JOINT PRODUCTS, BY-PRODUCT COSTING AND SERVICE COST

ALLOCATIONS

Joint products – products that are simultaneously produced from a common process or processes with
each product possessing more than a nominal value.
Main products – products of a single process that has relatively high sales value.
By products – products of relatively small value that are produced simultaneously with a product of
greater total value.
Joint costs – cost shared by the joint products.
Separable costs – costs incurred beyond split-off that are identifiable with individual products.
Subsequent costs – costs incurred in the processing of joint products after the point of separation.
Split-off point – point where the joint products are created.

Methods of Allocating Joint Production Cost

1. Physical Measure method
2. Sales Value at split-off method
3. Net Realizable Value at split-off method
4. Approximate Net Realizable Value method

Accounting for By-product

1. Cost Reduction method (if NRV is significant)
a. By-product of process
- NRV of by-product is deducted from the joint cost before allocating to the main products.
b. By-product of main product
- NRV of by-product is deducted from the cost directly related to the main product (separable
cost)

2. Realizable Value Method (if NRV is significant)

- NRV of by-product can be presented as:
 Other Revenue
 Other Income

Service Cost Allocations

1. Direct method – service department overhead cost is directly allocated to the revenue producing
departments only.

2. Step method – service department overhead cost is not only allocated to the revenue producing
department but also to other service department with the following conditions:
 Use of benefit provided ranking table.
 If the overhead cost of the service department is exhausted, that service department will not
receive any allocation from the other service department.

3. Algebraic / Reciprocal method – same as step method, but with the following conditions:
 No use of benefit provided ranking table.
 Even if the overhead cost of the service department is exhausted, that service department will
still receive an allocation from the other service department.

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LECTURE DRILLS
Problem 1
Miguel Corporation produces two floor cleaners from the same process, A and B. joint production costs
were P90,000.

Sales price per Disposal cost Further Final sales

Barrels barrel at split- per barrel at processing price per
off split-off cost per barrel barrel
A 800 100.00 60.00 20.00 150.00
B 1,000 70.00 20.00 30.00 120.00

If Miguel Company sells the products after further processing, the following disposal cost per barrel will
be incurred: 30.00 for A; 10.00 for B

1. Using the physical measure in allocating the joint cost, what amount of joint processing cost is
allocated to Product A?
a. 72,000
b. 40,000
c. 18,000
d. 50,000
2. Using the relative sales value at split-off in allocating the joint cost, what is the gross profit of
Product B if it was sold at the split-off point?
a. 28,000
b. 32,941
c. 32,000
d. 27,059
3. Using the net realizable value at split-off in allocating the joint cost, what is the net income (loss)
of Product A if it was sold at the split-off point?
a. 30,909
b. (17,091)
c. (3,122)
d. 44,878
4. Using the approximate net realizable value at split-off in allocating the joint cost, what is the net
income (loss) of Product B if it was sold after further processing?
a. 75,000
b. 35,000
c. 45,000
d. 40,000

Problem 2
Providence Manufacturing Company makes three products: A and B are considered main products and C
a by-product of the process. The company opted to use the cost reduction method in accounting its by-
product and the net realizable value method for assigning the joint cost.

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

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50,000 lbs. of Product C, salable at P.90
Production costs for the year:
Joint costs 276,600
Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900

1. What is the unit cost of Product A?

a. 0.80
b. 1.45
c. 2.26
d. 2.39
2. What is the gross profit (loss) of Product B?
a. 350,000
b. 288,167
c. 278,289
d. 478,167

Problem 3
Sherman Company produces two main products jointly, A and B, and C, which is a by-product of B. A and
B are produced from the same raw material. C is manufactured from the residue of the process creating
B.

Costs before separation are apportioned between the two main products by the net realizable method.
The net revenue realized from the sale of C is deducted from the cost of B. Data for April were as
follows:

Costs before separation 200,000

Costs after separation:
A 50,000
B 32,000
C 4,000

Production for April, in pounds:

A 800,000
B 200,000
C 20,000

Sales for April:

A 640,000 pounds @ .4375
B 180,000 pounds @ .65
C 20,000 pounds @ .30

1. What is the total gross profit (loss) for the month of April?
a. 165,000
b. 115,000
c. 117,000

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 d. 164,923

2. What is the ending inventory for the month end of April?

a. 47,925
b. 180,000
c. 50,760
d. 48,000

Problem 4
Merge Inc. manufactures ZEN product from a process that yields a by-product called YAN. The by-
product requires additional processing cost of P30,000. The by-product will require selling and
administrative expenses totaling P20,000. It is Merge’s accounting policy to charge the joint costs to the
main product only. Information concerning a batch produced during the year ended December 31, 2023
follows:

Product Units Produced Market Value at Split Off Units Sold

ZEN 100,000 50 60,000
YAN 8,000 10 8,000

The joint costs incurred up to split-off point are:

Direct materials 2,000,000
Direct labor 800,000
Factory overhead 200,000

The selling and administrative expense of Merge Inc. for the year ended December 31, 2023 is
P1,000,000 exclusive of that for the by-product.
1. What is the gross profit for the year if the net revenue from by-product is presented as other
income?
a. 1,200,000
b. 1,230,000
c. 1,218,000
d. 1,118,000
2. What is the gross profit for the year if the net revenue from by-product is presented as additional
sales revenue?
a. 1,230,000
b. 1,200,000
c. 1,218,000
d. 1,118,000
3. What is the net income for the year if the net revenue from by-product is presented as deduction
from the cost of goods sold?
a. 200,000
b. 218,000
c. 230,000
d. 118,000
4. What is the net income for the year if the net revenue from by-product is presented as deduction
from the total manufacturing cost of the main product?
a. 218,000
b. 200,000

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 c. 230,000
d. 118,000

Problem 5
RAV Manufacturing Company has two production departments (Fabrication and Assembly) and two
service departments (General Factory Administration and Factory Maintenance).

A summary of the year’s overhead costs and other data for each department prior to allocation of
service department costs appears below:

General Factory Factory

Fabrication Assembly
Administration Maintenance
Overhead costs 6,730,000 4,850,000 160,000 425,000
Direct labor hours 46,250 43,750 35,000 10,000
Square footage
88,000 72,000 40,000 20,000
occupied

The overhead costs of the General Factory Administration Department and Factory Maintenance
Department are allocated on the basis of direct labor hours and square footage occupied respectively. It
is the company’s policy that the order of distribution is based on the highest peso amount of costs
originating in the service departments.

1. Under the DIRECT METHOD, what is the total overhead cost allocated to the Fabrication
Department?
a. 315,972
b. 292,500
c. 269,028
d. 311,528
2. Under the STEP METHOD, what is the total overhead cost of the Assembly Department?
a. 272,097
b. 312,903
c. 5,122,097
d. 4,850,000
3. Under the ALGEBRAIC / RECIPROCAL METHOD, what is the total overhead cost to be allocated by
the Factory Maintenance Department?
a. 425,000
b. 250,000
c. 441,000
d. 450,000

END

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