Cost Accounting

Joint & By-Products Costing

Joint Products
Joint products are individual products, each with significant sales values, which are produced simultaneously from the
same raw materials and/or manufacturing process.

By-Products
By-Products are those products of limited sales value produced simultaneously with products of greater sales value,
known as main or joint products. Main products are usually produced in much greater quantity than by-products.

Basic characteristics of Joint products:

1. Manufacturing of joint products always has a split-off point in which separate products emerge, which can be sold as is
or processed further. Costs incurred after split-off point do not cause allocation problems since they can be identified
with the specific products.
2. None of the joint products is significantly greater in value than other joint products. This characteristic distinguishes
joint products from by-product.
3. Joint products require simultaneous common processing. Processing of one of the joint products results in the
processing of all the other joint products at the same time.

Basic characteristics of By-products:

1. The products are incidental to operations; therefore, they are not the primary objective why there is a manufacturing
operation.
2. Sales value of the by-product is relatively low as compared with the sales value of the main product.

Joint Costs, Split-off Point and Further Processing Costs

1. Joint Costs – costs incurred up to the point of separation.
2. Split-off Point (Point of Separation) – occurs when each separate products having a sales value can be separately
identifiable.
3. Further Processing Costs – are materials, labor and overhead necessary in processing the products after the split-off
point until they are completed and become salable as finished products.

Methods of Allocating Joint Cost to Joint Products

1. Market Value or Sales Value Method
a. Market Value or Sales Value at Split-off Point Approach
b. Net Realizable Value Approach (refer to Notes)
c. Hypothetical Market Value or Approximated (Estimated) NRV Approach (refer to Notes)
2. Average Unit Cost or Physical Output (Quantities/Measurement) Method
3. Weighted Average Method or Survey Method
4. Quantitative Unit Method

Notes:
1. At all times, if problem is silent, use the sales (market) value at split-off point.
2. If there is disposal cost at split-off point (separate costs if sold at split-off);
 NRV is not the same with Approximated (Estimated) NRV Method (Hypothetical Market Value Method)
3. If there is no disposal cost at split-off point;
 NRV is the same with Approximated (Estimated) NRV Method (Hypothetical Market Value Method)

Illustration: Methods of Allocating Joint Cost to Joint Products

Elmo Company produces four products, which have a manufacturing cost of P224,000 at the split-off point. Data pertaining to
these products (KK, LL, MM and NN) follow:

Separate Costs after Split-off Point

Sales Disposal/ Separate Ultimate/ Weight
Price Per Separate Costs if Final Sale Factor
Units Unit at Cost at Processed Price per (Pounds)
Products Produced Split-off Split-off* further Total Unit Per Unit
KK 20,000 P 12.00 P 18,000 P 22,000 P 40,000 P 15.00 3.0
LL 32,000 3.50 14,000 11,000 25,000 5.00 5.5
MM 36,000 6.00 16,000 14,000 30,000 8.00 5.0
NN 24,000 5.50 12,000 9,000 21,000 7.00 6.0
Totals 112,000 P 60,000 P 56,000 P116,000

* marketing costs regardless when sold at split-off point.

Required: Allocate the joint cost, using:
1. Physical measure / Average Unit Cost / Production Output Method
2. Weighted Average or Survey Method
3. Sales Value at Split-off Point
4. Net Realizable Value at Split-off
5. Approximated (Estimated) NRV at Split-off or Hypothetical Market Value Approach

Illustration: Joint Cost Allocation and Gross Profit Computation – Market Value Method

Explosion Company manufactures three different products from a single raw material. A summary of production costs shows:

Products
Dynamite Grenade Piccolo Total
Output in kilograms 80,000 200,000 160,000 440,000
Sales in kilograms 70,000 180,000 150,000 400,000
Sales price per kilogram P 0.75 P 1.00 P 1.50 -
Separable Costs
Dynamite Grenade Piccolo Total
Production costs:
Materials P -0- P -0- P -0- P 90,000
Direct labor 3,000 20,000 30,000 80,000
Variable FOH 2,000 10,000 16,000 45,000
Fixed FOH 15,000 34,000 30,000 115,000
Total P20,000 P64,000 P76,000 P330,000

All separable costs have been assigned to products but the joint costs have not been allocated.

