MPA 602: Cost and

Managerial
Accounting

Costing and Control of

Manufacturing Overhead
Overheads
• Manufacturing overhead or factory overhead is generally defined as
indirect materials, indirect labor and all other factory expenses that
cannot conveniently be identified with nor charged directly to specific
jobs or products or final cost objects.
Overheads
• Overhead includes a large number of types of indirect costs
• Direct cost are identifiable to cost units, but overhead which are often
considerable, cannot be related directly to cost units

3
• Overheads are assigned to the cost centres such as department
• An allocation base is selected for allocating production centre
expenses to products

4
Accounting for Factory Overhead
1. Identify cost behavior patterns.
2. Budget factory overhead costs.
3. Accumulate actual overhead costs.
4. Apply factory overhead estimates to production.
5. Calculate and analyze differences between actual and applied
factory overhead.
Budgeting Factory Overhead Costs
• Budgets are management’s operating plans expressed in quantitative
terms.
• Costs are segregated into fixed and variable components.
• Budgets can be prepared for different levels of production (flexible
budget).
• Valuable management tool for planning and controlling costs.
Accounting for Factory Overhead
• Entries are made in the general journal for indirect materials and
indirect labor from the summary of materials issued and the labor
cost summary.
• Other factory overhead expenses are recorded in the general ledger
from the invoices and schedules for fixed costs.
• A factory overhead subsidiary ledger may be used if the number of
factory overhead accounts becomes too large.
Examples of Factory Overhead Accounts
• Defective Work • Overtime Premium
• Depreciation • Plant Security
• Employee Fringe Benefits • Power
• Fuel • Property Tax
• Heat and Light • Rent
• Indirect Labor • Repairs
• Indirect Materials • Small Tools
• Insurance • Spoilage
• Janitorial Service • Supplies
• Lubricants • Telephone/Fax
• Maintenance • Water
• Materials Handling • Workers’ Compensation Insurance
Budgeted Overhead Application Rates

Overhead rates are budgeted; they are estimates. The budgeted

rates are used to apply overhead based on actual events.

Budgeted Total budgeted

overhead = Factory overhead
application Total budgeted
rate Amount of cost driver
Applying Factory Overhead to Production
• Factory overhead costs may not be known until the end of the
accounting period.
• The cost of a job is needed soon after completion, so a method to
estimate the amount of factory overhead applied must be
established.
• This enables companies to bill customers on a more timely basis and
to prepare bids for new contracts more accurately.
Illustration of Overhead Application
EMachine Parts Company selects a single cost-
allocation in each department for applying
overhead, machine hours in machining and
direct-labor in assembly.
Illustration of Overhead Application
Total overhead applied to a particular product
equals budgeted overhead rates multiplied by
actual machine hours (MH) or labor cost (LC)
used by that product.

Thus, we would apply $44 of overhead to a

product that uses 6 MH in machining and incurs
direct-labor cost of $40 in assembly.

Machining: 6 actual MH X $4 per MH= $24

Assembly: $40 of DL cost X 50% = 20
Total overhead $44
Illustration of Overhead Application

Suppose that at the end of the year EMachine

had used 70,000 machine hours in Machining.

How much overhead was applied to Machining?

Illustration of Overhead Application

Suppose that at the end of the year EMachine

had incurred $190,000 in direct labor cost.

How much overhead was applied to Assembly?

Illustration of Overhead Application

Total factory overhead applied:

Machining: $280,000
Assembly: 95,000
Total Factory Overhead Applied $375,000

The $375,000 is an estimate of EMachine’s

overhead for the year, and it will become part of
the cost of goods sold expense on EMachine’s
income statement when the units produced are
subsequently sold.
 Choice of Cost-Allocation Bases

The accountant’s goal is to find the cost-

allocation base that best links cause and effect.

No one cost-allocation base is right for all

situations. A separate cost pool should be
identified for each cost-allocation base.

