Accounting for By-

Product/Scrap
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 Hello!

I’m Mercy Nuñez from

BS Accountancy 2-D
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 What I will talk about
Classification of Joint
1 Process Outputs Accounting for by-
4 product and scrap

Management Decisions
2 In A Joint Process
Joint Costs of
5 Non-for-profit
Organizations
3 Joint Costs Allocation
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 1 Classification of Joint Process Outputs
A joint process is one in which one product cannot be made
without the production of others.

Joint Products By-products Scrap

▪ the primary ▪ incidental outputs ▪ incidental output of

outputs of a joint of a joint process a joint process
process ▪ produce higher ▪ produce lower sales
sales than a scrap than a by-product
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▪ residual output of a production process

▪ must be disposed
 2 Management Decisions In A Joint Process
1. Decide whether the total expected revenues from the sale of the joint
process output are likely to exceed the total expected processing costs
of the output.
2. Compare the net income from this use of resources to the other net
income of the company if total anticipated revenues from the “basket”
of products exceed the anticipated joint and separate costs.
3. Determine how to classify joint process outputs since joint cost is
assigned only to joint products. However, the joint cost may be reduced
by the sales value of any by-product or scrap.
4. Decide whether to sell any (or all) the joint output at split-off or to
process it further.
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 3 Joint Costs Allocation
Physical Measure Allocation Monetary Measure Allocation

▪ method of allocating common ▪ recognizes the relative ability of

costs to products that uses a each product to generate a profit
common physical characteristic as at sale
the proration base. ▪ but the basis used is dynamic
▪ provides an unchanging yardstick ▪ Accountants customarily ignore
of output price-level fluctuations
▪ useful in products that have
extremely unstable selling prices
▪ but ignores the revenue-
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generating ability of products

 3 Joint Costs Allocation

Net Realizable Value at Approximated Net

Sales Value at Split-Off
Split-off Realizable Value at Split-off
▪ method based on the
▪ method based on the ▪ uses a simulated net
relative sales values of
sales value at split-off realizable value at the
the products at the split-
minus all costs necessary split-off point
off point
to prepare and dispose of ▪ computed as final sales
▪ requires all joint products
the products minus incremental
are marketable at split- ▪ requires all joint products separate costs
off be salable at split-off
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 4 Accounting for by-product/scrap
“Scrap” can be substituted anywhere that “by-product” is used.
NRV Approach Realized Value Approach
▪ When by-product is generated, the NRV is ▪ Total sales of by-product is showed on the
debited to inventory and one of two accounts income statement under the Other Revenue.
may be credited: Work in Process Inventory – ▪ This also shows by-product revenue, net of
Joint Products or Cost of Goods Sold for the additional costs of processing and disposal,
joint products. on the income statement.

▪ Note: The NRV method does not indicate the ▪ Note: The net by-product revenue as to the
revenues, expenses, or profits from the by- second presentation is presented as an
product. Thus, it does not provide sufficient enhancement of net income in the period of
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information to induce management to sale under the Other Income.

maximize the inflows from by-product disposal
 4 Accounting for by-product/scrap
Journal Entries
NRV Approach Realized Value Approach
Work in Process Inventory- By-product xx *for the first presentation
Work in Process Inventory- Joint Products xx
Work in Process Inventory-Joint Products xx
To record production of by-product
Manufacturing Overhead Control xx
Various accounts xx
Work in Process Inventory- By-product xx
To record labor and overhead costs of by-
Various Accounts xx
product processing
To record additional processing costs
* for the second presentation
Work in Process Inventory- By-product xx
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Various Accounts xx
 5 Joint Costs of Non-for-profit Organizations
▪ There are two alternatives for accounting for the cost of
a joint activity by not-for-profit organizations:
▪ The activity must meet three tests for its cost to be
allocated:
- purpose
- audience
- content
▪ If all the criteria are met, the cost is allocated among
three categories
- fund-raising,
- program, and/or
- management/general activities
If all of the criteria are not met, the entire cost is
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▪
allocated to fund-raising
Thank you!
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