a split-offpoint (point
Manufacturing of joint products always
products emerge, which can be sold
of separation) in which separate incurred after
further. Costs split-off point do not
as is or processed
can be identified with the spe-
since they
cause allocation problems
cific products.
i18 81gnificantly greater in value than other
None of the joint products
characteristic distinguishes joint products from
joint products. This
by-products.
common processing. Procese
Joint products require simultaneous in the processing of all tho
of of the joint products results he
ing one
s a m e time.
at the
other joint products
569
 Chapter 14

570

industries producing joint products:

Below are some of the
Joint Products at the Split-Off Point
Industry
Food Processing:
Agriculture and Corn on the cob, whole kernels, corn-

Corn meal.
Bacon, ham, spare ribs.
Hogs Lumber of varying grades and shapes,
Lumber sawdust.

Extractive Industries:
Crude oil, gas, diesel, kerosene
Petroleum
Copper Ore Copper, silver, lead, zinc
Coke, gas, ammonia
Coal
Chemical Industries:
Butane, ethane, propane
Raw LPG

POINT
JOINT cOSTS AND THE SPLIT-OFF

Joint costs or common of direct materials, direct labor, and

costs consist
of the process up to the
manufacturing overhead incurred from the start
costs are indivisible, because
point of separation (split-off point). These
they cannot be identified to any of the products being simultaneously
produced. For example, the costs incurred by petroleum refining company
to process crude oil are joint costs. Since joint costs cannot be specifically
identified with gasoline, kerosene and diesel, they must be allocated to
this product.

Additional processing costs (sometimes called further processing costs or

separable costs) are costs incurred by each product, after they emerged
from the same raw material. Additional processing costs consist also or
additional materials, direct labor, and manufacturing overhead incurred
after the split-off point. The diagram below shows joint costs and split-or
point:

Start Joint Costs

(Materials+Labor +Overhead)
K
Split-Off Point
BJoint Products
AcCountingfor Joint Products and
By-Products 571
METHODS FOR ALLOCATING JOINT
COSTS
When a
company produces joint
products, there is no main or
product absorb the joint costs. Each
to
principau
joint product must absorb 1ts
of the costs of production. Snar
Therefore a method must be used to allocat
ioint costs to the various joint
products.
One of the following three methods is
to individual products: usually used to allocate joint costs

The physical measures method, such as weight (i.e., kilograms) or

volume (i.e., cubic feet).
The sales value at split-off
point method (relative sales value),
set to yield
uniform rate of gross profit.
a
The adjusted sales value method (Net Realizable Value),
considering additional processing costs.
In simple production process, the joint products are sold at the split-off
point without further processing. Our illustration will start with the
simplest case (Case 1) to illustrate the allocation on the basis of physical
measures and the sales value at split-off point. Then the joint production
that require further processing after the split
process that yield products
Case 3 illustrates the adjusted sales
off point (Case 2) will be explained. To help concentrate on key concepts;
value basis to allocate joint costs.
i n all llustrations in this chapter that are
we use numbers and amounts numbers present in practice.
much smaller than the typical

Case 1: raw farms and

milk from individual
Jose's Dairy Products purchases
c r e a m and liquid
processes it until the split-oft point, when
two products
a r e sold to a company, which markets
skim-emerge. These two products
and other retail stores
distributes them to supermarket
and

for April 2018

are:
Summary data
gallons are lost in +h
55,000 gallons; 5,000
Raw milk processed, spillage, and the like iol ing
due to evaporation,
production process 37,500 gallons of liquid
skim
c r e a m and
of
12,500 gallons
data, sales and
inventories
are presented in :i next
The production
page.
572
Chapter 14

Sales
Production
10,000 gallons at P8 per gallon
Cream 12,500 gallons 15,000 gallons at P4 per gallon
Liquid skim 37,500 gallons
inventories)
Ending Inventories (No beginning Ogallons
Raw milk
Cream
2,500 gallons
Liquid skim
22,500 gallons
Cost of purchasing 55,000 gallons of raw milk and processing it until the split-of

point to yield cream and liquid skim, P200,000.