Base 1 Pool 1

Base 2 Pool 2
Bases to be used
• Physical output
• Direct material cost
• Direct labor cost
• Direct labor hours
• Machine hours
• An appropriate FOR should reflect the effort or
time taken to produce the products
• Some commonly used absorption bases are listed
as follows:

Direct labour hours It is frequently used in the labour

intensive department because
overheads assigned to this
department are closely related to the
direct labour hours worked
Machine hours It is most appropriate for the
appropriate for the machining
department since most of the
overheads are closely related to
machine hours
18
Direct wages It is only suitable in the department
where the uniform wage rate is
applied
Direct materials This method is not recommended
unless the majority of overheads
incurred in a department are related
to materials instead of time
Units of output This method is suitable only where
all units produced in a period are
identical in the production process
and time. Therefore, this application
is very rare

19
Activity level selection
• Normal capacity – the normal capacity concept, the long-term
planning and control approach, advocates an overhead rate in which
expenses and production are based on average utilization of the
physical plant over a time period long enough to level out the highs
and lows that occur in every business venture.
• Expected actual capacity – the expected actual capacity concept, the
short-term planning and control approach, advocates a rate in which
overhead and production are based on the expected actual output for
the next production period
Accounting for Actual and Applied Factory
Overhead

Entry to apply estimated factory overhead to production

Work in Process XX
Applied Factory Overhead XX

At the end of the period, the applied factory overhead

account is closed to factory overhead.
Applied Factory Overhead XX
Factory Overhead XX
Under- and Overapplied Factory Overhead
• After the applied factory overhead account is closed, the underapplied
(debit) or overapplied (credit) balance in the factory overhead account
is moved to work in process.

Under- and Overapplied Factory Overhead XX

Factory Overhead XX

Cost of Goods Sold XX

Under- and Overapplied Factory Overhead XX
Period Costs and Product Costs
• Period Costs
• All costs that are not assigned to the product, but are recognized as expense
and charged against revenue in the period incurred.
• Product Costs
• Costs that are included as part of inventory costs and expensed when goods
are sold.
Disposing of Underapplied
or Overapplied Overhead
Recall that EMachine applied
$375,000 to its products, but . . .

it incurred $392,000 of actual

manufacturing overhead during the year.

$392,000 actual overhead

–375,000 applied overhead
$ 17,000 underapplied overhead

The $375,000 becomes part of Cost of Goods

Sold when the product is sold, however . . .
Disposing of Underapplied
or Overapplied Overhead
The applied overhead is $17,000 less
than the amount incurred. It is:

Overapplied overhead occurs when the

amount applied exceeds the amount incurred.

A company must report actual costs

incurred in its financial statements.
Disposing of Underapplied
or Overapplied Overhead
Accountants uses two methods for the adjustment:

1) Write-off to cost of goods sold

2) Proration, apportioning over- or under-

applied overhead to cost of goods sold,
work-in-process inventory, and finished-
goods inventory in proportion to the
ending balances of each account.
Immediate Write-Off
This method regards the $17,000 as a reduction in
current income and adds it to Cost of Goods Sold.

Manufacturing Overhead
392,000 -375,000 = 17,000

Cost of Goods Sold

Applied
Overhead
(Budgeted)

Incurred
Overhead
(Actual)
 Prorating Among Inventories
This method prorates the $17,000 of
underapplied overhead to Work-In-Process (WIP),
Finished Goods, and Cost of Goods Sold accounts.

Companies generally prorate overhead

variances only when material.
Including or excluding of fixed overhead
• Absorption costing
• Variable costing
Variable and Fixed Application Rates

The presence of fixed costs is a

major reason of costing difficulties.

Some companies distinguish between

variable overhead and fixed
overhead for product costing.
Variable costing excludes fixed manufacturing
overhead from the cost of products.

Variable Absorption
costing costing

Absorption costing includes fixed

manufacturing overhead in the cost of products.
Variable Versus Absorption Costing
Illustration

Basic Production Data at Standard Cost

Direct material $205

Direct labor 75
Variable manufacturing overhead 20
Standard variable costs per unit $300
 The annual budget for fixed
manufacturing overhead is $1,500,000

Budgeted production is 15,000 computers.

Sales price = $500 per unit

$20 per computer is variable overhead.

Fixed S&A expenses = $650,000

Sales commissions = 5% of dollar sales

 Actual product quantities are:

There are no variances from the standard variable

manufacturing or selling and administrative costs,
the actual fixed manufacturing overhead incurred is
$1,500,000 each year, and the actual fixed selling
and administrative cost is $650,000 each year.
 Comparative Income Statement
Using Variable-Costing
Comparative Income Statements
Fixed-Overhead Rate

The fixed-overhead rate is the

amount of fixed manufacturing
overhead applied to each
unit of production.

Fixed overhead rate = budgeted fixed manufacturing overhead

expected volume of production

$1,500,000 ÷ 15,000 = $100

 Absorption-Costing Method
Comparative Income Statement
Comparative Income Statements
Variable Costing vs. Absorption Costing

On a variable-costing income
statement, costs Are separated into the
Major categories of fixed and variable.

