“Sell as is, JOINT AND BY-

PRODUCT
COSTING
PATRICK LOUIE E. REYES,
or process further?” CTT, MICB, RCA, CPA
Joint Process
•one during which one product cannot be
manufactured without producing others.
•Joint cost - costs incurred for material, labor, and
overhead during a joint process.
- allocated only to the primary products of a
joint process using either a physical or a
monetary measure
•Separate cost - costs assignable to specific products;
incurred in the later stages of production.
Outputs of a Joint Process
•Joint products - primary outputs of a joint process.
•By-product – an incidental output of a joint process.
•Scrap – another incidental output of a joint process,
but has sales value lower than a by-product.
•Waste – no sales value.
Some notes
•Although by-products and scrap have saleable values,
they are not the reasons why a company pursues a
joint process. Example: Dunkin’ Donuts™ does not
pursue a joint process to produce the donut holes
(which we call munchkins).
•Classifications of products can change over time.
Example: Poultry farms previously considered bones
and beaks as waste, however, these are also now sold
as organic fertilizer.
Split-off points
•Split-off point - the point at which joint process
outputs are first identifiable as individual products.
•A joint process can have one or more split-off points,
depending on the number and type of output
produced.
•Output may be sold at the split-off point (if a market
exists for products at that degree of completion) or
may be processed further and then sold.
The Joint
Process
Model
Additional notes
•At split-off, a decision is made whether to sell as-is or
process further:
• Sell as is if further processing costs exceeds additional
revenue.
• Process further is additional revenue exceeds further
processing costs.
• Example: Meat is harvested to make bacon. The unused parts
can be sold as is for 100/kg, but it can also be processed further
for 20/kg to become lard. If the selling price of a kilogram of lard
is more than 120, process further. If below 120, sell as is.
Allocation of Costs
•Allocation of Joint Costs:
• Physical Measure Allocation
• Monetary Measure Allocation
• Sales Value at split-off
• NRV at split-off
• Approximated NRV at split-off

•Allocation of by-product and scrap:

• NRV approach
• Other income approach
Physical Measure Allocation
•proration using a common physical characteristic of
the joint products, such as:
• tons of meat, bone, and hide in the meat packing or
turkey processing industry,
• pounds of milk in the dairy industry,
• linear board feet in the lumber milling industry,
• barrels of oil in the petroleum refining industry, etc.
• Advantage: Physical measures are useful in allocating joint
cost to products that have highly variable selling prices.
Physical Measure Allocation
•Disadvantage: It ignores the revenue-generating
ability of individual joint products.
•Products that weigh the most or that are produced in
the largest quantity will receive the highest proportion
of joint cost allocation—regardless of their ability to
bear that cost when they are sold.
•Example: Assume that bones weigh more than meat.
Under this approach, bones will get more allocation of
cost compared to meat which is more saleable.
Example
(d)
(c) Marketing cost per (e)
(b) Sales price per kilogram Separate cost per (f)
(a) Amount produced kilogram at split- regardless of when kilogram if Final sales price
Joint Product (in kilograms) off sold processed further per kilogram
Breast 3,800 280 20 10 320
Thigh 2,400 180 10 10 210
Drumsticks 2,800 120 5 6 150
by-product 1,000

Joint processing cost for the period: 540,000 for 10,000 kg of output

Cost per physical measure: 540,000/9,000 kg* = 60 per kg

*do not include by-products
Example
Cost per physical measure: 540,000/9,000 kg = 60 per kg
(b) (e) (g)
Amount (c) (d) Revenue at (f) Gross profit at
(a) produced (in Cost per Total allocated split-off (see Cost at split- split-off (e
Joint Product kilograms) kilogram cost (b times c) previous slide) off minus f)
Breast 3,800 60 228,000 280 60 220
Thigh 2,400 60 144,000 180 60 120
Drumsticks 2,800 60 168,000 120 60 60
TOTAL 9,000
Journal Entries
Monetary Measure Allocation
•Advantage: It solves the problem created by the
physical measure allocation, which is ignoring the
revenue-generating ability of the individual joint
products.
•Disadvantage: Value of money is dynamic due to
fluctuations in price levels. A peso in 1969 is different
from a peso today.
Monetary Measure Allocation
Steps:
1. Choose a monetary allocation base (Sales value,
NRV, or approximated NRV)
2. List each joint product’s base values.
3. Add the values in Step 2 to obtain total.
4. Divide each individual Step 2 value by the Step 3
total to obtain numerical proportions. These
proportions should add to 100 percent.
Monetary Measure Allocation
Steps:
5. Multiply the joint cost by each proportion to obtain
the allocation for each product.
6. Divide each product’s prorated joint cost by the
number of product units to obtain a cost per unit for
valuation purposes.
Monetary Measure Allocation
Steps:
5. Multiply the joint cost by each proportion to obtain
the allocation for each product.
6. Divide each product’s prorated joint cost by the
number of product units to obtain a cost per unit for
valuation purposes.
Example: (Sales at split-off)
(b) (c) (d) (g) (h)
Amount Sales price Total Sales at (e) Amount Cost per
(a) produced (in per kilogram split-off Proportion (f) allocated kilogram
Joint Product kilograms) at split-off (b x c) (d/1,832,000) Joint cost (e x f) (g / b)
Breast 3,800 280 1,064,000 58.08% 540,000 313,632 82.53
Thigh 2,400 180 432,000 23.58% 540,000 127,332 53.06
Drumsticks 2,800 120 336,000 18.34% 540,000 99,036 35.37
TOTAL 9,000 1,832,000 100.00% 540,000
Example: (NRV at split-off)
(c)
Unit NRV per
(b) kg (Sales at (d) (g) (h)
Amount split-off less Total NRV at (e) Amount Cost per
(a) produced (in Marketing split-off Proportion (f) allocated kilogram
Joint Product kilograms) Costs*) (b x c) (d/1,718,000) Joint cost (e x f) (g / b)
Breast 3,800 260 988,000 57.51% 540,000 310,554 81.72
Thigh 2,400 170 408,000 23.75% 540,000 128,250 53.44
Drumsticks 2,800 115 322,000 18.74% 540,000 101,196 36.14
TOTAL 9,000 1,718,000 100.00% 540,000

