UNIT V – JOINT AND BY-PRODUCT COSTING

Definition of terms

Co-products – are produced simultaneously with other products but not necessarily from the same raw
materials or the same processing operations.

Main products – result from those manufacturing operations in which companies simultaneously
produce two or more products or significant sales value known as joint products.

Joint products – are individual products that are produced simultaneously from the same raw materials
and processing operations with each product possessing more than a nominal value in the
form in which they are produced.

By-products – denotes a product of relatively small value that is produced simultaneously with a
product of greater value known as the main product.

Split-off point – is the point at which the main product , having a significant sales value is identified and
associated by-products, having a lesser value will emerge.

Joint Costs – are costs incurred prior to split-off point to produce two or more goods manufactured
simultaneously by a single process or series of processing operations.

Separable costs – are costs that can be identified with a particular joint product and allocated to a
specific product being produced. These are costs incurred for a specific product after the
split-off point.

Characteristics of Main products

1. The products must be the primary objective of the manufacturing operations.
2. Sales value must be relatively high if compared with the products resulting at the same time
period.
3. In case of joint products, the manufacturer must produce all of the products through a
common process.

Characteristics of By-Products
1. The product is not the primary objective of the manufacturing operations
2. Sales value of the by-product is comparatively low as compared with the sales value of the
main product.

Methods of allocating Joint Costs to Joint Products

1. Average unit cost method or physical output method
 The basis for allocating the joint costs is the quantity of output which may be
expressed in units, tons, gallons or any other appropriate measurement. The quantity
of output of all the joint products must be stated in the same scale.

 The joint cost is allocated by a ratio of output per product over the total joint product
multiplied by the total joint cost.

 The most appealing characteristic is simplicity not accuracy

 It is assumed that all products produced by common production should be charged a

proportionate share of the joint cost based on the number of the units produced.
 2. Market value or Sales value at split-off point method
 Most popular allocation method.
 When the sales value is known at the split-off point, the total joint cost is allocated
among the joint products using the following formula:

Sales value at split-off point x Joint cost = allocated joint costs

Total sales value at split-off point

3. Net realizable value method (Adjusted sales value at split off point)
 If the some or all of the joint products must be processed further to be salable, the next
best approach is to allocate the joint cost using the net realizable value method of
adjusted sales value method.
 Any estimated additional processing and disposal costs are deducted from the final
sales value to compute for the net realizable value (NRV).
 The joint cost is allocated to the joint products using the following formula:

NRV or adjusted sales value of each product x Joint Costs = allocated joint cost
Total NRV or adjusted sales value of all products

Illustrative Problem 1: (source: Cost Accounting & Control by Norma D. De Leon, et al.)

The following information is available for the Guiller Company. Joint Costs amounted to P 164,000.

Products Units produced Disposal MV at split Add’l Processing Final MV

costs off costs
A 28,000 P 4,000 P 8.00 P 50,000 P 11.50
B 34,000 1,000 7.00 30,000 10.00
C 20,000 5,000 9.50 35,000 14.00

Solution:

1. Physical output/Average unit cost method

Product A = 28,000/82,000 x 164,000 = P 56,000

Product B = 34,000/82,000 x 164,000 = 68,000

Product C = 20,000/82,000 x 164,000 = 40,000

P 164,000

The total production costs of a product are computed as follows:

Products Units Cost/unit Share in Add’l Total

produced Joint Costs Processing Production
costs costs
A 28,000 P 2.00 P 56,000 P 50,000 P 106,000
B 34,000 68,000 30,000 98,000
C 20,000 40,000 35,000 75,000
82,000 P 164,000 P 115,000 P 279,000
2. Market value or Sales value at split-off

Allocation:

Product A = 224,000/652,000 x 164,000 = P 56, 344

Product B = 238,000/652,000 x 164,000 = 59,865

Product C = 190,000/652,000 x 164,000 = 47,791

The total production costs of a product are computed as follows:

Products Units MV at Total MV Share in Add’l Total

produced split @ SO Joint Cost Processing production
off cost costs
A 28,000 P 8.00 P 224,000 P 56,344 P 50,000 P 106,344
B 34,000 7.00 59,865 30,000 89,865
238,000
C 20,000 9.50 190,000 47,791 35,000 82,791
82,000 P 652,000 P 164,000 P 115,000 P 279,000