questions depict the relationships in the above illustration:

folowing
The How much of the P200,000 joint costs should be allocated to the cost
of goods sold of 10,000 gallons of cream and 15,000 gallons of liquid
skim?
How much should be allocated to the ending inventory of 2,500 gallons
of cream and 22,500 gallons of liquid skim?
The joint productiork costs of P200,000 cannot be traced to either product.
That's because the products are
not separated until the split-point. To
determine the costs of cream and liquid skim sold, different allocation
basis can be used.

PHYSICAL MEASURES METHOD

This method alocates joint costs to joint products on the basis of the
relative weight, volume, or other
physical measure at the split-off point
of the production process. In lllustration 14-1, the P200,000 joint costs
produced 12,500 gallons of cream and 37,500 gallons of liquid skim. Using
the number of gallons produced as the physical measure, joint costs are
allocated as follows:

Liquid
Cream Skim Total
1. Physical measure (gallons)
2 Ratio: 12,500 37,500 50,000
Cream (12,500 50,000)
25%
Liquid skim (37,500 50,000) 75% 100%
3.3. Allocated joint costs:
Cream (25% x P200,000)
Liquid skim (75% x P200,000) P50,000
4. Joint costs per gallon: P150,000 P200,000
Cream (P50,000 12,500) P4/ gal.
Liquid skim (P150,000 +37,500)
P4/ gal
Accountingfor oint Products
and By-Products 573
Determining
measure
which
products of
computation can greatlya joint process to include in a ysical-
those products. puy
Outputs with no affect the allocations between or
general guideline for the physical sales value are always excluded.amog
"he
joint product outputs in the measure method is to include oniy u e
weighting computations.
The income statement below
measure method. presents the two products using the physica
Illustration 14-2
Jose Dairy Products
Income Statement
For April 2018

Liquid
Cream Skim Total
RevenuesS
Cream (100,000 gal. x P8) P80,000
Liquid skim (15,000 gal. x P4)
Costs of goods sold joint costs)
P60,000P140,000
Production Costs 50,000 150,000 200,000
Less: Ending Inventory
Cream (2,500 gal. x P4) 10,000
Liquid skim (22,500 gal. x P4) 90,000 100,000
40,000 60,000 100,000
Cost of goods sold (joint costs)
P40,000 PO P40,000
Gross margin
50% 0% 28.57%
Gross profit rate
measures method:
features of the physical
Note the following
8 easy to use because the
measure in unit (the gallon)
The physical
m e a s u r e d in gallons.
products a r e the two products
allocated between
is easily the same, because thev
The joint cost
waus
are
products
Unit of all the
costs bythe total units.
total cost
dividing the
by value, special n r o n .

computed to relative sales sing

consideration
is given
ot the product, o r other sno ial
No the
content

required,
o r handling
characteristics.
to physical units.
are directly related
costs
Not all
574
Chapter 14
SPLIT-OFF POINT METHOD
SALES VALUE AT
on the basis of thei
method allocates joint costs to joint products
This uses the sales valtie
the split-off point. This method
relative sales value at
of the accounting period because joint costs arae
of the entire production
on those sold in the current period
incurred on all units produced, not just
the total joint
When the sales value is known at the split-off point,
cost is
s
formula:
allocated among the joint products using the following

Sales value at split-off point*

X Joint Costs = Allocated joint costs
Total sales value at split-off point
*
Units produced x unit sales value at split-off point.

