COST ACCOUNTING AND CONTROL
QUIZ 4
JOINT AND BY-PRODUCTS
STANDARD COSTING
JOINT AND BY-PRODUCTS
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 the
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-products.
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 product 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 the problem is silent, use the
sales (market) value at the 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 the split-off
point;
➔ NRV is the same with
Approximated (Estimated) NRV
Method (Hypothetical Market Value
Method)
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 second
METHODS OF COSTING (ALLOCATING
JOINT COSTS) BY-PRODUCTS
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 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
I . Additional sales revenue
II. Other income
III. 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 (the 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 the production cost of the
main product at the current market or
placement rate.
Method 4: Market value or Reversal cost
method
STANDARD COSTING
STANDARD
● Standard is a measure of acceptable
performance established by management
as a guide in making economic decisions.
STANDARD COST
● Standard Cost is a scientifically
predetermined cost of manufacturing a unit
or a specific quantity of product during a
particular period of time. It is a measure of
acceptable performance, established by
management as a guide to certain
economic decisions. It is in short, a
reflection of what management thinks a
cost ought to be.
STANDARD COSTING
● Standard costing is the practice of
substituting an expected cost for an actual
cost in the accounting records.
Subsequently, variances are recorded to
show the difference between the expected
and actual costs. This approach represents
a simplified alternative to cost layering
systems, such as the FIFO and LIFO
methods, where large amounts of historical
cost information must be maintained for
inventory items held in stock.
● Standard costing involves the creation of
estimated (i.e., standard) costs for some or
all activities within a company. The core
reason for using standard costs is that
there are a number of applications where it
is too time-consuming to collect actual
costs, so standard costs are used as a
close approximation to actual costs.
● Since standard costs are usually slightly
different from actual costs, the cost
accountant periodically calculates
variances that break out differences
caused by such factors as labor rate
changes and the cost of materials. The cost
accountant may periodically change the
standard costs to bring them into closer
alignment with actual costs.
ADVANTAGES OF STANDARD COSTING
● Though most companies do not use
standard costing in their original application
of calculating the cost of ending inventory,
it is still useful for a number of other
applications. In most cases, users are
probably not even aware that they are
using standard costing, only that they are
using an approximation of actual costs.
Here are some potential uses:
1. BUDGETING. A budget is always
composed of standard costs since it would
be impossible to include in it the exact
actual cost of an item on the day the budget
is finalized. Also, since a key application of
the budget is to compare it to actual results
in subsequent periods, the standards used
within it continue to appear in financial
reports through the budget period.
2. INVENTORY COSTING. It is extremely
easy to print a report showing the period-
end inventory balances (if you are using a
perpetual inventory system), multiply it by
the standard cost of each item, and
instantly generate an ending inventory
valuation. The result does not exactly
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 match the actual cost of inventory, but it is
close. However, it may be necessary to
update standard costs frequently, if actual
costs are continually changing. It is easiest
to update costs for the highest-peso
components of inventory on a frequent
basis and leave lower-value items for
occasional cost reviews.
3. OVERHEAD APPLICATION. If it takes too
long to aggregate actual costs into cost
pools for allocation to inventory, then you
may use a standard overhead application
rate instead, and adjust this rate every few
months to keep it close to actual costs.
4. PRICE FORMULATION. If a company
deals with custom products, then it uses
standard costs to compile the projected
cost of a customer’s requirements, after
which it adds a margin. This may be quite
a complex system, where the sales
department uses a database of component
costs that change depending upon the unit
quantity that the customer wants to order.
This system may also account for changes
in the company’s production costs at
different volume levels, since this may call
for the use of longer production runs that
are less expensive.
● Nearly all companies have budgets and
many use standard cost calculations to
derive product prices, so it is apparent that
standard costing will find some uses for the
foreseeable future. In particular, standard
costing provides a benchmark against
which management can compare actual
performance.
STANDARDS ARE MOST FREQUENTLY
ESTABLISHED FOR:
1. Raw materials used in making a product or
one of its components.
2. Direct labor needed to perform a
manufacturing operation.
3. Manufacturing overhead applied to a unit of
output.
PURPOSES OF STANDARD COSTS
1. Cost control
2. Pricing decisions
3. Motivation and performance appraisal
4. Cost awareness and cost reduction
5. Preparation of budgets
6. Costing of inventories
7. Preparation of cost reports
8. Management by objective
MANAGEMENT BY OBJECTIVE AND
MANAGEMENT BY EXCEPTION
● In essence, management by objectives
(MBO) means that managers establish
specific goals or objectives for all business
activities. Eventually, actual results of
operations are compared with these
objectives. If actual results fall within the
established objectives, little management
action is taken. When performance is
significantly different from the desired level,
