ACCOUNTING FOR JOINT AND BY-PRODUCTS

-rcroque

I. Costing joint products

A. Basics

1. Joint costs: costs of production process that yields multiple products simultaneously

2. Split-off point: juncture in joint production process when two or more products become
separately identifiable

3. Separable costs: all costs (manufacturing, marketing, distribution, etc.) incurred beyond the
split-off point that are assignable to each of the specific products identified at split off point

B. Focus of joint costing

1. Assigning costs to individual products at split-off point

2. Classifying outputs by sales value

a. Product: any output with positive net sales value (enables organization to avoid incurring
costs)
b. Main product: yield of joint production process of only one product with high sales value
compared with other products of process
c. Joint product: yield of two or more products with high sales value compared to other
products of process
d. Byproduct: low sales value compared with sales value of main or joint products
e. Some output has zero sales value
f. Some output has negative sales value

3. Changing values of products over time and distinctions of terms in organizations

C. Purposes for allocating joint costs

1. Computation of inventoriable costs and cost of goods sold for financial accounting purposes
and reports for income tax authorities

2. Computation of inventoriable costs and cost of goods sold for internal reporting purposes,
used in division profitability analysis and affect evaluation of division managers’ performance

3. Cost reimbursement under contracts for companies that have few, but not all, of products or
services reimbursed under cost-plus contracts

4. Insurance-settlement computations for damage claims made on basis of cost information by

company having joint products, main products, or byproducts

5. Rate regulation for one or more of the jointly produced products or services are subject to
price regulation

6. Litigation in which costs of joint products are key inputs

7. Other reasons

D. Approaches to allocating joint costs

1. Market-based data, such as revenues, used as basis of allocation

a. Sales value at split-off method
b. Net realizable value (NRV) method
c. Constant gross-margin percentage NRV method

2. Physical measures data, such as weight or volume, of joint products

E. Criterion to support use of market-based data as basis of joint cost allocation

1. Cause-and-effect criterion not applicable by definition at individual product level

2. Benefits-received criterion: revenues better indicator of benefits received than physical

measures
F. Joint cost allocation methods

1. Sales value at split-off method

a. Allocates joint costs to joint products on basis of relative total sales value at the split-off
point of total production of these products during the accounting period
b. Assigns a weighting to each product which is percentage of total sales value
c. Uses sales value of entire production of accounting period because joint costs incurred
on all units produced, not just those sold in period
d. Enables product-line income statements to show individual product costs and gross-
margins
e. Follows benefits-received criterion of cost allocation—costs allocated to products in
proportion to their potential revenues
f. Requires and uses market demand and selling prices for all products at split-off point—
straightforward and intuitive

2. Physical-measure method
a. Allocates joint costs to joint products on basis of relative weight, volume, or other physical
measure at split-off point
b. Uses total production of the products during the accounting period, not just those sold in
period
c. Enables product-line income statements to show individual product costs and gross-
margins
d. Has no relationship to the revenue-producing power of the individual product, hence no
relationship to benefits-received criterion
e. May require assistance from technical personnel outside of accounting because
comparable physical measures for all products not always straightforward.
f. Affects resulting allocation by choice of products to include in physical measure
computation as some output has zero sales value—general guideline: include only joint-
products outputs in the weighting computations

3. Net realizable value (NRV) method

a. Allocates joint cost to joint products on the basis of the relative NRV (final sales value
minus the separable costs)
b. Uses total production of products during the accounting period, not just those sold in the
period
c. Enables product-line income statements to show individual product costs and gross
margins
d. Substitutes for sales value at split-off method when market selling prices for one or more
products not available
e. Uses simplifying assumptions because companies frequently change the number of
subsequent steps beyond the split-off point or if selling prices of joint products vary
frequently
f. Exemplifies the benefits-received criterion of cost allocation