Revenue less all variable costs (both

manufacturing and non-
manufacturing) is the
contribution margin.
Variable Costing and Absorption Costing

On an absorption-costing income
statement, costs are separated into
the major categories of manufacturing
and non-manufacturing.

Revenue less manufacturing costs

(both fixed and variable) is gross
profit or gross margin.
 Product-costing and planning-and-control purposes
in accounting for variable and fixed costs.

The differences between variable- and

absorption-costing formats arise because
the two formats treat fixed manufacturing
overhead differently.

Variable and Fixed Unit Costs:

To stress the basic assumptions behind
absorption costing, split manufacturing
overhead into variable and fixed components.
 Fixed Overhead and
Absorption Costs of Product
Compare

(1) the manufacturing overhead costs in the

flexible budget used for departmental
budgeting and control purposes

With

(2) the manufacturing overhead

costs applied to products under an
absorption-costing system
 Production-Volume Variance
The difference between applied
and budgeted fixed overhead is
the production-volume variance.

In practice, accountants often call

the production-volume variance
simply the volume variance.

Production-volume variance =
(actual volume – expected volume) X fixed overhead rate
Production-Volume Variance
A production-volume variance arises when the
actual production volume achieved does not
coincide with the expected volume of production
used as a denominator for computing the fixed-
overhead rate for product-costing purposes:

1. When expected production volume and actual

production volume are identical, there is no
production-volume variance.

2. When actual volume is less than expected volume,

the production-volume variance is unfavorable
because usage of facilities is less than expected
and fixed overhead is underapplied.
 Reconciliation of Absorption-
Costing and Variable-Costing

The difference in variable-costing and

absorption-costing operating income can be
explained by multiplying the fixed-overhead
product-costing rate by the change in the total
units in the beginning and ending inventories.

Consider 20X1: The change in inventory

was 2,000 units, so the difference in net income
would be 2,000 units × $100 = $200,000.
Effects of Sales and Production
on Reported Income
The relationship between sales and production
determines the difference between
variable-costing and absorption-costing income.

Whenever units sold are greater than (less than)

units produced, variable-costing income is greater
than (less than) absorption costing income.

This means that when inventories decrease

(increase), variable-costing income is greater
than (less than) absorption-costing income.
Product Costing Allocation Methods
Plantwide Overhead Rate

Single Rate
P
Multiple Department Rates R
O
Department D
Department U
C
Activity-Based Costing T
Activity S
Activity
Single Plantwide Factory
Overhead Rate
 Computing Single Plantwide
Factory Overhead
Total budgeted factory overhead costs
Total budgeted plantwide allocation base

$1,600,000 $80 per hour

=
20,000 direct labor hours overhead rate
 Computing Single Plantwide
Factory Overhead

S mobile:
$80 per dlh x 10 direct labor hours = $800

L mobile:
$80 per dlh x 10 direct labor hours = $800
Factory
Overhead
cost per unit
 Plantwide factory
overhead
$1,600,000

$80 per direct labor hour

x 10 direct x 10 direct
labor hours labor hours

S mobile L mobile
$800 per unit $800 per unit
Single Plantwide Rate

Plantwide factory
overhead

Plantwide rate

Products
 The
The greatest
greatest advantage
advantage of
of the
the
single
single plantwide
plantwide overhead
overhead rate
rate isis
that
that itit isis simple
simple and
and inexpensive
inexpensive
to
to apply.
apply.
 Multiple Production
Department Factory
Overhead Rate Method
Multiple Production Department Rate

Fabrication Assembly
Department Department
factory overhead factory overhead

Fabrication Department Assembly Department

factory overhead rate factory overhead rate

Products
 Production Department Factory
Overhead Rates and Allocation

Fabrication Department Overhead Rate:

$1,030,000
= $103 per hour
10,000 direct labor hours

Assembly Department Overhead Rate:

$570,000
= $57 per hour
10,000 direct labor hours
 Production Department Factory
Overhead Rates and Allocation

S mobile:
Fabrication: $103 x 8 dlh = $824
Assembly: $57 x 2 dlh = 114 $938
L mobile:
Fabrication: $103 x 2 dlh = $206
Assembly: $57 x 8 dlh = 456 $662
 Multiple Production Department
Rate Method
Fabrication
Fabrication Assembly
Department
Department Department
$1,030,000
$1,030,000 $570,000

