CHAPTER 16

COST ALLOCATION: JOINT PRODUCTS AND BYPRODUCTS

16-16 (20-30 min.) Joint-cost allocation, insurance settlement.

1. (a) Sales value at splitoff method:

Pounds Wholesale Sales Weighting: Joint Allocated

of Selling Price Value Sales Value Costs Costs per
Product per Pound at Splitoff at Splitoff Allocated Pound
Breasts 100 $0.55 $55.00 0.675 $33.75 0.3375
Wings 20 0.20 4.00 0.049 2.45 0.1225
Thighs 40 0.35 14.00 0.172 8.60 0.2150
Bones 80 0.10 8.00 0.098 4.90 0.0613
Feathers 10 0.05 0.50 0.006 0.30 0.0300
250 $81.50 1.000 $50.00

Costs of Destroyed Product

Breasts: $0.3375 per pound  40 pounds = $13.50
Wings: $0.1225 per pound  15 pounds = 1.84
$15.34
b. Physical measure method:

Pounds Weighting: Joint Allocated

of Physical Costs Costs per
Product Measures Allocated Pound
Breasts 100 0.400 $20.00 $0.200
Wings 20 0.080 4.00 0.200
Thighs 40 0.160 8.00 0.200
Bones 80 0.320 16.00 0.200
Feathers 10 0.040 2.00 0.200
250 1.000 $50.00

Costs of Destroyed Product

Breast: $0.20 per pound  40 pounds = $ 8
Wings: $0.20 per pound  15 pounds = 3
$11

Note: Although not required, it is useful to highlight the individual product profitability figures:

Sales Value at Physical

Splitoff Method Measures Method
Sales Joint Costs Gross Joint Costs Gross
Product Value Allocated Income Allocated Income
Breasts $55.00 $33.75 $21.25 $20.00 $35.00
Wings 4.00 2.45 1.55 4.00 0.00
Thighs 14.00 8.60 5.40 8.00 6.00
Bones 8.00 4.90 3.10 16.00 (8.00)
Feathers 0.5 0.30 0.20 2.00 (1.50)

16-1
2. The sales-value at splitoff method captures the benefits-received criterion of cost
allocation and is the preferred method. The costs of processing a chicken are allocated to
products in proportion to the ability to contribute revenue. Quality Chicken’s decision to process
chicken is heavily influenced by the revenues from breasts and thighs. The bones provide
relatively few benefits to Quality Chicken despite their high physical volume.
The physical measures method shows profits on breasts and thighs and losses on bones
and feathers. Given that Quality Chicken has to jointly process all the chicken products, it is non-
intuitive to single out individual products that are being processed simultaneously as making
losses while the overall operations make a profit. Quality Chicken is processing chicken mainly
for breasts and thighs and not for wings, bones, and feathers, while the physical measure method
allocates a disproportionate amount of costs to wings, bones and feathers.

16-17 (10 min.) Joint products and byproducts (continuation of 16-16).

1. Ending inventory:
Breasts 15  $0.3375 = $5.06
Wings 4  0.1225 = 0.49
Thighs 6  0.2150 = 1.29
Bones 5  0.0613 = 0.31
Feathers 2  0.0300 = 0.06
$7.21
2.
Joint products Byproducts Net Realizable Values of
byproducts:
Breasts Wings Wings $ 4.00
Thighs Bones Bones 8.00
Feathers Feathers 0.50
$12.50

Joint costs to be allocated:

Joint costs – Net Realizable Values of byproducts = $50 – $12.50 = $37.50
Pounds Wholesale Sales Weighting: Joint Allocated
of Selling Price Value Sales Value Costs Costs Per
Product per Pound at Splitoff at Splitoff Allocated Pound
Breast 100 $0.55 $55 55 ÷ 69 $29.89 $0.2989
Thighs 40 0.35 14 14 ÷ 69 7.61 0.1903
$69 $37.50

Ending inventory:
Breasts 15  $0.2989 $4.48
Thighs 6  0.1903 1.14
$5.62

3. Treating all products as joint products does not require judgments as to whether a product
is a joint product or a byproduct. Joint costs are allocated in a consistent manner to all products
for the purpose of costing and inventory valuation. In contrast, the approach in requirement 2
lowers the joint cost by the amount of byproduct net realizable values and results in inventory
values being shown for only two of the five products, the ones (perhaps arbitrarily) designated as
being joint products.