4. Constant gross-margin percentage NRV method

a. Allocates joint costs to joint products in such a way that overall gross-margin
percentage is identical for individual products
b. Entails three steps:
 Step 1: Compute the overall gross-margin percentage for all joint products taken
together (use final sales of total production, not the total sales of the period)
 Step 2: Multiply overall gross-margin percentage and final sales values of each
product to calculate gross margin for each product, subtract gross margin for
each product from final sales value of each product to obtain total costs that each
product will bear
 Step 3: Deduct the separable costs from the total costs that each product will
bear to obtain the joint-cost allocation
c. Allocates negative amounts to some products to bring their gross-margin percentage
up to overall average
d. Enables product-line income statements to show individual product cost and gross-
margins—overall gross-margin percentage identical for each of the individual
products
e. Is different from other market-based methods in it is both a joint cost and a profit
allocation method
METHODS POSITIVE NEGATIVE
Sales value at split- Costs are allocated to products in We use the sales value of the entire
off proportion to their potential revenues. production of the accounting period.
This is a fairly simple method to
implement.
Estimated net Can be used when the market prices of Can be very complex in operations with
realizable value the products are not known or multiple products and multiple split-off
method available. points.
The constant gross Account is taken of the profits earned The assumption that all have the same
margin method either before or after the split-off point ratio of cost to sales value. This is
when allocating the joint costs. likely not true.
A physical measure Fairly simple Has no relationship to the revenue-
such as volume producing power of individual products.

G. Choosing a method

1. Use sales value at split-off method when selling-price data available (even if further
processing done)
a. Measures the value of the joint product immediately at end of joint process—best
measure of benefits received relative to other methods of allocating joint costs
b. No anticipation of subsequent management decisions as required by NRV and constant
gross-margin percentage NRV methods
i. Information required on specific sequence of further processing decisions
ii. information required on the point at which individual products are sold
c. Availability of meaningful basis to allocate joint costs to products

i. Market-based measures have meaningful basis (revenues)

ii. Physical measures methods lack meaningful basis
d. Simplicity
i. Sales value at split-off is simple
ii. NRV and constant gross-margin percentage NRV methods can be complex for
processing operations having multiple products and multiple split-off points

2. Use other methods when selling prices of all products at split-off point not available
a. NRV method attempts to approximate sales value at split-off by subtracting separable
costs incurred after split-off point on each product from selling prices—assuming markup
or profit margin attributable to joint process and not to separable costs
b. Constant gross-margin percentage NRV method assumes all products have the same
ratio of cost to sales value (very uncommon in companies that produce multiple products
that have no joint costs)
c. Physical-measure method may be used in rate regulation [Surveys of Company Practice]
3. Purpose of joint-cost allocation important in choosing allocation method

II. Sell or process further a product line.

A decision whether to sell a joint product at split-off point or to process it further and sell it in a
more refined form is called a sell-or-process-further decision. Joint products are two or more products
which have been manufactured from the same inputs and in a same production process (i.e., a joint
process). The point at which joint products leave the joint process is called split-off point.

Some of the joint products may be in final form ready for sale, while others may be processed
further. In such cases, managers have to decide whether to sell the unfinished goods at split-off point or
to process them further. Such decision is known as sell-or-process-further decision and it must be made
so as to maximize the profits of the business.

A sell-or-process-further analysis can be carried out in three different ways:

• Incremental (or Differential) Approach calculates the difference between the additional revenues and
the additional costs of further processing. If the difference is positive, the product must be processed
further, otherwise not.

• Opportunity Cost Approach calculates the difference between net revenue from further processed
product and the opportunity cost of not selling the product at split-off point. If the difference is
positive, further processing will increase profits.
• Total Project Approach (or the comparative statement approach) compares the profit statements of
both options (i.e., selling or further processing) separately for each product. The option generating
higher profit is chosen.

III. Irrelevance of joint costs for decision making

A. Decision to sell at split-off or process further

1. Joint-cost allocations somewhat arbitrary—no cause-and-effect relationship that identifies

resources demanded by each joint product that can be used as basis for pricing
2. Key concept of relevance—joint costs incurred up to the split-off point whether product sold at
split-off point or processed further
3. Do not assume all separable costs in joint-cost allocation always incremental costs

B. Performance evaluation
1. Potential conflict between cost concepts used for decision making and cost concepts used for
evaluating performance of managers
2. Conflict less severe if used market-based methods of joint-cost allocation

IV. Accounting for byproducts

A. Presence of byproducts can affect allocation of joint costs although byproducts have much lower
sales value than joint or main products