Using the above formula, joint costs of P200,000 are allocated as follows:

Liquid
Cream Skim Total
1. Sales value at split-off point:
Cream (12,500 gal. x P8) P100,000
Liquid skim (37,500 gal. x P4) P150,0000 P250,000
2. Ratio:
Cream (P100,000+ P250,000) 40%
Liquid skim (P150,000 P250,000 60% 100%
3. Allocated joint costs:
Cream (P200,000 x 40%) P 80,000
Liquid skim (P200,000 x 60%) P200,000
P120,000
4. Joint costs per gallon:
Cream (P80,000+ 12,500 gal.) P 6.40
Liquid skim (P120,000+ 37,500 gal) P 3.20

In computing the ratio using the sales value at ould

be taken to make sure that the split-off point, care shou
percentages of sales value of each produe
sum up to 100 percent. Unit joint costs number of
may be carried to the number
decimal places that are deemed appropriate
given the number of un
involved. (The greater the number of units, the more decimal places will
be used.)
Accountingfor Joint Products and
By-Products
The income tatement 575
presented below. Take using the sales value
note at split-off point method is
profit rates of 20%. that both cream and
point meun
liquid skims
skims have gro
Illustration 14-3
Jose Dairy Products
Income Statement
For April 2018

Liquid
Cream Skim Total
Revenues:
Cream (10,000 gal.x P8)
Liquid skim (15,000 gal. x P4) P80,000
Costs of goods sold (joint costs) P 60,000 P140,000
Production Costs
Less: Ending Inventory 80,000 120,000 200,000
Cream (2,500 gal. x P6.40) 16,000
Liquid skim (22,500 gal. x P3.20)
72,000 88,000
Cost of goods sold (joint costs) 64,000 48,000 112,000
Gross margin P16,000 P 12,000 P 28,000
Gross profit rate 20% 20% 20%

Note the following features of the sales value at split-off point method

Costs are allocated to products in proportion to their expected revenues.

T h e cost-allocation base (total Sales value at split-off point) is

expressed in terms of
a common (the amount af
denominator
in the accounting system.
revenues) that is systematically recorded
market selling prices for all products at the
This method needs the
split-off point. of gross
same profit for the
rate
This method always yield the
when there are no beginning inventories and all
individual products point.
products are sold at the split-off
straightforward.
This method is
 aper 14

576
METHOD
VALUE
ADJUSTED SALES
sale, the sales valie
ue
further before
be
must
processed m e a s u r e the
oe
true value
If the joint products does not
method of
allocation
processing costa
at split-off point separation.
The a d d i t i o n a l
the products at the point of cost allocation is made
the
sales value before
widely, it may be desirable
from the
must be deducted vary
the products
Similarly, if the costs of selling costs from the sales prices
in order to
estimated selling used as the basis of
to deduct the
relative sales value to be
arrive at the net or adjusted cost is a l l o c a t e d
to the joint
allocation. Under this
method the joint
formula.
products using the following

Adjusted Sales Value of each product* X Joint Costs

= Allocated Joint Cost

Total Adjusted Sales Value of all products

Additional Processing Costs
*Units Produced x Sales Value Before Cost Allocation-

Product is expanded as follows:

To illustrate, the example of Jose's Dairy

Case 2:
data in Case 1 except that both cream and liquid
Assume the same as

skim can be processed further:

Cream to Whipping Cream: 12,500 gallons of cream are furtherT

processed to yield 10,000 gallons of whipping cream at additional
processing costs of P140,000. Whipping cream, sells for P25 per gallon.
Liquid Skim to Condensed Milk: 37,500 gallons of liquid skim art
further processed to yield 25,000 gallons of condensed milk a
additional processing costs of P260,000. Condensed milk sells for P22
per gallon.
0
Sales during the periodwere 6,000 gallons of whipping eream and 22.500
gallons of condensed milk. 'The ending inventories are as follows:

