Accounting for Joint

Products and By-Products

PROFESSOR: JOHN ANTHONY M. LABAY, CPA, MBA

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

I. DISCUSSION

Basic Concepts:
• Joint product - yield of two or more products with high sales value compared to
other products of process
• By-product - low sales value compared with sales value of main or joint products
• Main product - yield of joint production process of only one product with high sales
value compared with other products of process
• Joint costs - costs of production process that yields multiple products simultaneously
• Split-off point - juncture in joint production process when two or more products
become separately identifiable
• 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

Joint cost is the manufacturing cost incurred on a joint production process which takes
common inputs but simultaneously produces multiple products called joint-products e.g.
processing of crude oil simultaneously yields gasoline, diesel, jet fuel, lubricants and other
products.

A joint cost is a cost that benefits more than one product, while a by-product is a product that
is a minor result of a production process and which has minor sales. Joint costing or by-product
costing are used when a business has a production process from which final products are split
off during a later stage of production. The point at which the business can determine the final
product is called the split-off point. There may even be several split-off points; at each one,
another product can be clearly identified, and is physically split away from the production
process, possibly to be further refined into a finished product. If the company has incurred any
manufacturing costs prior to the split-off point, it must designate a method for allocating these
costs to the final products. If the entity incurs any costs after the split-off point, the costs are
likely associated with a specific product, and so can be more readily assigned to them.

Four Decisions that Management Must Make Concerning Joint Processes

The four decisions that managers must make regarding joint processes are as follows:
• They must try to determine what joint costs, selling costs, and separate processing costs
are expected to occur when certain products are manufactured.
• Next, management must decide on the best use of resources that are available.
• Managers must next classify, as joint products and/or by-products/scrap, the output of
production.
• The last decision that must be made is whether some or all of the products will be
processed further or sold at split-off. This decision is made based on the incremental
costs that would be incurred to process further and the incremental revenue if processed
further. Joint production costs are irrelevant to this decision.

Cost Accounting and Control Page 1

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

Steps in Allocating Joint Costs

1. Choose the basis on which to allocate joint cost.
2. List all values that comprise the basis.
3. Add up all the values in the list (No. 2).
4. Determine the percentage of the total each item in No. 2 is.
5. Multiply the percentage by the cost being allocated.
6. For valuation purposes, divide the prorated cost by equivalent units of production.

Methods of Allocating Joint Costs

• Physical-Measure Method
Joint costs are allocated based on number of units or physical quantity such as weight,
volume or length of each product relative to total production. This method is suitable
where physical quantity of joint-products closely reflects their costs.

Formula:
Quantity of the Product
Cost Allocated to a Joint Product = x Total Joint Costs
Quantity of Total Production

• Sales Value Method (at split-off point)

This method allocates joint costs on the basis of estimated sales value of a given joint
product relative to the sales value of total joint production. This method is suitable when
physical quantity of joint products does not reflect their value and a reliable estimate of
their sale value can be easily made.
Formula:
Sales Value of the Product
Cost Allocated to a Joint Product = x Total Joint Costs
Sales Value of Total Production

• Net Realizable Value Method (at split-off point) and Hypothetical Market Value Method or
Approximated Net Realizable Value Method
For products that need further processing, NRV method is more suitable because it takes
into account, the additional costs needed to further process and sell the joint products.
When such products are further processed after split-off, their total costs also include
further processing cost.
Formula:
NRV of the Product
Cost Allocated to a Joint Product = x Total Joint Costs
NRV of Total Production

NRV (at S.O. pt) = Sales Value at S.O. − Cost at S.O.

Approximated NRV = Estimated Sales Value − Estimated Cost to Further Process and Sell

By-products are incidental products that are created by a manufacturing process that creates
multiple products. The other products created by the process are considered to be the primary
output of the system.

The typical accounting for any revenues generated from byproducts is to offset them against
the cost of goods sold for the primary products that are generated from the manufacturing
system. It is also acceptable to record these revenues as miscellaneous revenue. Either
approach will result in the same net profit figure. However, recording the sale of byproducts as
miscellaneous revenue will result in a minor increase in the amount of reported sales. You

Cost Accounting and Control Page 2

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

do not need to assign any materials or overhead cost to byproducts; instead, it is easier to assign
all production costs to the primary products that are being manufactured.

There are other, more complicated methods available for accounting for the cost of byproducts,
such as the sales value at split-off method and the net realizable value method, but they
introduce considerable complexity to the accounting process, and so should generally be
avoided.

Methods of Accounting for By-Products

• Realizable Value Method – The sales value of the by-product less related costs to
process and to dispose is presented as: sales revenue – by product; other income; a
reduction from cost of goods sold; and reduction from cost of goods manufactured.

• Net Realizable Value Method – The NRV of by-product is used to reduce the joint costs
of the main products.

II. PROBLEMS

1. Zen Chemical, Inc., processes pine rosin into three products: turpentine, paint thinner, and
spot remover. During May, the joint costs of processing were P240,000. Production and sales
value information for the month were as follows:
Product Units Produced Sales Value at Splitoff Point
Turpentine 6,000 liters P60,000
Paint thinner 6,000 liters 50,000
Spot remover 3,000 liters 25,000

Required:
Determine the amount of joint cost allocated to each product if the physical-measure method
is used.

