CHAPTER SEVEN

JOINT PRODUCTS AND BY PRODUCTS COSTING

Joint Products – outputs of a joint production process that yields two or

more products with a high sales value compared to the sales values of any
other outputs.
Byproducts – outputs of a joint production process that have low sales
values compare to the sales values of the other outputs.
Main Product – output of a joint production process that yields one product
with a high sales value compared to the sales values of the other outputs.
Product – any output with a positive sales value, or an output that enables a
firm to avoid incurring costs. Value can be high or low
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Joint Cost Terminology
Joint Costs – costs of a single production process that yields multiple products
simultaneously.
Split off Point – the place in a joint production process where two or more
products become separately identifiable.
Separable Costs – all costs incurred beyond the split off point that are
assignable to each of    the now-identifiable specific products.
• Categories of Joint Process Outputs:
Outputs with a positive sales value
Outputs with a zero sales value
• Joint products:
• refers to a group of products that are produced simultaneously by a common process.
• A group of joint products is inseparable until the products reach a certain point where
they are divided or split into separate products.
• This point is usually called the split off point.
• Joint product cost:
• is the cost which arises from the common processing or manufacturing of products
produced from a common raw material.
• Whenever two or more different products are created from a single cost factor, a joint
product cost results.
• A joint cost is incurred prior to the point at which separately identifiable products
emerge from the same process.
• Characteristics of Joint Products
• Joint products are produced from the same raw materials in natural proportion.
• They are produced simultaneously by a common process.
• They comparatively of almost equal value.
• They may require further processing after their point of separation.
• 
• Examples of entities that manufacture joint products:
• Entity Main products By-products
• Shell oil Petrol, diesel, jet fuel Asphalt
• Flour mill White flour, brown flour Animal feeding stuff
• Cheese Fresh cheese, butter Butter milk
• Reasons for Allocating Joint Costs
• Required for GAAP and taxation purposes:
• Inventory costing and cost of goods sold computations for financial accounting
purposes and reports for income tax authorities.
• Cost values may be used for evaluation purposes:
• Inventory costing and Cost of goods sold computation for internal reporting
purposes.
• Such reports are used in division profitability analysis when compensation is
determined for division managers and performance measurement of different units
and individual worker.
• Cost-based Contracting:
• Cost reimbursement when only a portion of a business’s products or services is sold
or delivered to a single customer (such as government agency) i.e to specify and
resolve contractual interests and obligations.
• Byproducts:
• is generally used to denote one or more products of relatively small total value that are
produced simultaneously with a product of greater total value.
• The product with the greater value, commonly called the main product, is usually
produced in greater quantities than the byproducts.
• By products and joint products are difficult to cost because a true joint cost is
indivisible.
• For example: an ore might contain both lead and zinc. In a raw state, these minerals are
joint products. Until they are separated, the cost of finding, mining and processing is a
joint cost. Then, the cost accumulated up to the split off point must be borne by the
difference between: the selling price and the cost to complete and sell each mineral
after the split off point. Joint and byproducts usually create cost allocation problem
• Their costs can not be allocated using the cause and effect logic as that of allocating the
supporting departments’ cost. There is no accurate way to determine the amount of
joint costs that is caused by any particular joint product.
• Accounting for Joint Products
• Accounting for joint products means the apportionment of joint costs to each
of the joint products. Such apportionment serves the following objectives:
• To determine the cost per unit
• To help in venture valuation
• To determine the profit or loss on each line of product
• To determine the price of each product.
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• The Various methods of apportionment of joint costs are based mainly on
individual opinion and tend to produce only approximate result. This is
because no perfectly logical basis exists for the apportionment of joint costs
to products and most of the methods are arbitrary.
• Approaches to Allocate Joint Costs
• There are five basic approaches to allocate joint costs:
• 1. Allocate based on physical quantities
• 2. Allocate based on Actual Sales Value at split off point
• 3. Allocate based on Net Realizable Value (NRV) at split off
• 4. Allocate based on Net Realizable Value (NRV) less an Average Gross Profit Margin
• 5. Allocate based on Average Unit Cost method
• 
• Example: Assume that 30,000 and 10,000 units of joint products A and B respectively are
produced at a total joint production cost of $120,000. Product A is sold at $15 and
product B for $10.
• Required: allocate the joint cost by using the following methods?
• 1. Allocate base on physical quantities ,
• 2. Allocate Based on Actual Sales Value at Split off Point
• Why is the sales value at split off method widely used?
• It measures the value of the joint product immediately. It does not
anticipate subsequent management decisions. It uses a meaningful basis. It
is simple.
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• Allocate Based on Net Realizable Value (NRV) at split off
• NRV refers to a product’s estimated sales value at the split off point.
• These estimates are frequently used when an actual sales value at split off
point does not exist or cannot be obtained.
• A NRV is calculated for each product by subtracting the after split off costs –
cost required to convert the joint product in to marketable condition, from
the final sales value.
• NRV = Final Sales value – After split off cost
• Example: Assume that 30,000 and 10,000 units of joint products A and B respectively are
produced at a total joint production cost of $120,000. Product A is sold at $15 and
product B for $10.
• Assume the above example except that additional $ 115,600 is incurred to make joint
product A in marketable condition and $84,400 for joint product B. And after the
additional process joint products A and B will be sold at $20 and $12 respectively.