Raw milkk gallonss

Cream O gallons
Liquid skim 0 gallons
Whipping cream 4,000 gallons
Condensed milk 2,500 gallons
There are no beginning inventories.
Accountingfor Joint,Products and
By-Products 577
Ioint costs in this case
are allocated as follows:
Whipping
Cream
Condensed
Milk Total
1. Sales value before cost allocation:
Whipping cream (10,000 gal. x P25) P250,000
Condensed milk (25,000 gal. x P22) P800,000
2. Less separable costs P550,000
260,000 400,000
140,000
3. Adjusted sales value at split off point P110,000 P290,000 P400,000
4. Ratio:
Whipping cream (P110,000/P400,000) 27.5%
Condensed milk (P290,000/P400,000 72.5%
5. Allocated joint costs:
Whipping cream (P200,000 x 27.5%) P 55,000
Condensed milk (P200,000 x 72.5%) P145,000 P200,000
6. Production cost per gallon*
Whipping cream P 19.500
Condensed milk P 16.20

Production cost per gallon:

Whipping8 Condensed
Cream Milk
P55,000 P145,0000
Allocated joint costt
140,000 260,000
Separable costs
P195,000 P405,000
Total production costs
10,000 25,000
Divide by gallons produced
P19.50 P16.20
Production cost per gallon
cream and
presenting
the
two products, whipping
The income statement in l l l u s t r a t i o n
14-4 in the next page.

condensed milk is
presented
sales value method (net
features of the adjusted
the
The following are
realizable method): the sales value at split-off
usually used only when
This method is products is
not known.
one or
more
those made when the sales value
similar to
point of a r e very
allocatior.s
The used.
point is and relatively easy to
simple and relatively apply.
applu

split-off lved
at split-off poin i n v o l v e d are simple
the values at
picture of th the oint
The
The procedures the true
present
costs
usually
The products.
of the derived
m the selling cor rmarl
from k e t price
separation still
the actoi st.
of allocations
are
relationship
to
or no
The c o s t have
little
which may
 Chapter 14
578
Nlustration 14-4
Jose Dairy Products
Income Statement
For April 2018
Whipping Condensed
Cream Milk Total
Revenues P150,000
Whipping cream (6,000 gal. x P25)
Condensed milk (22,500 gal. x P22)
P495,000 P645,000
Costs of goods sold:
Joint costs cOsts 55,000 145,000 200,000
Separable costs 140,000 260,000 400,000
Costs of goods available for sale 195,000 405,000 600,000
Less: Ending Inventory
Whipping cream (4,000 gal. x P19.50) 78,000
Condensed milk (2,500 gal. x P16.20) 40,500 118,500
Cost of goods sold Goint costs) 117,000 364,500 481,500
Gross margin P 33,000 P130,500 P163,500
Gross profit rate 22% 26.36% 25.35%
CHOOSING A METHOD OF COST ALLOCATION
Which method ofallocating jointcosts should be used? Use the sales value
at split-off method when selling price is available (even if further
processing is done). Reasons for using sales value at split-off point (relative
sales value) method are:
It measures the value of the joint product immediately at the end or
the joint process.
It does not require information on the processing steps after
off point, if there is further spilt
processing.
It serves as a meaningful basis to
which are revenues.
allocate joint costs to producus»
It is simple to apply.
AccountingforJoint Products and
By-Products 579
AGCOUNTING FOR BY-PRODUCTS
Joint proaueulon process
may yield not
products.By-products
Simultaneously with
are those only ioint
products of products but also D
by-
limited sales value
or
principal products.products of greater
Main products sales value,
ue,
value produce
known
known prouan
as the
as the main
greater
greater quantit than
by-products. are usually produced in muc uch

By-products, like joint or main products are

materials and or common produced from the same ra
manufacturing process. Joint costs are no
directly traceable to either main
products or
are generally of
secondary importance inby-products. Since by products
methods, differ from those used for joint production, cost allocation
products.
Two by-product accounting methods
can be used as follows:

Method A: By-products recognized when sold.

are
This method is used when by-products are considered of minor
and does not require additional importance
processing costs. Net revenue from the
sale of by-products (sales value less selling costs) may be treated aS:

Addition to revenue from the sale of the main product or as other

income, and all manufacturing costs are applied to the main product.
Reduction from the cost of the main product.

Method B: By-products are recognized when produced.