16-2
 16-18 (10 min.) Net realizable value method.

A diagram of the situation is in Solution Exhibit 16-18.

Corn Syrup Corn Starch Total

Final sales value of total production,
12,500  $50; 6,250  $25 $625,000 $156,250 $781,250
Deduct separable costs 375,000 93,750 468,750
Net realizable value at splitoff point $250,000 $ 62,500 $312,500
Weighting, $250,000; $62,500  $312,500 0.8 0.2
Joint costs allocated, 0.8; 0.2  $325,000 $260,000 $ 65,000 $325,000

SOLUTION EXHIBIT 16-18 (all numbers are in thousands)

Joint Costs Separable Costs

Processing Corn Syrup:

12,500 cases at
$375,000 $50 per case

Processing
$325000

Processing Corn Starch:

6,250 cases at
$93,750 $25 per case

Splitoff
Point
16-20 (40 min.) Alternative methods of joint-cost allocation, ending inventories.
Total production for the year was:

Ending Total
Sold Inventories Production
X 75 175 250
Y 225 75 300
Z 280 70 350
A diagram of the situation is in Solution Exhibit 16-20.
1. a. Net realizable value (NRV) method:
X Y Z Total
Final sales value of total production,
250  $1,800; 300  $1,300; 350  $800 $450,000 $390,000 $280,000
$1,120,000
Deduct separable costs –– –– 120,000
120,000

16-3
Net realizable value at splitoff point $450,000 $390,000 $160,000
$1,000,000

Weighting, $450; $390; $160  $1,000 0.45 0.39 0.16

Joint costs allocated,

0.45, 0.39, 0.16  $328,000 $147,600 $127,920 $ 52,480 $
328,000

Ending Inventory Percentages:

X Y Z
Ending inventory 175 75 70
Total production 250 300 350
Ending inventory percentage 70% 25% 20%
Income Statement

X Y Z Total
Revenues,
75  $1,800; 225  $1,300; 280  $800 $135,000 $292,500 $224,000
$651,500
Cost of goods sold:
Joint costs allocated 147,600 127,920 52,480
328,000
Separable costs –– –– 120,000
120,000
Production costs 147,600 127,920 172,480
448,000
Deduct ending inventory,
70%; 25%; 20% of production costs 103,320 31,980 34,496
169,796
Cost of goods sold 44,280 95,940 137,984
278,204
Gross margin $ 90,720 $196,560 $ 86,016
$373,296

Gross-margin percentage 67.2% 67.2% 38.4%

b. Constant gross-margin percentage NRV method:

Step 1:
Final sales value of prodn., (250  $1,800) + (300  $1,300) + (350  $800)
$1,120,000
Deduct joint and separable costs, $328,000 + $120,000 448,000
Gross margin $ 672,000
Gross-margin percentage, $672,000 ÷ $1,120,000 60%
Step 2:
X Y Z Total
Final sales value of total production,
250  $1,800; 300  $1,300; 350  $800 $450,000 $390,000 $280,000
$1,120,000
Deduct gross margin, using overall

16-4
 Gross-margin percentage of sales, 60% 270,000 234,000 168,000
672,000
Total production costs 180,000 156,000 112,000
448,000

Step 3: Deduct separable costs — — 120,000

120,000
Joint costs allocated $180,000 $156,000 $ (8,000) $
328,000
The negative joint-cost allocation to Product Z illustrates one “unusual”
feature of the constant gross-margin percentage NRV method: some products may
receive negative cost allocations so that all individual products have the same gross-
margin percentage.

Income Statement
X Y Z
Total
Revenues, 75  $1,800;
225  $1,300; 280  $800 $135,000 $292,500 $224,000
$651,500
Cost of goods sold:
Joint costs allocated 180,000 156,000 (8,000)
328,000
Separable costs - - 120,000
120,000
Production costs 180,000 156,000 112,000
448,000
Deduct ending inventory,
70%; 25%; 20% of production costs 126,000 39,000 22,400
187,400
Cost of goods sold 54,000 117,000 89,600
260,600
Gross margin $ 81,000 $175,500 $134,400
$390,900
Gross-margin percentage 60% 60% 60%
60%
Summary
X Y Z
Total
a. NRV method:
Inventories on balance sheet $103,320 $ 31,980 $ 34,496
$169,796
Cost of goods sold on income statement 44,280 95,940 137,984
278,204

