PROCESS COSTING – Continued

Losses Made Part Way through Production

 INPUT = ACTUAL OUTPUT + NORMAL LOSS + ABNORMAL
LOSS
 INPUT = ACTUAL OUTPUT + NORMAL LOSS - ABNORMAL
GAIN
Generally it is assumed that losses occur at the end of the production
process and Units of Abnormal losses or Gain are given a cost or Value as
if they are fully completed units and so one equivalent unit each.
However, if losses occur at a different stages in the process, the
assumption of differing degrees of completion [Concept of Equivalent
Units] is used to decide the cost of Abnormal Loss or Gain.
Case of Abnormal Loss
1) Prepare the Statement of Equivalent Units
2) Calculate the Cost Per Equivalent Units
3) Valuation of Output and Abnormal Loss
4) Complete the Process Account
Case of Abnormal Gain
*** Same Process as Per Abnormal Loss
Note: Equivalent Units of Abnormal Gain are given a Negative
Value and Subtracted Form Total EU of Output during the Period.
Example 1: Illustration 11 Form Kaplan Text.

JOINT AND BY-PRODUCTS

Joint Products/Main Product/Important Saleable Item are two or
more Products separated in a process, each of which has a significant
Value.
A by-product/Secondary Product/Not Important Saleable Item is an
incidental product form a process which has insignificant Value compared
the main product.
Example:
Form Oil-refining Process, petrol and paraffin are Main Products (Joint
Products) have similar sales Values.
For a timber Industry, sawdust and bark are secondary products and have
relatively low Sales value compared to the timber, Main Product.

Accounting Treatment for Joint Products

Split off Point/Separation Point is the Point at which joint products and
by-products becomes separately identifiable.
Cost Incurred prior to this point of separation are called common costs or
Joint Costs.

How Common Costs are allocated between Products?

When to sell Main Products or Joint Product [Before or After
Processing]??

Basis of Apportionment of Joint Costs

1) Sales Value of Production (Market Value )
2) Production Units
3) Net Realisable Value (NRV)

