Accounting for Joint Products and By-products

Methods of Allocating Joint Costs to Joint products

1. Physical Units Method - allocation is based on some physical measures like

a. Units
b. Pounds
c. Tons
d. Gallons
e. Board Feet
f. Atomic Weight
g. Heat units like BTUs (British thermal units) of energy
h. Barrels
i. Ounces
2. Weighted Average Method - Weight factors maybe assigned to individual units of the various
joint products based on attributes such as:
- Size of the unit
- Difficulty of manufacture
- Time consumed in making the unit
- Difference in type of labor applied
- Amount of materials used
-
3. Sales Value at split-off method- allocation of joint cost based on market value or sales value of
the joint products at the split-off point

4. Net Realizable value Method- When there is not ready market price for individual products at
the split-off point, the net realizable value method can be used. This method is used when one
or more products cannot be sold at the split-off point but must be processed further.

5. Constant Gross Margin Percentage Method- this method recognizes that costs incurred after the
split-off point are part of the total cost on which profit is expected to be earned and it allocates
joint cost such that the gross margin percentage is the same for each product.

Accounting for By-Products - the difference between joint products and by-products rests solely on the
relative sales value. A by-product is produced incidental to the production of the main product. It is a
product whose total sales value is relatively small in comparison with the sales value of the main
products. Revenue from the sale of by-products may be treated as:

a. Other Income
b. Additional Sales Revenue
c. A deduction from the Cost of Goods Sold of the main product
d. A deduction from the total production cost of the main product.
Illustration Problems:

1. A Company buys sides of beef to convert into three products: Steaks, Roasts and Ground Beef.
During the month, A Company bought multiple sides of beef for P20,000 that were converted
into the following products at a cost of P6,400:

Products No. of pounds Sales value at split-off

Steaks 3,312 P4.25 per pound
Roasts 6,210 3.80 per pound
Ground Beef 4,278 0.90 per pound

The remaining 1,200 pounds per lost as waste

a. Allocate the joint cost to the three products using the physical units method.
b. Allocate the joint cost to the three products using the sales value at split-off method.
c. Assume that the ground beef could be processed into sausage that could be sold for P2.10 per
pound to a distributor that wants a special label costing P0.15 per pound attached to the
sausage. If A Company uses the sales value at split-off point to allocate joint cost, what is the
maximum separate cost of processing that the company could incur to still appear to earn P0.40
per pound upon the sale? If the separate cost were incurred, would you consider the P0.40 per
pound a real profit amount?

2. B Company manufactures three joint products in a single process. The following information is
available for the month:

Product Number of Gallons Sales Value at Cost after Final

Split-off per Gallon Split-off Selling Price
A 4,500 P14 P4 P24
B 18,000 8 5 15
C 13,500 18 2 22

Allocate the joint cost of P558,000 to the production based on the

a. Number of gallons
b. Sales value at split-off
c. Net realizable value at split-off
d.
3. C Company makes 3 products from a joint production process using honey. Joint cost for the
process is P123,200

Product Units of Output Per unit selling price Incremental Final

At split-off Processing cost Sales Price

Honey Butter 10,000 P4.00 P3.00 P6.00

Honey Jam 20,000 6.40 4.00 14.00
Honey Syrup 1,000 3.00 0.40 3.60
Each container of honey butter, jam and syrup, respectively, contains 16 ounces, 8 ounces, and 3
ounces of product.
a. Determine which products should be processed beyond the split off point
b. Assume honey syrup should be treated as a by-product. Allocate the joint cost based on
units produced , weight, and sales value at split-off . Use the net realizable value method in
accounting for the by-product and treat the net realizable value as a deduction from the
joint cost.