$448,000
b. Constant gross-margin percentage NRV method
Inventories on balance sheet $126,000 $ 39,000 $ 22,400
$187,400

16-5
Cost of goods sold on income statement 54,000 117,000 89,600
260,600

$448,000
2. Gross-margin percentages:
X Y Z
NRV method 67.2% 67.2% 38.4%
Constant gross-margin percentage NRV 60.0% 60.0% 60.0%
SOLUTION EXHIBIT 16-20

Joint Costs Separable Costs

Product X:
250 tons at
$1,800 per ton

Joint
Product Y:
Processing
300 tons at
Costs
$1,300 per ton
$328,000

Product Z:
Processing
350 tons at
$120000 $800 per ton

Splitoff
Point

16-6
16.22 (30 min.) Joint-cost allocation, sales value, physical measure, NRV
methods.
1a.
Special B/ Special S/
PANEL A: Allocation of Joint Costs using Sales Value at Beef Shrimp
Splitoff Method Ramen Ramen Total
Sales value of total production at splitoff point    
(10,000 tons  $10 per ton; 20,000  $15 per ton) $100,000 $300,000 $400,000
Weighting ($100,000; $300,000 ÷ $400,000) 0.25 0.75  
Joint costs allocated (0.25; 0.75  $240,000) $60,000 $180,000 $240,000

PANEL B: Product-Line Income Statement for June 2012 Special B Special S Total
Revenues    
(12,000 tons  $18 per ton; 24,000  $25 per ton) $216,000 $600,000 $816,000
Deduct joint costs allocated (from Panel A) 60,000 180,000 240,000
Deduct separable costs 48,000 168,000 216,000
Gross margin $108,000 $252,000 $360,000
Gross margin percentage 50% 42% 44%

1b.
Special B/ Special S/
PANEL A: Allocation of Joint Costs using Physical-Measure Beef Shrimp
Method Ramen Ramen Total
Physical measure of total production (tons) 10,000 20,000 30,000
Weighting (10,000 tons; 20,000 tons ÷ 30,000 tons) 33% 67%  
Joint costs allocated (0.33; 0.67  $240,000) $80,000 $160,000 $240,000

PANEL B: Product-Line Income Statement for June 2012 Special B Special S Total
Revenues    
(12,000 tons  $18 per ton; 24,000  $25 per ton) $216,000 $600,000 $816,000
Deduct joint costs allocated (from Panel A) 80,000 160,000 240,000
Deduct separable costs 48,000 168,000 216,000
Gross margin $ 88,000 $272,000 $360,000
Gross margin percentage 41% 45% 44%

1c.
PANEL A: Allocation of Joint Costs using Net Realizable
Value Method Special B Special S Total
Final sales value of total production during accounting period    
(12,000 tons  $18 per ton; 24,000 tons  $25 per ton) $216,000 $600,000 $816,000
Deduct separable costs 48,000 168,000 216,000
Net realizable value at splitoff point $168,000 $432,000 $600,000
Weighting ($168,000; $432,000 ÷ $600,000) 28% 72%  
Joint costs allocated (0.28; 0.72  $240,000) $67,200 $172,800 $240,000

PANEL B: Product-Line Income Statement for June 2012 Special B Special S Total
Revenues (12,000 tons  $18 per ton; 24,000 tons  $25 per ton) $216,000 $600,000 $816,000
Deduct joint costs allocated (from Panel A) 67,200 172,800 240,000
Deduct separable costs 48,000 168,000 216,000
Gross margin $100,800 $259,200 $360,000
Gross margin percentage 46.7% 43.2% 44.1%

16-7
 2. Sherrie Dong probably performed the analysis shown below to arrive at the net
loss of $2,228 from marketing the stock:

Special B/ Special S/
PANEL A: Allocation of Joint Costs using Beef Shrimp
Sales Value at Splitoff Ramen Ramen Stock Total
Sales value of total production at splitoff point    
(10,000 tons  $10 per ton; 20,000  $15 per
ton; 4,000  $5 per ton) $100,000 $300,000 $20,000 $420,000
Weighting  
($100,000; $300,000; $20,000 ÷ $420,000) 23.8095% 71.4286% 4.7619% 100%
Joint costs allocated
(0.238095; 0.714286; 0.047619  $240,000) $57,143 $171,429 $11,428 $240,000