appropriate action is done by management.
● This concept is very much related to the so-
called management by exception, which
states that managers will maximize their
efficiency if they concentrate only on those
operational factors showing material
deviations from the plan.
STANDARD COST ACCOUNTING SYSTEM
● The standard cost accounting system
consists of three basic objectives, they are:
1. Standard-setting
2. Accumulation of actual costs
3. Variance analysis
● Determination of standard cost is based on
physical standards – basic and current. A
basic standard is a yardstick against which
both expected and actual performances
are compared. It is similar to an index
number against which all subsequent
results are measured.
The current standards are of three types:
1. THEORETICAL STANDARD – is a
standard set for an ideal or
maximum level of operation and
efficiency. Such standard constitute
goals to be aimed for rather than
performance that can be currently
achieved.
2. EXPECTED ACTUAL STANDARD
– is a standard set for a normal level
of operation and efficiency. It is a
reasonably close estimate of actual
results.
3. NORMAL STANDARD – is a
standard set for the normal level of
operation and efficiency, instead to
represent challenging yet attainable
results.
DIFFERENT TYPES OF CAPACITY LEVELS
1. CAPACITY. Refers to the fixed amount of
the company’s human and nonhuman
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 resources for which management has
committed itself and with which it expects
to conduct the business and maintain the
firm as a going concern. Different levels of
capacity are described as theoretical,
practical, and normal.
2. THEORETICAL CAPACITY. Refers to the
plant’s or department’s capability to
produce at full tilt, without interruptions.
Though it is highly impossible to attain, it is
well calculated to serve as a basis for
establishing other capacity levels.
3. PRACTICAL CAPACITY. Is theoretical
capacity less internal factors such as
ordinary and expected interruptions due to
delays, breakdowns, inefficiencies, non-
working days, and changes in production
processes.
4. NORMAL CAPACITY. Is the most
commonly used type of capacity level. In
calculating normal capacity, not only
internal but also external factors,
particularly the market or the demand for
the product, are considered. The normal
capacity level is used in calculating the
predetermined or standard factory
overhead rate.
STANDARD COST VARIANCE ANALYSIS
DIRECT MATERIAL VARIANCES
● The materials price variance is also known
as materials spending variance, materials
money variance, materials rate variance.
● The materials quantity variance is also
known as materials usage variance,
materials efficiency variance.
● Materials price usage variance is a price
variance.
TO COMPUTE:
Actual Materials Actual Quantity
Cost Used x Actual
Price
LESS. Standard Standard Quantity
Material Cost x Standard Price
Materials Cost
Variance
ANALYSIS:
● Quantity Variance: Difference in
Quantities Used x Standard Price
● Price Variance: Difference in Prices x
Actual Quantity (Purchased/Used)
DIRECT LABOR VARIANCES
● The labor rate variance is also known as
labor price variance, labor spending
variance, labor money variance.
● The labor efficiency variance is also known
as labor hours variance, labor usage
variance, labor time variance.
● The labor efficiency variance excludes idle
time spent in the production. If any, idle
time is separately explained through the
Idle Time Variance, which is generally
regarded as unfavorable. Idle Time
Variance = Idle Time x Standard Labor
Rate.
TO COMPUTE:
Actual Labor Cost Actual Hours x
Actual Labor Rate
LESS. Standard Standard Hours x
Labor Cost Standard Labor
Rate
Labor Cost
Variance
ANALYSIS:
● Efficiency Variance: Difference in Hours x
Standard Rate
● Rate Variance: Difference in Rates x
Actual Hours
FACTORY OVERHEAD VARIANCES
● SFOH = SH x Standard FOH Rate. Under
standard costing, SFOH is likewise referred
to as the Applied FOH.
● If AFOH > SFOH, then FOH is said to be
under-applied; hence, under-application
indicates an unfavorable variance, while
over-application indicates a favorable
variance.
● The term capacity variance is also used to
mean the volume variance.
● Budget Variance = Actual Cost – Budgeted
Cost = Actual FOH – Budgeted FOH
(BFOH)
➔ If BFOH is adjusted based on SH
(BASH), then budget variance is
controllable variance.
➔ If BFOH is adjusted based on AH
(BAAH), then budget variance is
spending variance.
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 ● Volume variance is actually the Fixed
Budget allowed based on XX
Volume Variance; there is no such thing as
standard hours (BASH)
a variable volume or variable capacity
variance. Controllable Variance XX
● Under the 3-way approach, the FOH
Efficiency Variance is actually the Variable
Efficiency Variance. Other than “BAAH-
BASH”, variable overhead efficiency Budget allowed based on XX
variance may also be computed based on: standard hours (BASH)
(AH-SH) x VR
● FOH variances may be classified into: Standard factory overhead XX
➔ Variable FOH Variances = VSV + (SFOH)
VEV
➔ Fixed FOH Variances = FSV + FVV Volume Variance XX
● Alternatively, another FOH variance
analysis may include the following THREE-WAY VARIANCE ANALYSIS:
variances (NOTE: this version is not
included in the board exam syllabus for Actual factory overhead (AFOH) XX
Management Services):
Budget allowed based on actual XX
➔ IDLE Capacity Variance: BAAH –
hours (BAAH)
(AH x SOR)
➔ TOTAL Efficiency Variance: (AH- Spending Variance XX
SH) x SOR
➔ FIXED Efficiency Variance
(Effectiveness) Variance: (AH-SH) Actual hours (AH) XX
x FR
● Manufacturing Efficiency Variance LESS. Standard hours (SH) (XX)
incorporates the effect of both FOH
Efficiency Variance and Labor Efficiency Difference xx
Variance. In rare cases, the materials
quantity variance may also be included. MULTIPLY. Budget allowed based XX
● DM Variance + DL Variance + FOH on actual hours (BAAH)
Variance = Production or Manufacturing
Variable Efficiency Variance XX
Cost Variance.