$103 x 8 dlh
$57 x 2 dlh

$938 per unit

 Multiple Production Department
Rate Method
Fabrication Assembly
Department Department
$1,030,000 $570,000

$57 x 8 dlh
$103 x 2 dlh

$662 per unit

 Distortion in Product Costs—Single
Plantwide versus Multiple Production
Department Overhead Rates
Factory Overhead Cost per Unit

Single Plantwide Multiple Production

Rate Department Rates
S mobile $800 $938
L mobile 800 662
 Distortion in Product Costs—Single
Plantwide versus Multiple Production
Department Overhead Rates

The
The single
single plantwide
plantwide factory
factory
overhead
overhead rate
rate distorts
distorts product
product
cost
cost byby averaging
averaging high
high and
and low
low
factory
factory overhead
overhead costs.
costs.
 Conditions for Product Cost
Distortion
Fabrication Assembly
Department Department
Condition 1:
Differences in
production $103 per $57 per
department direct direct
factory labor hour labor hour
overhead rates
 Activity-Based Costing Method
 Activity-based costing changes the way overhead costs are
allocated.
 When identifying specific activities, inefficiencies may be
discovered and eliminated, reducing the product’s cost.
 Traditional cost accounting undercosts complex products and
overstates their profit margins.
 ABC may be used for decision making but not necessarily for
inventory valuation.
 Multiple Production Department
Factory Overhead versus ABC
Production Department Production Department
Factory Overhead Factory Overhead

Production Department Rates

Products
 Multiple Production Department
Factory Overhead versus ABC
Activity Activity Activity Activity

Activity Rates

Products
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000
Assembly 70,000
Setup 480,000
Quality control 312,000
Engineering 208,000
Total $1,600,000
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000 ÷ 10,000 dlh = $53
Assembly 70,000 ÷ 10,000 dlh = $7
Setup 480,000 ÷ 120 setups = $4,000
Quality control 312,000 ÷ 104 inspts. = $3,000
Engineering 208,000 ÷ 16 changes = $13,000
Total $1,600,000

Fabrication: DL Hours Rate Total

Cost
Cost Drivers
Drivers
S mobile 8,000 $53 $424,000
L mobile 2,000 53 106,000
Total 10,000 $530,000
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000 ÷ 10,000 dlh = $53
Assembly 70,000 ÷ 10,000 dlh = $7
Setup 480,000 ÷ 120 setups = $4,000
Quality control 312,000 ÷ 104 inspts. = $3,000
Engineering 208,000 ÷ 16 changes = $13,000
Total $1,600,000

Assembly: DL Hours Rate Total

S mobile 2,000 $7 $14,000
L mobile 8,000 7 56,000
Total 10,000 $70,000
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000 ÷ 10,000 dlh = $53
Assembly 70,000 ÷ 10,000 dlh = $7
Setup 480,000 ÷ 120 setups = $4,000
Quality control 312,000 ÷ 104 inspts. = $3,000
Engineering 208,000 ÷ 16 changes = $13,000
Total $1,600,000

Setup: Setups Rate Total

S mobile 100 $4,000 $400,000
L mobile 20 4,000 80,000
Total 120 $480,000
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000 ÷ 10,000 dlh = $53
Assembly 70,000 ÷ 10,000 dlh = $7
Setup 480,000 ÷ 120 setups = $4,000
Quality control 312,000 ÷ 104 inspts. = $3,000
Engineering 208,000 ÷ 16 changes = $13,000
Total $1,600,000

Quality Control: Inspts. Rate Total

S mobile 100 $3,000 $300,000
L mobile 4 3,000 12,000
Total 104 $312,000
 Activity-Based Costing Method
Activity Amount Activity Rate
Fabrication $ 530,000 ÷ 10,000 dlh = $53
Assembly 70,000 ÷ 10,000 dlh = $7
Setup 480,000 ÷ 120 setups = $4,000
Quality control 312,000 ÷ 104 inspts. = $3,000
Engineering 208,000 ÷ 16 changes = $13,000
Total $1,600,000

Engineering: Changes Rate Total

S mobile 12 $13,000 $156,000
L mobile 4 13,000 52,000
Total 16 $208,000
 Activity-Based Costing Method
Cost Allocation Summary:
Activity S mobile L mobile Total
Fabrication $ 424,000 $106,000 $ 530,000
Assembly 14,000 56,000 70,000
Setup 400,000 80,000 480,000
Quality control 300,000 12,000 312,000
Engineering 156,000 52,000 208,000
Total $1,294,000 $306,000 $1,600,000
Budgeted units 1,000 1,000
Cost per unit $1,294 $306
 Activity-Based Costing Method