B. Two methods of accounting for byproducts

1. Method A: production method—byproducts recognized at time production is completed

a. Byproduct recognized in financial statement when produced
b. Estimated NRV of byproduct produced offset against costs of main or joint products
c. Byproduct inventories at their selling price (variant of using estimated NRV reduced by
normal profit margin)

2. Method B: sale method—byproducts recognized at time of sale

a. Byproducts recognized in financial statement when sold—grouped with other sales (other
income) or deducted from cost of goods sold
b. Byproduct dollar amounts immaterial yet may permit earnings to be ―managed‖ through
timing of sales

PROBLEMS

Problem 1

Brant Corporation manufactures two products out of a joint process—Scout and Andro. The joint
(common) costs incurred are P400,000 for a standard production run that generates 70,000 pounds of
Scout and 30,000 pounds of Andro. Scout sells for P9.00 per pound while Andro sells for P7.00 per
pound.

1. If there are no additional processing costs incurred after the split-off point, the amount of joint cost of
each production run allocated to Scout on a physical-quantity basis is

2. If there are no additional processing costs incurred after the split-off point, the amount of joint cost of
each production run allocated to Andro on a sales value at split-off basis is

1
3. If additional processing costs beyond the split-off point are P1.00 per pound for Scout and P2.33
3
per pound for Andro, the amount of joint cost of each production run allocated to Andro on a physical
quantity basis is

1
4. If additional processing costs beyond the split-off point are P1.00 per pound for Scout and P2.33
3
per pound for Andro, the amount of joint cost of each production run allocated to Andro on an
estimated net realizable value basis is

5. Assume the same cost information as in question 4. The amount of joint cost of each production run
allocated to Scout using the constant gross-margin percentage NRV method is
Problem 2

GEMS Company manufactures 4 products namely G, E and M and the by-product S. The
production costs totaled P600,000, which is composed of P250,000 materials, P150,000 labor and
P200,000 overhead. The process yielded 20,000 units of GG, 12,000 units of E, 18,000 units of M and
2,500 units of S. Products G, E, M and S weigh 3 pounds, 5 pounds, 4.2 pounds and 1 pound
respectively. The sales value for each of product G is P33, E is P35, M is P40 and S is P4.

Use all possible methods to allocate joint cost.

Problem 3
Gasoline Heating Oils Kerosene
Total market value of gallons sold P400,000 P285,000 P365,400
Market value per gallon P10 P6 P7
Beginning inventory (gallons) 10,275 20,000 25,000

The above table was used by the Trisikstin Company for allocating P450,000 of joint cost incurred
in October 2018 for Department A. During the month, the company had no ending inventory. No
additional processing costs were incurred. The Trisikstin Company uses a process cost system.

Use all the methods in allocating the joint cost and compute for the unit cost of each product.

Problem 4

Product Katran has been allocated P7,500 of total joint costs of P30,000 for the 1,500 units
produced. Katran can be sold at the split-off point for P4 per unit, or it can be processed further with
additional costs of P2,000 and sold for P7 per unit. If Katran is processed further and sold, the result
would be ______________.

a. a break-even situation.
b. an overall loss of P1,500.
c. a gain of P2,500 from further processing.
d. a gain of P1,000 from further processing.

Problem 5

Tripiptin Company manufactures two products out of a joint process: Compod and Ultrasene. The
joint cost incurred are P2,500,000 for a standard production run that generates 120,000 gallons of
Compod and 80,000 gallons of Ultrasene. Compod sells for P20 per gallon while Ultrasene sells for
P32.50.

1. If there are no additional processing costs incurred after split – off point, calculate the amount of
joint cost allocated to Compod on a physical – units basis.

2. If there are no additional processing costs incurred after split – off point, the cost to produce per
unit of Ultrasene on a physical – units basis is __________.

3. If there are no additional processing costs incurred after split – off point, calculate the amount of
joint cost allocated to Ultrasene on a relative – sales - value basis.

4. If there are no additional processing costs incurred after split – off point, the cost to produce each
unit of Compod on a relative – sales - value basis is ______________.

5. Suppose the following additional processing costs are required beyond the split – off point in
order to obtain Compod and Ultrasene: P1 per gallon for Compod and P11 per gallon for
Ultrasene, calculate the amount of joint cost allocated to Compod on a net – realizable – value
basis.