2. Ore Lumber processes timber into four products. During January, the joint costs of
processing were P280,000. There was no inventory at the beginning of the month. Production
and sales value information for the month were as follows:
Sales Value at
Product Board feet Splitoff Point Ending Inventory
2 x 4's 6,000,000 P0.30 per board foot 500,000 bdft.
2 x 6's 3,000,000 0.40 per board foot 250,000 bdft.
4 x 4's 2,000,000 0.45 per board foot 100,000 bdft.
Slabs 1,000,000 0.10 per board foot 50,000 bdft.

Required:
Determine the value of ending inventory if the sales value at split-off method is used for product
costing. Round to 2 decimal places when necessary.

Cost Accounting and Control Page 3

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

3. Red Canning Company processes tomatoes into catsup, tomato juice, and canned tomatoes.
During the summer of 2020, the joint costs of processing the tomatoes were P420,000. There
was no beginning or ending inventories for the summer. Production and sales value information
for the summer were as follows:
Sales Value Separable
Product Cases at Splitoff Point Costs Selling Price
Catsup 100,000 P6 per case P3.00 per case P28 per case
Juice 150,000 8 per case 5.00 per case 25 per case
Canned 200,000 5 per case 2.50 per case 10 per case

Required:
Determine the amount allocated to each product if the estimated net realizable value method is
used, and compute the cost per case for each product.

4. The Cana Company prepares lumber for companies who manufacture furniture. The main
product is finished lumber with a byproduct of wood shavings. The byproduct is sold to
plywood manufacturers. For July, the manufacturing process incurred P332,000 in total costs.
Eighty thousand board feet of lumber were produced and sold along with 6,800 pounds of
shavings. The finished lumber sold for P6.00 per board foot and the shavings sold for P0.60 a
pound. There were no beginning or ending inventories.
Required:
Prepare an income statement showing the byproduct (1) as a cost reduction during production,
and (2) as a revenue item when sold.

5. Butt Manufacturing Company makes three products: A and B are considered main products
and C a by-product.

Production and sales for the year were:

220,000 lbs. of Product A, salable at P6.00
180,000 lbs. of Product B, salable at P3.00
50,000 lbs. of Product C, salable at P.90

Production costs for the year:

Joint costs P276,600
Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900

Required: Using the by-product revenue as a cost reduction and net realizable value method
of assigning joint costs, compute unit costs (a) if C is a by-product of the process and (b) if C
is a by-product of B.

Cost Accounting and Control Page 4

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

III. ASSESSMENT

1. Leg Manufacturers produces three products from a common manufacturing process. The
total joint cost of producing 2,000 pounds of Product A; 1,000 pounds of Product B; and 1,000
pounds of Product C is P7,500. Selling price per pound of the three products are P15 for Product
A; P10 for Product B; and P5 for Product C. Joint cost is allocated using the sales value method.

Required:
a. Compute the unit cost of Product A if all three products are main products.

b. Compute the unit cost of Product A if Products A and B are main products and Product C is
a by-product for which the cost reduction method is used.

2. Wall Company produces only two products and incurs joint processing costs that total
P3,750. Products Alpha and Beta are produced in the following quantities during each month:
4,500 and 6,000 gallons, respectively. Wallace Company also runs one ad each month that
advertises both products at a cost of P1,500. The selling price per gallon for the two products
are P20 and P17.50, respectively.

Required:
a. What amount of joint processing costs is allocated to each product based on gallons
produced?

b. What amount of advertising cost is allocated to each product based on sales value?

3. Wym Company produces three products from the same process and incurs joint processing
costs of P3,000.
Disposal
Sales price Further Final sales
cost per
Gallons per gallon processing price per
gallon at
at split-off costs gallon
split-off
X 2,300 P 4.50 P1.25 P1.00 P 7.00
Y 1,100 6.00 3.00 2.00 10.00
Z 500 10.00 8.00 2.00 15.00

Disposal costs for the products if they are processed further are: X, P3.00; Y, P5.50; Z, P1.00.

Required:
a. What amount of joint processing cost is allocated to the three products using sales value at
split-off?

b. What amount of joint processing cost is allocated to the three products using net realizable
value at split-off?

Cost Accounting and Control Page 5

 Global Reciprocal Colleges
454 GRC Bldg. Rizal Ext. cor. 9th Avenue Grace Park, Caloocan City

4. McBee Company processes raw material in Department 1 from which come two main
products, A and B, and a by-product, C. A is further processed in Department 2, B in
Department 3, and C in Department 4. The value of the by-product reduces the cost of the main
products, and sales value is used to allocate joint costs.
Dept 1 Dept 2 Dept 3 Dept 4
Cost Incurred: P90,000 P10,000 P8,000 P10,000
Production:
A 10,000 lbs.
B 20,000 lbs.
C 10,000 lbs.

Selling Price:
A P10/lb.
B P5/lb.
C P2/lb.
Ending Inventory:
A 1,000 lbs
B 5,000 lbs

Required:
A. Using sales value method, compute for the following:
A1. Unit Cost for Products A and B
A2. Value of the ending inventory

B. Using net realizable value method, compute for the following:

B1. Unit Cost for Products A and B
B2. Value of the ending inventory

Cost Accounting and Control Page 6