This method is used when by-products are considered important and
therefore require additional processing costs. Two basic accountine
methods can be used when by-products are recognized when production
is completed.

The realizable value of the completed by-product (estimated

net
sales value less estimated
additional
costs and selling costs) is
charged to By-product inventory and deducted from the total
No part of the joint costs is allocated to the by
manufacturing costs.
product.
joint costs is allocated to the by-product using the Normal
Part of the
Reversal C0st Methoa. By-products are also charged
Net Profit or
costs a f t e r separation.
additional processing
with any

accounting for by-products ao

methods of the
To illustrate the Company.
McBee
followi case for
 Chapter 14
580

two products:
Case 3: which generates
processes
potatoes
CDee Company
pack.
sold for P80 per
product) pack (net of selling
-

main
French fries (the -
sold for P40 per
Potato skin (the by-product)
costs)
follows:
are as
Data in number of packs in May 2014
Beginning Ending
Sales Inventory Inventory
Production
0 500
French Fries 2,500 2,000
150 0 350
Potato Skins 500

The joint manufacturing costs of these products May in 2018 were P125,000,
costs.
comprising P75,000 for direct materials and P50,000 for. conversion

METHOD A: BY-PRODUCTS RECOGNIZED WHEN SOLD

The potato skins (by-product) are sold without any additional processing

Net Revenue Treated as Additional Revenue or Other Income.

This method makes no journal entries until sale of the by-product occurs.
Revenues (proceeds) of the by-product are reported in the income
statement either as revenues group with other sales or as other income.
From the data given, the journal entry to record the sale of the by-product
is as follows:

Accounts Receivable (or Cash) 6,000

Sales Potato Skins 6,000
To record sales of the by-product (150 P40).
x

Analysis of the Method

No cost is assigned or allocated to the
The sale of the by-product has no effect by-product.
on the cost of the
The procedure is simple and practical main product.
and requires no
of the cost of the by-product. computations
 int Products an
AccounigJor Join
oint
Products and By-Product
By-Products
Net
Tf Revenue Treated as
he net:
Ifthe net
581
revenue
from Cost
from the cost of
f the the sale ofReduction
the
of the main
by-product would product, theby-product is treated
be made: treated as aa reduction
following entry
ry to record Tethe sale
Accounts Receivable (or
Work in Process - Cash) 6,000
To record sale of the French Fries
by-product G,000
Thismethod is Simple and does
main product. iowever,, this show the net
frequently manufacturing
cost of the
method is not used in practICe
The income statement of the
below: McBee Company under Method A is
presented
Illustration 14-5
McBee Company.
Income Statement
For the Month of May 2018
As Addition to As Cost
Revenue from
Sales of Main
Reductio
from Cost of
Product Main Product

REVENUES
Main product: French Fries (2,000 x P80) P160,000 P160,000
6,000
By-product: Potato Skins (150x P40)
Total revenues 166,000 160,000
COST OF GOODS SOLD
125,000 125,000
Total manufacturing costs
6,000
Less: By-product revenue (150 x P40) 125,000 119,000
Net manufacturing costs 25,000* 23,800**
Less: Main product inventory 100,000 95,200
Cost of goods sold P64,800
P66,000
GROSS PROFIT 39.76% 40.5%
GROSS PROFIT RATES
of period): P25,000 P23,800
Costs of inventories (end
French Friee8 14,000 14,000
x P40)
Main product:
Potato
Skins (350
By-product: ,500) xx P12
P125,000 = 25,000
costs = +2,500)
(500+
00+ 2,500)
2,500) xx P119,000) = P23,800
(500 +
m a n u f a c t u r i n g

costs=

*(500+2,50
s
500)
2,500)
(d00+
x net

x net
manufacturing
 Chapter 14
582

WHEN PRODUCED
METHOD B: BY-PRODUCTS REcOGNIZED

statements at the
the financial
This method recognizes by-products in
time production is completed.
Realizable Value (NRV).
By-product is Recorded at its Net the
the financial statement
-