PANEL B: Product-Line Income Statement

for June 2012 Special B Special S Stock Total
Revenues    
(12,000 tons  $18 per ton; 24,000  $25 per ton;
4,000  $5 per ton) $216,000 $600,000 $20,000 $836,000
Separable processing costs 48,000 168,000 0 216,000
Joint costs allocated (from Panel A) 57,143 171,429 11,428 240,000
Gross margin $110,857 $260,571 8,572 380,000
Deduct marketing costs   10,800 10,800
Operating income     $ (2,228)  $369,200
In this (misleading) analysis, the $240,000 of joint costs are re-allocated between
Special B, Special S, and the stock. Irrespective of the method of allocation, this
analysis is wrong. Joint costs are always irrelevant in a process-further decision. Only
incremental costs and revenues past the splitoff point are relevant. In this case, the
correct analysis is much simpler: the incremental revenues from selling the stock are
$20,000, and the incremental costs are the marketing costs of $10,800. So, Instant
Foods should sell the stock—this will increase its operating income by $9,200
($20,000 – $10,800).

16-25 (35-45 min.) Joint costs and byproducts.

1. Computing byproduct deduction to joint costs:

Revenues from C, 16,000  $6 $ 96,000
Deduct:
Gross margin, 10% of revenues 9,600
Marketing costs, 20% of revenues 19,200
Peanut Butter Department separable costs 12,000
Net realizable value (less gross margin) of C $ 55,200
Joint costs $180,000
Deduct byproduct contribution 55,200
Net joint costs to be allocated $124,800
Deduct Net
Unit Final Separable Realizable Allocation
of
Sales Sales Processing Value at $124,800
Quantity Price Value Cost Splitoff Weighting
Joint Costs

16-8
 A 12,000 $12 $144,000 $27,000 $117,000 37.5%$
46,800
B 65,000 3 195,000 –– 195,000 62.5%
78,000
Totals $339,000 $27,000 $312,000 $124,800
Add Separable
Joint Costs Processing
Allocation Costs Total Costs Units Unit
Cost
A $ 46,800 $27,000 $ 73,800 12,000 $6.15
B 78,000 –– 78,000 65,000 1.20
Totals $124,800 $27,000 $151,800 77,000

Unit cost for C: $3.45 ($55,200 ÷ 16,000) + $0.75 ($12,000 ÷ 16,000) =

$4.20,
or $6.00 – $0.60 (10%  $6) – $1.20 (20%  $6) =
$4.20.
2. If all three products are treated as joint products:

Allocation
Deduct Net of
Unit Final Separable Realizable $180,000
Sales Sales Processing Value at Joint
Quantity Price Value Cost Splitoff Weighting Costs
A 12,000 $12 $144,000 $27,000 $117,000 117 ÷ 376.8 $ 55,892
B 65,000 3 195,000 ─ 195,000 195 ÷ 376.8 93,153
C 16,000 6 96,000 31,200 64,800 64.8 ÷ 376.8 30,955
Totals $435,000 $58,200 $376,800 $180,000

Add Separable
Joint Costs Processing
Allocation Costs Total Costs Units Unit Cost
A $ 55,892 $27,000 $ 82,892 12,000 $6.91
B 93,153 –– 93,153 65,000 1.43
C 30,955 12,000 42,955 16,000 2.68
Totals $180,000 $39,000 $219,000 93,000

Call the attention of students to the different unit “costs” resulting from the two
assumptions about the relative importance of Product C. The point is that costs of
individual products depend heavily on which assumptions are made and which
accounting methods and techniques are used.

16-32 (20 min.) Joint-cost allocation with a byproduct.