STEPS for Apportionment

1) Identify the Joint Costs of the Process
 2) Identify the Basis of Allocation and Find its Value
a. Sales Value of Products if basis is Sales Value of
Production (Market Value ) Method
b. Units of Products for Production Units Method
c. NRV of Products for Net Realisable Value Method
3) Calculate the Total of Each Basis and Proportion for Each
Products and Allocate the Costs.
a. For Market Value Method, calculate total Market Value of
all products and share the proportion of Costs on the basis
of individual Products Market Value.
b. Same case for Production Units Method
c. Same case for Net Realisable Value Method
Example 1: Illustration 12 Form Kaplan Text.
Example 2:
Two products (W and X) are created from a joint process. Both
products can be sold immediately after split-off. There are no
opening inventories or work in progress. The following information
is available for last period.
Total joint production costs $776,160
Product Production Units Sales units Selling price per unit
W 12,000 10,000 $10
X 10,000 8,000 $12
Using the sales value method of apportioning joint production costs,
what was the value of the closing inventory of product X for last
period?
A $68,992
B $70,560
C $76,032
D $77,616
Example 3: Joint Products in Process Accounts
Three joint products are manufactured in a common process, which
consists of two consecutive stages. Output from process 1 is transferred to
process 2, and output from process 2 consists of the three joint products,
Hans, Nils and Bumpsydaisies. All joint products are sold as soon as they
are produced.
Data for period 2 of 20X6 are as follows.
Process 1 Process 2
Opening and closing inventory None None
Direct material
(30,000 units at $2 per unit) $60,000 –
Conversion costs $76,500 $226,200
Normal loss 10% of input 10% of input
Scrap value of normal loss $0.50 per unit $2 per unit
Output 26,000 units 10,000 units of Han
7,000 units of Nil
6000 units of Bumpsdaisy
Selling prices are $18 per unit of Han, $20 per unit of Nil and $30 per unit
of Bumpsydaisy.
Required
(a) Prepare the Process 1 account.
(b) Prepare the Process 2 account using the sales value method of
apportionment.
(c) Prepare a profit statement for the joint products.
Accounting Treatment of By-Products
By-products are of less Significance than main products and may not
require precise cost allocation.
The Most common method of accounting for by-products is to deduct the
net realizable value of the by-product form the cost of the main products.
Factors that influence valuation and accounting treatment of by-
products;
1) Is the value of by-product known at the time of the production?
2) Could the by-product be used in other production?
3) Is the by-product an alternative to the main products?
4) Is there a need for separate profit calculation for Sales Incentives or
for Control?
NON-COST Methods makes no attempt to allocate joint cost to the by-
product.
1) Other Income: Net Sales Value of the by-products for the current
period is recognized as other income and is reported in the income
statement.
Applicability of other Income method;
a) Low Value of the by-product, where any other method would be
more expensive than the benefits received.
b) Carrying by-products with the main products would not really
affect the cost of main products.
2) By-product Revenue deducted from the main product(s) Cost:
This is the most common method where Net Sales Value of the by-
products for the current period is treated as deduction form the cost
of the main product(s).
Note: This Treatment is similar to the accounting treatment of
Normal Loss.
COST Methods attempts to allocate some joint cost to the by-products
and carry inventory at the allocated cost levels.
 1) Replacement Cost Method values the by-product at its
opportunity cost of purchasing or replacing the by-products.
2) By-products valued at standard price method
a. Products are valued at standard price to avoid fluctuations in
the by-product value.
b. Main product costs will not be affected by any fluctuations in
the by-product price.
c. If Standard Price is set arbitrarily, or it may reflect the average
price over time, a Variance account is used to account for the
difference between actual and standard price.
3) Joint Cost Pro-rata Method allocates some joint costs to the by-
product using any one of the joint cost allocation methods. This
method is rarely used in practice.
PROCESS ACCOUNTS FOR JOINT AND BY PRODUCTS
1) Joint Products are treated as normal output form a process
2) Treatment of By-products in process account is similar to the
treatment of Normal Loss.
a. By-product income is credited to the process account and
debited to a by-product account.
b. To calculate the number of units in a period, by-product units
(Like Normal Loss) reduce the number of output units.
c. Cost Per Unit when by-products are produced :
i. Net Cost of Inputs = Process Costs – Scrap Value of
Normal Loss – Sales Value of by-product
ii. Expected Output = Input Units – Normal Loss Units –
By- Product Units

Cost Per Unit = Net Cost of Inputs/Expected Output

Example 1: Illustration 13 of Kaplan Text

Example 2: Test Your Understanding 7 of Kaplan Text
Example 3: Test Your Understanding 8 of Kaplan Text
Example 4: Test Your Understanding 9 of Kaplan Text
Example 5:
During November 20X3, Splatter Co recorded the following results.
Opening inventory
Main product P Nil
Cost of production $120,000
By-product Z Nil
Sales of the main product amounted to 90% of output during the
period, and 10% of production was held as closing inventory at 30
November. Sales revenue from the main product during November
20X2 was $150,000.
A by-product Z is produced, and output had a net sales value of $1,000.
Of this output, $700 was sold during the month, and $300 was still in
inventory at 30 November.
Required: Calculate the profit for November using
a) Income from by-product added to sales of the main product
b) By-product income treated as a separate source of income
c) Sales income of the by-product deducted from the cost of
production in the period.
d) Net Realisable value of the by-product deducted from the cost
of production in the period.
Example 6:
Randolph manufactures two joint products, J and K, in a common
process. A by-product X is also produced. Data for the month of
December 20X2 were as follows.
Opening inventories Nil
Costs of processing
Direct materials $25,500
Direct labour $10,000
Production overheads are absorbed at the rate of 300% of direct labour
costs.
Production Sales
Units Units
Output and sales consisted of:
Product J 8,000 7,000
Product K 8,000 6,000
By-product X 1,000 1,000
The sales value per unit of J, K and X is $4, $6 and $0.50 respectively.
The saleable value of the by product is deducted from process costs
before apportioning costs to each joint product. Costs of the common
processing are apportioned between product J and product K on the
basis of sales value of production.
The individual profits for December 20X2 are:
Product J Product K
$ $
A 5,250 6,750
B 6,750 5,250
C 22,750 29,250
D 29,250 22,750