Quality
Assembl Engineering
Fabrication Setup Control
y Change
Activity Activity Inspectio
Activity Activity
$530,000 $480,000 n Activity
$70,000 $208,000
$312,000

$53 per $7 per $4,000 $3,000 per $13,000 per

dlh dlh per setup inspection engineering
change
 Distortion in Product Costs—Multiple
Production Department Factory Overhead
Rate Method versus Activity-Based Costing
Factory Overhead Cost per Unit—
Three Cost Allocation Methods
Single Plantwide Multiple Production
Rate Department Rates ABC
S mobile $ 800 $ 938 $1,294
L mobile 800 662 306
Distributing Service Department Expenses
• Service departments are an essential part of the organization, but
they do not work directly on the product.
• Production departments perform the actual manufacturing
operations that physically change the units being processed.
• The costs of the service departments must be apportioned to the
production departments.
• An analysis of the service department’s relationship to other
departments must be done.
Methods of Distributing Costs
1. Direct Distribution Method
• Service department costs are allocated only to production departments.
2. Sequential Distribution or Step-Down Method
• Distributes service department costs regressively to other service
departments and then to production departments.
3. Algebraic Distribution Method
• Distributes costs by simultaneous equations recognizing the relationship of
services rendered by departments to each other.
Example:

2 Production Dept.
* Machining dept. bud. O/h Tk400000
* Assembly dept. bud. O/h Tk200000
2 Support Dept.
* Plant maint. Bud. O/h Tk600000
* Information Sys. Bud. O/h Tk116000
• Support work finished:
- by Plant dept.
* IS 1600 hours
* Machi. 2400 hours
* Assemb.4000 hours
- by IS dept.
* Plant 200 hours
* Machi. 1600 hours
* Assemb. 200 hours
Allocating common costs
• A common cost is a cost of operating a facility, activity or like cost
object that is shared by two or more users. Common cost exist
because each user obtains a lower cost by sharing than the separate
cost that would result if such user were an independent entity. The
goal is to allocate common costs to each user in a reasonable way.
• Stand-Alone cost allocation method
• Incremental cost allocation method

Shapley value method

Bundled Product & Revenue allocation
method
• Allocation issues can also arise when revenues from multiple products
are bundled together and sold at a single price.
• Similar to cost allocation, revenue allocation occurs when revenues
are related to a particular revenue object but cannot be traced to it in
an economically feasible (cost effective) way.
• Stand-Alone revenue allocation method
• Selling price
• Unit cost
• Physical unit – same weight
• Incremental revenue allocation method
• Stand-alone Selling price Cost per unit
•A Tk. 1250 Tk. 180
•B 1500 200
•C 2250 250
• Package
• A+B Tk. 2200
• A+C 2800
• C+B 3050
• A+C+B 3800
• ED Company owns e-power plant that services all manufacturing
departments of the company has a budget for the coming year. The
budget has been expressed in the following terms on a monthly basis
• Manufacturing Practical capacity Expected monthly
department (kilowatt-hours) usage (K.H)
A 100008000
B 200009000
C 120007000
D 80006000
The expected monthly costs for operating the power plant during the
budget year are Tk. 1500000; Tk. 600000 variable and Tk. 900000 fixed
• Assume that a single cost pool is used for the power plant costs. What
amount will be allocated to each manufacturing department if (a) the
rate is calculated based on practical capacity and (b) the rate is
calculated based on expected monthly usage.
• Assume that dual rate method is used with separate cost pools for the
variable and fixed costs. Variable costs are allocated on the basis of
expected monthly usage. Fixed costs are allocated on the basis of
practical capacity. What amount will be allocated to each
manufacturing department? Why might you prefer the dual rate
method?
• E-Books is an online book retailer. The company has four
departments. Two revenue producing departments are Corporate
Sales and Consumer Sales. Two support departments are
Administrative and Information Systems. The following data are
available for September:
• Departments Revenues Number Processing
of employees time (mins)
Corporate Sales Tk. 1334200 42 1920
Consumer Sales 667100 28 1600
Administrative - 14 320
Information Systems - 21 1120
• Costs incurred in each of the four departments for September are:
• Corporate Sales Tk. 998270
• Consumer Sales 489860
• Administrative 72700
• Information Systems 234400

Use number of employees to allocate Administrative costs and processing time

used to allocate Information Systems costs.

