COST ACCOUNTING & CONTROL

Joint & By-Products Costing

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 – 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: Market Value and Physical Output Method

BL Company produces only two products and incurs joint processing costs that total P3,750. Products Aba and Ibi are
produced in the following quantities during each month: 4,500 and 6,000 gallons, respectively. BL also runs one ad each
month that advertises both products at a cost of P1,500. The selling prices per gallon for the two products are P20 and
P17.50, respectively.

Required:
1. Amount of joint processing costs allocated to each product based on gallons produced
2. Amount of advertising cost allocated to each product based on sales value

Illustration: Sales Value at Split-off and Net Realizable Value Method

GAB Company produces three products from the same process and incurs joint processing costs of P3,000.
Disposal
Sales price cost per Further Final sales
per gallon gallon at processing price per
Gallons at split-off split-off costs gallon
Mat 2,300 P 4.50 P1.25 P1.00 P 7.00
Nat 1,100 6.00 3.00 2.00 10.00
Kat 500 10.00 8.00 2.00 15.00
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 Disposal costs for the products if they are processed further are:

Mat, P3.00; Nat, P5.50; Kat, P1.00

Required:
1. Amount of joint processing cost allocated to the three products using sales value at split-off
2. Amount of joint processing cost allocated to the three products using net realizable value at split-off

Illustration: Joint-Cost Allocations

Ohio Chemical manufactures two industrial chemicals in a joint process. In October, direct material costing P120,000 was
processed at a cost of P300,000, resulting in 16,000 pounds of Pentex and 4,000 pounds of Glaxco. Pentex sells for P35
per pound and Glaxco sells for P60 per pound. Management generally processes each of these chemicals further in
separable processes to produce more refined products. Pentex is processed separately at a cost of P7.50 per pound, with
the resulting product, Pentex-R, selling for P45 per pound. Glaxco is processed separately at a cost of P10 per pound,
and the resulting product, Glaxco-R, sells for P100 per pound.

Required:
1. Compute the company's total joint production costs.
2. Assuming that total joint production costs amounted to P500,000, allocate these costs by using:
a. The physical-units method.
b. The relative-sales-value method.
c. The net-realizable-value method.

Illustration: Fundamentals of Joint-Cost Allocations

Higgins Corporation manufactures two chemicals (Flextra and Hydro) in a joint process. Data from a recent month follow.

Direct materials used P 360,000

Direct labor 150,000
Manufacturing overhead 690,000
Manufacturing output:
Flextra 40,000 gallons
Hydro 120,000 gallons

Flextra sells for P15 per gallon and Hydro sells for P20 per gallon.

Required:
A. Compute the total joint costs to be allocated to Flextra and Hydro.
B. Compute the joint costs that would be allocated to Flextra by using the physical-units method.
C. Compute the joint costs that would be allocated to Hydro by using the relative-sales-value method.
D. Assume that Hydro can be converted into a more refined product, Hydro-R, in a totally separable process at an
additional cost of P4 per gallon. Hydro-R can be sold in the marketplace for P26 per gallon.
1. Compute the net realizable value of Hydro-R.
2. If Higgins allocated P800,000 of joint cost to Hydro-R and sold 90% of the production completed, determine
the cost of remaining Hydro-R that would be transferred to the company’s month-end balance sheet as
finished-goods inventory.

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

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 (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.

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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 1:

Unknown Company provided the following data for the month of January:

The total joint cost of producing 2,000 pounds of Product A; 1,000 pounds of Product B; and 1,000 pounds of Product C is
P7,500. Selling price per pound of the three products are P15 for Product A; P10 for Product B; and P5 for Product C.
Joint cost is allocated using the sales value method.

Required:
1. Compute the unit cost of Product A if all three products are main products.
2. Compute the unit cost of Product A if Products A and B are main products and Product C is a by-product for
which the cost reduction method is used.

Illustration 2:

A Manufacturing Company makes three products: A and B are considered main products and C a by-product.

Production and sales for the year were:

220,000 lbs. of Product A, salable at P6.00

180,000 lbs. of Product B, salable at P3.00
50,000 lbs. of Product C, salable at P0.90

Production costs for the year:

Joint costs P 276,600

Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900

Required: Using the by-product revenue as a cost reduction and net realizable value method of assigning joint costs,
compute unit costs (a) if C is a by-product of the process and (b) if C is a by-product of B.

Illustration 3:

A company produces two main products jointly, A and B, and C, which is a by-product of B. A and B are produced from
the same raw material. C is manufactured from the residue of the process creating B.

Costs before separation are apportioned between the two main products by the net realizable value method. The net
revenue realized from the sale of C is deducted from the cost of B. Data for April were as follows:

Costs before separation P 200,000

Costs after separation:
A 50,000
B 32,000
C 4,000

Production for April, in pounds:

A 800,000
B 200,000
C 20,000

Sales for April:

A 640,000 pounds @ P0.4375
B 180,000 pounds @ P0.65
C 20,000 pounds @ P0.30

Required:
1. Determine the NRV of the by-product.
2. Determine the joint costs allocated to each joint product.
3. Determine the unit cost of each joint product.
4. Determine the gross profit for April.

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 EXERCISES

THEORIES:

1.The point in a joint production process where each individual product becomes separately identifiable is commonly called the:
a. decision point b. separation point c. joint product point d. split-off point

2.The joint-cost allocation method that recognizes the revenues at split-off but does not consider any further processing costs is
the:
a. relative-sales-value method c. physical-units method
b. net-realizable-value method d. reciprocal-accounting method

3.Which of the following choices correctly denotes the data needed to allocate joint costs under the relative-sales-value
method?
Sales Value Sales Value of Product
of Product Separable After Processing
at Split-Off Cost Beyond Split-Off
a. Yes Yes No
b. Yes Yes Yes
c. Yes No No
d. No Yes Yes
e. No No Yes

4.When allocating joint costs, Wolstein calculates the final sales value of the various products manufactured and subtracts
appropriate separable costs. The company is using the:
a. gross margin at split-off method c. physical-units method
b. relative-sales-value method d. net-realizable-value method

5. If a company obtains two salable products from the refining of one ore, the refining process should be accounted for as
a(n)
a. mixed cost process b. joint process c. extractive process d. reduction process
6. Joint costs are allocated to which of the following products?
By-products Scrap
a. yes yes
b. yes no
c. no no
d. no yes

7. Joint cost allocation is useful for

a. decision making c. control
b. product costing d. evaluating managers’ performance

8. Which of the following components of production are allocable as joint costs when a single manufacturing process
produces several salable products?
a. direct material, direct labor, and overhead c. direct labor and overhead only
b. direct material and direct labor only d. overhead and direct material only

9. Joint costs are most frequently allocated based upon relative

a. profitability b. conversion costs c. prime costs d. sales value

10. By-products are

a. allocated a portion of joint production cost.
b. not sufficient alone, in terms of sales value, for management to justify undertaking the joint process.
c. also known as scrap.
d. the primary reason management undertook the production process.

11. Which of the following has sales value?

By-products Waste
a. no no
b. yes no
c. yes yes
d. no yes

12. Which of the following is a false statement about scrap and by-products?
a. Both by-products and scrap are salable.
b. A by-product has a higher sales value than does scrap.
c. By-products and scrap are the primary reason that management undertakes the joint process.
d. Both scrap and by-products are incidental outputs to the joint process.

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 PROBLEMS:

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

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 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 to PROBLEMS:

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