*see slide 11, column (d)

 Approximated NRV at split-off
In this approach, we take into consideration the NRV at
split-off, but including further processing. (work back)
(b) (c) (d)
(a) Final sales price per Separate cost per kg Approximated NRV
Joint Product kilogram after split-off* (b - c)
Breast 320 30** 290
Thigh 210 20*** 190
Drumsticks 150 11**** 139

*see slide 11, add columns (d) and (e)

**20+10 = 30
***10+10 = 20
****5+6 = 11
Approximated NRV at split-off
(d) (e) *see slide 18, column (c)
**see slide 11, column (d)
(b) (c) Separate Cost per Separate Cost per ***see slide 20, column (c)
(a) Final sales price Sales Price at kilogram at split- kilogram after
Joint Product per kilogram split-off* off** split-off***
Breast 320 280 20 30
Thigh 210 180 10 20
Drumsticks 150 120 5 11

(f) Since for all (i) (j)

products,
Incremental (g) (h) the NRV at split- Approx. NRV (k)
Joint Revenue Incremental Incremental incremental off**** at split- Difference
profit
Product (b – c) Cost (e – d) Profit (f – g) (column h) is Joint Product (b – c) off***** (i -j)
positive, all
Breast 40 10 30 joint Breast 260 290 +30
products
Thigh 30 10 20 must be Thigh 170 190 +20
processed
Drumsticks 30 6 24 further. Drumsticks 115 139 +24
****see slide 19, column (c)
*****see slide 20, column (d)
Example: (approx. NRV at split-off)
(b) (d) (g) (h)
Amount (c) Approximated (e) Amount Cost per
(a) produced (in NRV per Total NRV Proportion (f) allocated kilogram
Joint Product kilograms) kilogram (b x c) (d/1,947,200) Joint cost (e x f) (g / b)
Breast 3,800 290 1,102,000 56.59% 540,000 305,586 80.42
Thigh 2,400 190 456,000 23.42% 540,000 126,468 52.70
Drumsticks 2,800 139 389,200 19.99% 540,000 107,946 38.55
TOTAL 9,000 1,947,200 100.00% 540,000
Furthermore…
(b) (d) (g) (h)
Amount (c) Approximated (e) Amount Cost per
(a) produced (in NRV per Total NRV Proportion (f) allocated kilogram
Joint Product kilograms) kilogram (b x c) (d/1,947,200) Joint cost (e x f) (g / b)
Breast 3,800 290 1,102,000 56.59% 540,000 305,586 80.42
Thigh 2,400 190 456,000 23.42% 540,000 126,468 52.70
Drumsticks 2,800 139 389,200 19.99% 540,000 107,946 38.55
TOTAL 9,000 1,947,200 100.00% 540,000

Assume that 1,000 kg of breast will be processed into

protein shake, 900 kg of thigh into fried chicken, and
1,200 kg of drumsticks into buffalo “wings”.
Furthermore…
Processing costs are as follows:
•Breast to Protein Shake – 9 per kg
•Thigh to Fried Chicken – 8 per kg
•Drumsticks to Buffalo “wings” – 7 per kg
Journal Entries:
Refer to slide 22 or 23, column (h). WIP-
Protein Shake is established so that all
costs related to the processing of
Protein Shake will be placed in it.
Remember that Chicken Breasts cost
80.42 per kg. 1,000 kgs of Chicken
Breasts were processed further. Thus,
Php 80,420 is transferred from WIP-
Breast to WIP-Protein Shake. The same
is true for the other products.

Further processing costs are 9, 8,

7, respectively. Just multiply the
cost to the quantity:

9 x 1,000 kg = Php 9,000

8 x 900 kg = 7,200
7 x 1,200 kg = 8,400
TOTAL: Php 24,600
Who’s the fairest of them all? ✨
Approximated NRV is considered the “best”
method of joint cost allocation because this
method captures the
•intended level of separate processing,
•costs of separate processing,
•expected selling costs of each joint product, and
•expected selling price of each joint product.
NRV Approach (by-product & scrap)
• reduces joint product cost for the net realizable value
created by the by-product’s sale.
• When by-product is generated, the NRV is debited to
inventory and one of two accounts may be credited for the
joint products:
• Work in Process Inventory—Joint Products
• Cost of Goods Sold
Example
Remember that 10,000 kgs of product were produced.
9,000 kgs were joint products, and 1,000 kgs were by-
products. Assume that fertilizer pellets are the by-
products from chicken processing.

Selling price of fertilizer pellets: Php 2/kg

Processing costs per kg: DL - 0.20; OH - 0.05
NRV per kg of fertilizer pellets: Php 1.75
Journal Entries
Other Income Approach
• Simplest approach to accounting for by-product.
• No value is recognized for the by-product until it is sold.

All costs are included in the cost of joint products. All costs are included in the cost of by-product.
By-products and scrap in Job Order
Costing
• Just use either NRV or Other Income approach to recognize
the value of the by-product or scrap.
• If by-product is created by all/most jobs, credit OH.
• If by-product is created by a few jobs/single job, credit the
job/s causing the production of by-product or scrap.
• Debit Cash (if sold immediately) or Scrap Inventory (if
inventoried, then debit Cash, credit Scrap Inventory when
eventually sold).