1. Sales value at splitoff method: Byproduct recognized at time of production method

Rubber
Floor Mats Car Mats Shreds (lbs)
Products manufactured 31,250a 93,750b 50,000c

16-9
 Products sold 25,000 85,000 43,000
Ending inventory 6,250 8,750 7,000
a
25 floor mats/100 tires = .25 floor mats per tire  125,000 tires = 31,250 floor
mats
b
75 car mats/100 tires = .75 car mats per tire  125,000 tires = 93,750 car mats
c
(125,000 tires/100)  40 lbs = 50,000 lbs rubber shreds
Joint cost to be charged to joint products = Joint Cost – NRV of Byproduct
= $600,000 – (50,000 lbs  0.70 per lb)
= $600,000 – $35,000
= $565,000

Floor Mats Car Mats Total

Sales value of mats at splitoff,
31,250 × $12; 93,750 × $6 $375,000 $562,500 $937,500
Weighting, $375,000; $562,500  $937,500 0.40 0.60
Joint costs allocated, 0.40; 0.60 × $565,000 $226,000 $339,000 $565,000

Floor Mats Car Mats Total

Revenues, 25,000 × $12; 85,000 × $6 $300,000 $510,000 $810,000
Cost of goods sold
Joint costs allocated, 0.40; 0.60 × $565,000 226,000 339,000 565,000
Less: Ending inventory (45,200)b (31,640)c (76,840)
Cost of goods sold 180,800 307,360 488,160
Gross margin $119,200 $202,640 $321,840
b
6,250 × $226,000/31,250 = $45,200
c
8,750 × $339,000/93,750 = $31,640

2. Sales value at splitoff method: Byproduct recognized at time of sale method

Joint cost to be charged to joint products = Joint Cost = $600,000

Floor Mats Car Mats Total

Sales value of mats at splitoff,
31,250 × $12; 93,750 × $6 $375,000 $562,500 $937,500
Weighting, $375,000; $562,500  $937,500 0.40 0.60
Joint costs allocated, 0.40; 0.60 × $600,000 $240,000 $360,000 $600,000

Rubber
Floor Mats Car Mats Shreds Total
Revenues, 25,000 × $12; 85,000 × $6 $300,000 $510,000 $30,100d $840,100
Cost of goods sold
Joint costs allocated, 0.40; 0.60 × $600,000 240,000 360,000 600,000
Less: Ending inventory (48,000)e (33,600)f (81,600)
Cost of goods sold 192,000 326,400                518,400
Gross margin $108,000 $183,600 $30,100 $321,700

d
43,000 lbs × $0.70 per lb. = $30,100
e
6,250 × $240,000/31,250 = $48,000
f
8,750 × $360,000/93,750 = $33,600

16-10
3. The production method of accounting for the byproduct is only appropriate if The Mat
Place is positive they can sell the byproduct at the expected selling price. Moreover,
The Mat Place should view the byproduct’s contribution to the firm as material
enough to find it worthwhile to record and track any inventory that may arise. The
sales method is appropriate if either the disposition of the byproduct is unsure or the
selling price is unknown, or if the amounts involved are so negligible as to make it
economically infeasible for The Mat Place to keep track of byproduct inventories.

16-33 (15 min.) Byproduct journal entries (continuation of 16-32).

1. Byproduct – production method journal entries

i) At time of production:
Work-in-process Inventory 600,000
Accounts Payable, etc. 600,000

For byproduct:
Finished Goods Inv – Shreds 35,000
Work-in-process Inventory 35,000

For Joint Products

Finished Goods Inv – Floor 226,000
Finished Goods Inv – Car 339,000
Work-in-process Inventory 565,000

ii) At time of sale:

For byproduct
Cash or A/R 30,100
Finished Goods Inv – Shreds 30,100

For Joint Products

Cash or A/R 810,000
Sales Revenue – Floor 300,000
Sales Revenue – Car 510,000

Cost of goods sold - Floor 180,800

Cost of goods sold – Car 307,360
Finished Goods Inv – Floor 180,800
Finished Goods Inv – Car 307,360
2. Byproduct – sales method journal entries

i) At time of production:
Work-in-process Inventory 600,000
Accounts Payable, etc. 600,000

For byproduct:
No entry

For Joint Products

Finished Goods Inv – Floor 240,000

16-11
 Finished Goods Inv – Car 360,000
Work-in-process Inventory 600,000

ii) At time of sale

For byproduct
Cash or A/R 30,100
Sales Revenue – Shreds 30,100

For Joint Products

Cash or A/R 810,000
Sales Revenue – Floor 300,000
Sales Revenue – Car 510,000

Cost of goods sold - Floor 192,000

Cost of goods sold - Car 326,400
Finished Goods Inv – Floor 192,000
Finished Goods Inv – Car 326,400

16-12