Budget allowed based on XX

standard hours (BASH)

Standard factory overhead XX

(SFOH)

Volume Variance XX
TO COMPUTE:
Actual FOH Cost Actual Hours x FOUR-WAY VARIANCE ANALYSIS:
Actual FOH Rate
Actual fixed factory overhead XX
Less. Standard Standard Hours x (AFFOH)
FOH Cost Standard FOH
Rate Budget allowed based on actual XX
hours – fixed (BAAH-F)
FOH Cost
Variance Fixed Spending Variance XX

ANALYSES:
TWO-WAY VARIANCE ANALYSIS: Actual variable factory overhead XX
Actual factory overhead (AFOH) XX (AVFOH)

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Budget allowed based on actual XX
hours – fixed (BAAH-V)

Variable Spending Variance XX

Actual hours (AH) XX

LESS. Standard hours (SH) (XX)

Difference xx

MULTIPLY. Budget allowed based XX

on actual hours (BAAH)

Variable Efficiency Variance XX

Budget allowed based on XX

standard hours (BASH)

Standard factory overhead XX

(SFOH)

Volume Variance XX

BUDGET ALLOWED BASED ON STANDARD

AND ACTUAL HOURS
Budgeted fixed factory overhead XX

Standard variable overhead rate x XX

standard hours

Budget allowed based on XX

standard hours

Budgeted fixed factory overhead XX

Standard variable overhead rate x XX

actual hours

Budget allowed based on actual XX

hours

VARIANCES IN THE LEDGER ACCOUNTS

● Variances usually do not appear on the FS
of a company. They are used for
managerial control and are recorded in the
ledger accounts.

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