Required: Using market value method in allocating joint cost, compute:

1. The gross profit for each product.
2. The cost assigned to ending inventory for each product and in total.

Accounting for By-Products

By-Products, like joint or main products are produced from the same raw materials and or common manufacturing
process. Joint costs are not directly traceable to either main products or by-products. Since by-products are generally of
secondary importance in production, costs allocation methods, differ from those used for joint products.

Methods of Costing (Allocating Joint Costs) By-Products

1. No Joint Costs is allocated to by-products

Method 1: Gross revenue from sales of by-product is listed in the income statement as:

A. Treat sales of by-product as income

o Additional sales revenue
o Other income
o A deduction from the COGS of the main product

Note: The net income derived from these three alternatives will yield the same amount.

B. A deduction from the total production cost of the main product

Note: The net income derived from this alternative will not yield the same amount of net income computed under A
above.

Method 2: Net revenue from sales of by-product (gross selling price less the cost of marketing and administrative
expenses and any additional processing costs). Presented in the income statement similar to the treatment I Method 1
above.

2. With Joint Costs allocated to by-products

Method 3: Replacement cost method. This method credits production cost of the main product at the current market or
placement rate.

Method 4: Market value or Reversal cost method

Illustration: Joint Cost Allocation – Market Value Method: By-Product Cost Allocation – Market Value or Reversal Cost
Method

Ericson Company manufactured joint products X and Y as well as by-product Z. Cumulative joint cost data for the period show
P204,000, representing 20,000 completed units process through the Refining Department at an average cost of P10.20. Costs
are assigned to X and Y by the market value method, which considers further processing costs in subsequent operations. To
determine the cost allocation to Z, the market value (reversal cost) method is used. Additional data:
X Y Z
Quantity processed 2,000 8,000 10,000
Sales price per unit P6 P 20 P 25
Further processing cost per unit 2 5 7
Marketing & administrative expenses per unit 1 - -
Operating profit per unit 1 - -

Required: Compute the joint cost allocated to Z, then the amount to X and Y.

Illustration: By-Product Costing – Market Value (Reversal Cost) Method

Nextel Company manufactures one main product and two by-products, A and B. For April, the following data are available:

Main By-Product
Product A B Total
Sales P 75,000 P 6,000 P 3,500 P 84,500
Manufacturing cost after separation 11,500 1,100 900 13,500
Marketing and administrative expenses 6,000 750 550 7,300
Manufacturing cost before separation 37,500

Profit allowed for A and B is 15% and 12%, respectively.

Required: Calculate the manufacturing cost before separation for by-products A and B, using the market value (or reversal cost)
method.

Illustration: Joint Products

Acer Company buys Article X for P0.80 per unit. At the end of processing in Department 1, Article X split-off into Product A, B
and C. A is sold at the split-off point with no further processing; B and C require further processing before they can be sold; B is
processed in Department 2; and C is processed in Department 3. The following is a summary of costs and other related data for
the year ended December 31, 2012:
Department
1 2 3
Cost of Article X P 96,000 P -0- P -0-
Direct labor 14,000 45,000 65,000
Factory overhead 10,000 21,000 49,000

Product
A B C
Units sold 20,000 30,000 45,000
Units on hand, December 31, 2012 10,000 -0- 5,000
Sales P 30,000 P 96,000 P 141,750

There were no inventories on hand at January 1, 2012 and there was no Article X on hand at December 31, 2012. All units on
hand at December 31, 2012 were complete as to processing. There were no factory overhead variances. Acer Company uses
the market value at split-off point to allocate joint cost.

Required:
1. The market value of Product A for the year ended December 31, 2012 for the purpose of allocating joint costs.
2. The total joint cost to be allocated for the year ended December 31, 2012.
3. The cost of goods sold for Product B for the year ended December 31, 2012.
4. The cost of ending inventory for Product A.
 EXERCISES

PROBLEM 1: Solmix Company produces four solvents from the same process: A, B, C, and D. Joint product costs are P45,000.
(Round all answers to the nearest peso.)

Sales price per Disposal cost per Further processing Final sales price
Product Barrels barrel at split-off barrel at split-off costs per barrel
A 2,250 P 30.00 P 19.50 P 6.00 P 40.50
B 3,000 24.00 12.00 7.50 30.00
C 4,200 33.00 21.00 12.00 46.50
D 6,000 45.00 28.50 13.50 58.50

If Solmix sells the products after further processing, the following disposal costs will be incurred: A, P7.50; B, P3.00; C, P10.50;
D, P18.00.