6. Suppose the following additional processing costs are required beyond the split – off point in
order to obtain Compod and Ultrasene: P1 per gallon for Compod and P11 per gallon for
Ultrasene. Suppose also that Compod can be processed further into a product called
Compodalene, at an additional cost of P4 per gallon. Compodalene will be sold for P26 per gallon
by independent distributors. The distributor’s commission will be 10% of the sales price. Should
Tripiptin sell Compod or Compodalene?
Problem 6

Trisebentin Chemical Company manufactures two industrial chemical products in a joint process.
In May, 10,000 gallons of input costing P60,000 were processed at cost of P150,000. The joint process
resulted in 8,000 pounds of Resoline and 2,000 pounds of Krypto. Resoline sells at P25 per pound while
Krypto sells for P50 per pound. Management generally processes each of these chemicals further in
separable processes to produce more refined chemical products. Resoline is processed separately at a
cost of P5 per pound. The resulting product, Resolite, sells for P35 per pound. Krypto is processed
separately at a cost of P15 per pound. The resulting product, Kryptite, sells at P95 per pound.

1. The joint cost of product Kryptite using the net realizable value method would be __________.

2. The cost to produce each unit of Resolite is ________

3. Assume that Trisebentin Chemical Company’s management is considering an opportunity to

process Kryptite further into a new product called Omega. The separable processing will cost P40
per pound. Packaging costs for Omega are projected to be P6 per pound and the anticipated
sales price is P130 per pound. Should the company sell Kryptite or Omega?

Problem 7

Mohler Corporation manufactures a product that yields the byproduct, Jep. The only costs
associated with Jep are selling costs of P0.10 for each unit sold. Mohler accounts for sales of Jep by
deducting Jep’s separable costs from Jep’s sales and then deducting this net amount from the major
product’s cost of goods sold. Jep’s sales were 200,000 units at P1.00 each. If Mohler changes its
method of accounting for Jep’s sales of showing the net amount as additional sales revenue, the Mohler’s
gross margin would _________.

a. increase by P180,000.
b. increase by P200,000.
c. increase by P220,000.
d. be unaffected.

Problem 8

Tritertin Inc produces joint products X and Y, together with by – product W. Product X is sold at
split – off point, but Y and W undergo additional processing. Production data pertaining to these products
for the year ended June 30, 2015 are as follows:

X Y W Total
Joint costs Variable P 88,000.00
Fixed P 148,000.00
Separable costs Variable P 120,000.00 P 3,000.00 P 123,000.00
Fixed P 90,000.00 P 2,000.00 P 92,000.00
Production in pounds 50,000 40,000 10,000 100,000
Sales price per pound P 4.00 P 7.50 P 1.10

There are no beginning and ending inventories. No materials are spoiled in production. Joint
costs are allocated to joint products to achieve the same gross profit percentage for each joint product.
Net revenue from by – product W is deducted from production costs of the main products.

1. Determine the joint cost share of Product Y.

2. The cost to produce each unit of Product X is

Problem 9

HBD Co. buys Article RS for P5.6 per unit. At the end of processing in Dept. 1 Article RS split into
products J, K and L. Product J is sold at split-off point with no further processing, K and L require further
processing before they can be sold; K is processed in Dept. 2; and L is processed in Dept. 3. The
following is a summary of costs and other related data for the year ended July 31, 2014:

Dept. 1 Dept. 2 Dept. 3

Cost of Article RS
Direct Materials 10,080,000 105,000 1,020,000
Direct Labor 1,470,000 4,323,000 4,860,000
Factory Overhead 1,050,000 2,205,000 5,145,000

Product J Product K Product L

Unit sold 750,000 1,125,000 1,687,500
Units on hand at July 31, 2014 375,000 112,500 562,500
Sales 3,150,000 10,080,000 14,883,750

Cases:

A. Use physical measure.

B. Use net realizable value method.
1. The cost to produce each unit of Product L is ___________.
2. The cost of Product J sold for the year ended July 31, 2014 is __________.
3. The cost of ending inventory for Product K on July 31, 2014 is __________.