This method recognizes the by-product in

500 packs of potato skins i n the mnonth it
is produced. The net realizable
is debited to By-product
value (NRV) from the by-product produced
costs of the main product. The
Inventory account and deducted from the
journal entry to illustrate this method is:

By-product Inventory -

Potato Skins 20,000

Work in Process - Main product 20,000
To record net realizable value of the
completed by-product (500 x P40)

The income statement under this method is presented below:

Illustration 14-5
McBee Company
Income Statemnent
For the Month of May 2018

Revenues - Main Product P160,0000

Cost of goods sold:
Total manufacturing costs P125,000
Less: Net realizable value of by-product 20,000
Net manufacturing costs 105,000
Less: Main Product inventory 21,000* 84,000
Gross profit P 76,000
Gross profit rate 47.5%

Inventories (end of period):

Main product: French Fries8 21,000
By-product: Potato Skins (350x P40) 14,000

*(500 2,500) x Net manufacturing costs = (500 + 2,500) x P105,000 P21,000

Accountingfor Joint Products and
By-Products 583
Joint Costs
Allocated to By-product. Inventory (Reversal o t
Method).
Under this method, the
cost to be allocated to the
so that the
by-product will yield the normal by-product is compu
that the company percentage of profit on s
makes, on the average. To illustrate this method, assume
the following data for the
by-product:
The potato skins
by-product can be sold at P45 per pack.
The selling expenses are P5 per pack.
The normal net profit of the business is 20% of sales.
Additional Manufacturing Costs after separation are materials,
P3,000 and conversion costs, P2,000.
The estimated cost of the by-product is computed by working back from
the estimated sales value, as shown in the following computation:

Estimated Sales Price of Completed By-product

(500 packs at P45 per pack) P22,500
Estimated Selling Expenses (500 x P5) P2,500
Estimated Normal Net Profit (20%) 4,500 7,000)
Costs 15,500
Total Estimated Manufacturing 5,000)
Costs
Estimated Additional Processing
Costs Before Separation P10,500
Estimated Manufacturing

is determined, journal entries relating

to
Once the cost of the by-product
follows:
recorded as
by-product are

applicable to by-product:
cost before
separation
Charged 10,500
By-product
Work in Process
-

10,500
Work in Process

are incurred:
costs
additional processing
When 5,000
By-product
3,000
-

Process
Work in
Materials 2,000
Conversion costs

completed:
is
When by-product
15,500
By-product inventory
By-product 15,500
Work in P r o c e s s
 Chapter 14

584
t h e r e v e r s a l cost
under
Company
McBee
income
statement for the
The
method is presented below:

Illustration 14-6
McBee Company
Income Statement
2018
For the Month of May
Main
Product By-Product

Revenues (actual): P160,000

Main product: French Fries (2,000 P80) P 6,000
x

By-product: Potato skins (150x P40)

Costs of Goods Sold: 10,500
114,500
Joint costs before separation 5,000
Additional processing costs after separation -

Total manufacturing costs 114,500 15,500

22,900 10,850
Less: Ending inventory"
Cost of goods sold 91,600 4.650
Gross profit 68,400 1,350
Gross profit percentages 42.75% 22.5%
Ending Inventory
Main product (500+2,500)xP114,500 =P22,900
By-product (350+ 500) x P15,500 =P10,850

Analysis of the Method

This method assigned both the joint costs and costs incurred after
separation to the by-product. The transfer of the joint costs reduces the
cost of the main product.

This method is complicated and often difficult to

to sell the by-products should be used in
apply, because all costs
the computation and it 1s
impossible to determine the normal selling costs that are
the incremental selling costs related applicable. Thus,
specifically to the by-product are
usually used. The computations are made from so
the results may not be sufficiently reliable. many estimates tha

by-product is minimal, it may not be necessaryTherefore, if the of a

amount
to use this method because
of the time and effort required
compared to the
benefits received.