AFAR 1

THEORIES:
1. This method of allocating joint manufacturing costs to main/joint products allocates joint costs on the
basis of estimated sales value at split off of a given joint product relative to the sales value at split off
of total joint production.
MARKET VALUE AT SPLIT-OFF APPROACH

2. For products that need further processing, this method is more suitable because it takes into account,
the additional costs needed to further process and sell the joint products. Under this method of
allocating manufacturing costs to man products, joint cost is allocated to products using the following
net realizable value ratio of the products.
HYPOTHETICAL MARKET VALUE or APPROXIMATED NET REALIZABLE VALUE APPROACH

3. This method of allocating joint manufacturing costs to main/joint products allocates joint costs based
on number of units or physical quantity such as weight, volume, length of each product relative to
total production.
AVERAGE UNIT or PRODUCTION OUTPUT METHOD

4. This method of allocating joint manufacturing costs to main products allocates joint cost based using
the weight factors to include such diverse elements as amount of materials used, difficulty to
manufacture, time consume, difference in type of labor used, and size of unit for determination of cost
allocation ratio.
WEIGHTED AVERAGE METHOD

5. If the net realizable value of the by-product of a joint production process is significant, how shall it be
accounted for?
The net realizable value of the by-product shall be recorded as deduction from the total joint
manufacturing cost thereby reducing the cost of the main products also known as replacement cost
method.
Insignificant
The net realizable value of the by-product shall be recorded as addition from the net sales of the
main product.
The net realizable value of the by-product shall be recorded as deduction from the cost of sales of
the main product.
The net realizable value of the by-product shall be recorded as other income.

When allocating By-product, we need to remember 2 things: SIGNIFICANT & INSIGNIFICANT

SIGNIFICANT – the method we use to allocate the by-product should be CAPITALIZABLE AT THE POINT
OF PRODUCTION
INSIGNIFICANT – we record the by-product value/cost AT THE POINT OF SALE METHOD (Net Realizable
Value Method)