Allocate support departments costs using direct, step-down and reciprocal

method.
 Cost Allocation: Joint
products and Byproducts
Joint Process
• A single process in which one product cannot be manufactured
without producing others. Such processes are common in the
extractive, agricultural, food and chemical industries.
Joint Product, By-Product, scrap
• A joint process simultaneously produces more
than one product line. The product categories
resulting from a joint process that have a sales
value are referred to as:
• Joint product
• By-product
• Scrap
Joint Product
• Joint products are the primary outputs of a joint
process. Each joint product individually has
substantial revenue generating ability. Joint
products are the primary reason management
undertakes the production process yielding them.
These products are also called primary products,
main products or co-products. Joint products all
have relatively high sales value but are not
separately identifiable as individual products until
the split-off point.
 By-Product and Scrap
• A by-product has a low sales value compared with the sales value of
the main or joint products. Its sales value alone would not be
sufficient for management to justify undertaking the joint process.
• Scrap has a minimal sales value. In other words, scrap is salable
material resulting from the manufacturing process and having limited
value.
Split-off point and Separable cost
• The point at which joint process outputs are first identifiable as
individual products is called the split-off point. A joint process may
have one or more split-off points, depending on the number and
types of output produced.
• Separable costs are costs incurred beyond the split off point that are
assignable to one or more individual products.
Joint Costs and Common Costs
• Joint costs are the production costs incurred up to the point where
products are separately identified. Joint costs must be assigned to
products. Whereas common costs are associated with the sharing of
facilities by two or more users. Common costs include such service
department costs as building repair & maintenance, cafeteria and
utilities.
Why allocate joint costs?
• To value inventories and compute cost of goods
sold for both external and internal financial
reporting.
• Cost reimbursement under contracts when only a
portion of a business’s products or services is sold
or delivered to a single customer.
• Insurance settlement computations.
• Price regulation
 Allocating Joint Costs
• Allocate costs using market based data
• The sales value at split-off method
• The estimated net realizable value (NRV) method
• The constant gross margin percentage NRV method
• Allocate costs using physical measure based data e.g. weight or
volume
Illustration
• Material – Raw milk processed 110000 gallons
• Produced (i) Cream -25000 gallons and (ii) Liquid skim
75000 gallons
• Cost of purchasing 110000gl of raw milk and processing up
to the split-off point is $4000000
• Sales – Cream 20000gl @80 and Liquid skim 30000gl @40
• Suppose cream (25000gl) can be processed further to
produce butter (20000gl) at additional processing costs of
$2800000. butter is sold @250 (12000gl)
• Suppose liquid skim (75000gl) can be processed further to
produce condensed milk (50000gl) at additional processing
costs of $5200000. Condensed milk is sold @220 (45000gl)
Accounting for By-products
• Joint production processes may yield not only joint products (main products)
but also by-products. Although by-products have low total sales values
compared with total sales value of joint or main products, the presence of
by-products in a joint production process can affect the allocation of joint
costs.
• Example: Main product X – selling price @60
by-product m - selling price @10
production: X 50000 units
m 4000 units
sales : X 40000 units
m 1200 units
Joint manufacturing costs Tk. 1500000 for DM and Tk. 1000000 for CC
• Production method – by-product recognized at the time production is
completed - recognize by-product inventory in the financial statement
• Sales method – by-product recognized at the time of sales
• BP Chemical operates a simple production process to convert a single
material into three separate items X Y and Z. All three end products are
separated simultaneously at a single split-off point. Products X and Y are
ready for sale immediately upon split-off without further processing.
Product Z, however, is processed further before being sold. There is no
available market price for Z at the split-off point. During 2016, the
selling price of the items and total volume sold were:
• X – 120 tons sold @Tk. 15000 per ton
• Y – 340 tons sold @Tk. 10000 per ton
• Z – 475 tons sold @Tk. 7000 per ton

The total joint manufacturing costs for the period were Tk. 4000000. An additional
Tk. 2000000 was spent to finish product Z. there were no beginning inventories.
At the end of the period, inventories on hand X- 180 tons, Y- 60 tons, Z- 25 tons.
• Compute the cost of inventories, cost of goods sold and gross margin
percentage for X, Y and Z using
• NRV method
• Constant gross margin percentage NRV method
• Compare the gross margin percentage for X, Y and Z using the two
methods given in first requirement.