• 3. Allocate Based on Net Realizable Value (NRV) at split off

• 4. Allocate based on Net Realizable Value (NRV) less an Average Gross Profit Margin
• Example: Assume in processing a basic raw material, three joint products ‘X’, ‘Y’ and ‘Z’
are produced. The joint expenses of manufacturing are: materials $10,000, labor $8,000,
overhead $ 9,000 (total $ 27,000). Subsequent /separable/ costs are as follows.
•    Products
• X Y Z
• Material……………… . $2,000 ………… $1,600 $1,800
• Labour……………… 2,500 …………… 1,400 1,700
• Overhead……………… 2,500………… 1,000 1,500
• Total 7,000 4,000 5,000
• Sales value………... 42,000 20,000 18,000
• Estimated profit on sales 50% 50% 33 1/3 %
• Required: Show how you would apportion the joint costs of manufacture by reverse
  cost method.
• Example: From the following particulars, find out the cost of joint products X, Y and Z
under the average unit cost method
• A) Per-separation point costs $30,000
• B) Other production data,
•   
• Product Unit produced
• X ……………………………………………....1000
• Y…………………………………………….....400
• Z………………………………………………. 600
• Total 2,000 units
• Calculate Average unit cost method.
• Choosing an Allocation Method
• Which method of allocating joint costs should be used? The sales value at split-off method
is preferable when selling-price data exist at split-off (even if further processing is done).
Reasons for using the sales value at split-off method include the following:
• Measurement of the value of the joint products at the split-off point: Sales value at split-
off is the best measure of the benefits received as a result of joint processing relative to all
other methods of allocating joint costs. It is a meaningful basis for allocating joint costs
because generating revenues is the reason why a company incurs joint costs in the first
place. It is also sometimes possible to vary the physical mix of final output and thereby
produce more or less market value by incurring more joint costs. In such cases, there is a
clear causal link between total cost and total output value, thereby further validating the
use of the sales value at split-off method.
• No anticipation of subsequent management decisions: The sales value at split
- off method does not require information on the processing steps after split -
off if there is further processing. In contrast, the NRV and constant gross-
margin percentage NRV methods require information on (a) the specific
sequence of further processing decisions, (b) the separable costs of further
processing, and (c) the point at which individual products will be sold.
• Availability of a common basis to allocate joint costs to products: The sales
value at split - off method (as well as other market-based methods) has a
common basis to allocate joint costs to products, which is revenue. In contrast,
the physical-measure at split - off method may lack an easily identifiable
common basis to allocate joint costs to individual products.
• Simplicity: The sales value at split-off method is simple. In contrast, the NRV
and constant gross-margin percentage NRV methods can be complex for
processing operations having multiple products and multiple split-off points.
This complexity increases when management makes frequent changes in
the specific sequence of post-split-off processing decisions or in the point at
which individual products are sold.
• Note: Despite this, some firms choose not to allocate joint costs at all.
• Accounting for Byproducts
• Joint production processes may yield not only joint products and main
products but also byproducts. Although byproducts have relatively low total
sales values, the presence of byproducts in a joint production process can
affect the allocation of joint costs.
• 
• We present two byproduct accounting methods: the production method and
the sales method. The production method recognizes byproducts in the
financial statements at the time production is completed. The sales method
delays recognition of byproducts until the time of sale.
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• Illustration. The Westlake Corporation processes timber into fine-grade lumber and wood
chips that are used as mulch in gardens and lawns. Information about these products
follows:
• Fine-Grade lumber (the main product)—sells for $6 per board foot (b.f.)
• Wood chips (the byproduct)—sells for $1 per cubic foot (c.f.)
• Data for July 2012 are as follows:
•  Beginning Inventory Production Sales Ending Inventory
• Fine-Grade lumber (b.f.) 0 50,000 40,000 10,000
• Wood chips (c.f.) 0 4,000 1,200 2,800
• Joint manufacturing costs for these products in July 2012 are $250,000, comprising
$150,000 for direct materials and $100,000 for conversion costs. Both products are sold at
the splitoff point without further processing.
• Required: Allocate byproduct cost to the byproducts by using the two methods?
• 1. By product method 2. sales method
Other Approaches to Allocate Byproduct Costs
There are four commonly used methods:
Method 1 Revenue from sales of the byproduct is listed on the income
statement as
 other income
Additional sales revenue
A deduction from the CGS of the main product
A deduction from the total manufacturing cost of the main product
Method 2 Revenue from sales of the byproduct less the cost of placing the by
product on the market and less any additional processing cost of the byproduct
is shown on the income statement in a manner similar to that indicated in
method 1.
Method 3 Replacement method: This method applied by entities whose by products
are used within the plant, thereby avoiding purchasing other materials and supplies
from outside suppliers. The production cost of the main product is credited or such
materials and the offsetting debit is to the department that uses the by product. The
cost assigned to the byproduct is the purchase or replacement cost existing in the
market.
Method 4 The market value (reversal cost) method: This method is similar to the last
technique illustrated in method 1. However, it reduces the manufacturing cost of the
main product not by the actual revenue received but by an estimate of the
byproduct’s value at the time of recovery. This estimate must be made prior to split
off from the main product.
• Distinction between Joint products and By Products
• There are no hard and fast rules to distinguish between joint products and by-products.
A product may be treated as a by-product in one business and the same product may be
treated as a joint product in another business. However, the following factors should be
considered to determine if a product is a joint product or a by-product.
• Relative sales value: If the sales values of the entire product are more or less equal, they
are treated as joint products. If however, there is wide difference in the relative sales
values of products, the product with the greater sales value is treated as the main
product and the products of lower value are treated as by product.
• Objective of manufacture: If the objective of manufacturing is product A, the unwanted
product B and C be treated as by-product.
• Policy of management: The management may decide to treat a particular product as the
main product and the other products as by products.
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