1. Using the physical measurement method, what amount of joint processing cost is allocated to Product B?
a. P17,475 b. P6,555 c. P8,738 d. P12,235

2. Using sales value at split-off, what amount of joint processing cost is allocated to Product A?
a. P22,165 b. P5,910 c. P11,380 d. P5,542

3. Using the net realizable value at split-off, what amount of joint processing cost is allocated to Product C?
a. P10,850 b. P5,085 c. P7,750 d. P21,315

PROBLEM 2: EE Company produces chemical H and I. The processing also yields by product X, another chemical. The joint
costs of processing is reduced by the NRV of X. Joint costs for the month of August were P2,900,000. Below are additional data:

Product Units Market Value

H 1,000 P 5,000,000
I 2,000 2,500,000
X 500 500,000

An additional P120,000 were spent to complete the processing of X. The company uses the NRV method of allocating joint
costs.

How much is the joint cost allocated to product I?

a. P1,260,000 b. P840,000 c. P1,680,000 d. P1,600,000

PROBLEM 3: MM Company produces joint products A and B together with by product C. A is sold at split off but B and C
undergo additional processing. Production data pertaining to these products for the year ended December 31, 2014 are as
follows:
A B C Total
Joint costs P1,200,000
Separable costs P435,000 P56,000 491,000
Production in pounds 100,000 150,000 40,000 290,000
Sales price per pound P5 P9 P2.5

There are no beginning or ending inventories. No materials are spoiled in production. Joint costs are allocated to joint products
to achieve the same gross profit rate for each joint product. Net revenue from by product is deducted from joint production costs
of the main product.

How much is the share of product B in the joint cost?

a. P843,658 b. P747,520 c. P430,000 d. P726,000

PROBLEM 4: RR Company makes two products, Y and Z. They are initially processed from the same materials and then after
split-off, further processed separately. Additional information is as follows:
Y Z Total
Final sales value P 40,500 P 49,500 P 90,000
Sales value at split-off 33,000 47,000 80,000
Costs beyond split-off 9,000 11,000 20,000
Joint costs prior to split-off 15,000

Using the Actual NRV approach, how much is the joint cost assigned to Y and Z, respectively?
a. P6,000 and P9,000 b. P6,188 and P8,812 c. P6,750 and P8,250 d. P7,500 and P7,500
PROBLEM 5: JKL Company buys Article G for P0.80 per unit. At the end of processing in Department 1, Article G split into
products D, E and F. Product D is sold at split-off point with no further processing. E and F require further processing before
they can be sold. E is processed in Department 2 and F is processed in Department 3. The following is a summary of costs and
other related data for the year ended July 30, 2014.

Cost of Article G: Department 1 Department 2 Department 3

Direct materials P 1,440,000
Direct labor 210,000 P 675,000 P 975,000
Factory overhead 150,000 315,000 735,000
Product D Product E Product F
Units sold 300,000 450,000 675,000
Units on hand at July 30, 2014 150,000 - 225,000
Sales P 450,000 P 1,440,000 P 2,126,250

1. The cost of Product E sold for the year ended July 30, 2014
a. P1,470,000 b. P1,440,000 c. P990,000 d. P1,350,000

2. The cost of ending inventory for Product D

a. P270,000 b. P225,000 c. P180,000 d. P540,000

PROBLEM 6: The ABC Chemical Company produces a product known as “minergy” from which by product results.

 This by-product can be sold at P10 per pound.

 The manufacturing costs of the main product and by-product up to the point of separation for the three months ended
March 31, 2014 follows: Materials, P175,000; Labor, P100,000; Overhead, P100,000.
 The units processed were 35,000 pounds of the main product and 3,500 pounds of the by-product.
 During the period, 31,500 pounds of the “minergy” were sold at P48, while the company was able to sell 2,625 pounds
of the by-product.
 Selling and administrative expenses related to the main product amounted to P210,000.
 Disposal cost per unit of the by-product is P2.

Assume that the by-product is inventoried and recorded at NRV. The NRV of the by-product reduces the manufacturing costs of
“minergy”. (1)What is the unit cost of “minergy”? (2) What is the cost of inventory of minergy?
a. (1) P10.71; (2) P37,500 c. (1) P9.91; (2) P34,700
b. (2) P9.91; (2) P37,500 d. (1) P10.71; (2) P34,700

ANSWERS:

Problem 1: c, d, a
Problem 2: b
Problem 3: d
Problem 4: b
Problem 5: d, c
Problem 6: b