3. Net realizable value method (Adjusted sales value at split off point)
Allocation:

Product A = 268,000/817,000 x 164,000 = P 53,797

Product B = 309,000/817,000 x 164,000 = 62,027

Product C = 240,000/817,000 x 164,000 = 48,176

The total production costs of a product are computed as follows:

Products Units Final Total Disposal Add’l Share in Total

produced MV MV costs Processing NRV Joint Cost Production
costs Costs
(1) (2) (4) (5) (6) (7) (8) (9)
(3) ( 2 x 3) (4 – (5+6_) (6 + 8)
A 28,000 P 11.50 P 322,000 P 4,000 P 50,000 P 268,000 P 53,797 P 103,797
B 34,000 10.00 340,000 1,000 30,000 309,000 62,027 92,027
C 20,000 14.00 280,000 5,000 35,000 240,000 48,176 83,176
82,000 P 942,000 P 10,000 P 115,000 P 817,000 P 164,000 P 279,000

Illustrative Problem 2: (source: Cost Accounting & Control by Norma D. De Leon, et al.)

Francis manufactures three joint products from a joint process. the following data pertains to operations
of September, 2020:

Products Units produced MV at split off

A 5,000 P 8.40
B 3,000 6.00
C 2,000 5.00

REQUIRED: Allocate the joint cost of P 42,000, using:

1. Market value method
2. Average unit cost method
Solution:
1. Market value method

Products Units MV at split off Total MV @ SO Percentage Share in Joint

produced Cost
A 5,000 P 8.40 P 42,000 60% P 25,200
B 3,000 6.00 18,000 60% 10,800
C 2,000 5.00 10,000 60% 6,000
10,000 P 70,000 P 42,000

Percentage = 42,000/70,000 = 60%

2. Average unit cost method

Products Units produced Average unit cost Share in Joint Cost
A 5,000 P 4.20 P 21,000
B 3,000 4.20 12,600
C 2,000 4.20 8,400
10,000 P 42,000

ACCOUNTING FOR BY-PRODUCT

By-products, like main products, are produced from a common raw materials and/or common
manufacturing process. Joint costs are not directly traceable to either main products or by-products.
By-products are those products of limited sales value produced simultaneous with products of greater
sales value, known as main products. Main products are usually produced in much greater quantity than
by-products. Cost allocation methods for by product differ from those used for main products.

Methods of Costing (Allocating Joint Costs) By-Products

Method A – By-Products are recognized when sold

 Used when by products are considered of minor importance and does not require
additional processing costs. Net revenue from the sale of by-products ( sales value
less selling expenses) may be treated and presented in the income statement as:
1. Other income
2. Additional sales revenue
3. A deduction from the cost of goods sold of the main product

Method B - By-Products are recognized when produced

 Used when by products are considered important and therefore require additional
processing costs.
 The expected value of the by-product produced is shown in the income statement as a
deduction from the total production cost of the main products produced.
 Two basic accounting methods if by products are recognized when production is
completed.

1. Net realizable value method

 Estimated sales value less estimated additional processing cost and
marketing and administrative expenses equals net realizable value is
deducted from the total manufacturing costs of the main products.
 No part of the joint cost is allocated to the by product.

2. Reversal Cost Method (Normal Net Profit)

 Estimated sales value less estimated additional processing cost,
marketing and administrative expenses and normal gross profit are
 deducted from the gross revenue, the remaining portion is the estimated
cost of producing the by product at split-off point.
 The joint cost allocated to the production of the by product is deducted
from the total production cost of the main product and charged to a By-
Product Inventory account.
Illustrative Problem 1: (adapted )
DRS Corporation produces main product Bee from a process that also yields by-product Da. The by-
product requires additional processing costing P 2,000 and selling expenses of P 700. Information
concerning the batch produced in November, 2020 follows:

Product Production MV at SO Units sold

BEX 30,000 20 25,000
Dee 10,000 2 7,500

The cost incurred up to the split-off point are:

Direct materials P 130,000
Direct labor 95,000
Factory overhead 75,000

Method A – By-Products are recognized when sold

1. Net revenue treated as additional revenue.
 No journal entries until the sale of the by-products occurs.
 The net revenues./proceeds of the by-products are reported in the income statement
as revenues group with other sales.
 The journal entry to record the sale of the by-products is as follows:

Cash 12,300
Sales – By-product 12,300
To record net revenue from sales of by-product

DRS Corporation
Income Statement
For the Month of November, 2020

Sales
Main product - BEX
500,000
By-product – Dee 12,300 P 512,300

Less: Cost of goods sold:

Direct materials P 130,000
Direct Labor 95,000
Factory overhead 75,000
Total manufacturing costs P 300,000
Less: Inventory, end 50,000 250,000
Gross Profit 262,300
Less: Selling and Administrative expense 105,000
Net income 157,300

2. Net revenue treated as other income

 No journal entries until the sale of the by-products occurs.
 The net revenues./proceeds from sale of the by-product are shown in the income
statement as other income.
 The journal entry to record the sale of the by-products is as follows:

Cash 12,300
 Revenue from by-product 12,300
To record net revenue from sales of by-product
DRS Corporation
Income Statement
For the Month of November, 2020

Sales
Main product - BEX P 500,000
Less: Cost of goods sold:
Direct materials P 130,000
Direct Labor 95,000
Factory overhead 75,000
Total manufacturing costs P 300,000
Less: Inventory, end 50,000 250,000
Gross Profit 250,000
Add: other income
Revenue from by-product 12,300
Total 262,300
Less: Selling and Administrative expense 105,000
Net income 157,300

3. Net revenue from by-product treated as deduction from the cost of main product:
 No journal entries until the sale of the by-products occurs.
 The net revenues./proceeds from sale of the by-product are treated as a reduction
from the cost of the main product.
 The journal entry to record the sale of the by-products is as follows:

Cash 12,300
Work in process 12,300
To record net revenue from sales of by-product

DRS Corporation
Income Statement
For the Month of November, 2020

Sales
Main product - BEX P
500,000
Less: Cost of goods sold:
Direct materials P 130,000
Direct Labor 95,000
Factory overhead 75,000
Total manufacturing costs P 300,000
Less: Revenue from by product 12,300
Net manufacturing cost 287,700
Less: Inventory, end 47,950 239,750
Gross Profit 260,250
Less: Selling and Administrative expense 105,000
Net income 155,250
Illustrative Problem 2: (source: Cost Accounting & Control by Norma D. De Leon)
MCQ Company manufactures product MN from a process that also produces by-product J and by
product
K. The following pertains to operations for October 2020:

MN J K Total
Units produced 10,000 6,000 4,000 20,000
Sales price/unit P 20.00 P 3.00 P 2.75
Units sold 8,000 6,000 4,000 18,000
Subsequent costs P 62,300 P 5,700 P 4,300 P 72,300
Selling and adm. 32,000 2,500 1,000 35,500
expenses
Desired profit 2,000 1,200

The joint cost amounted to P 50,000.

1. By Product is recorded at its Net realizable value.

 Estimated sales value less estimated additional processing cost and marketing and
administrative expenses equals net realizable value is deducted from the total
manufacturing costs of the main products.
 The journal entry to record the net realizable value of by-products:

By-Product – J 9,800
By-Product - K 5,700
Work in Process 15,500
To record the net realizable value of the completed by-products.

Solution:
By-Product J By-Product K
Units produced 6,000 4,000
Sales price/unit P 3.00 P 2.75
Total estimated sales P 18,000 P 11,000
Less:
Subsequent costs P 5,700 4,300
Selling and adm. Expenses 2,500 8,200 1,000 5,300
Net realizable value P 9,800 P 5,700

MCQ Corporation
Income Statement
For the Month of October, 2020

Sales
Main product – MN P 160,000
Less: Cost of goods sold:
Joint costs P 50,000
Subsequent costs 62,300
Total Manufacturing costs 112,300
Less: NRV of by-products 15,500
Net manufacturing cost 96,800
Less: Inventory, end – main product 19,360 77,440
Gross Profit 82,560
Less: Selling and Administrative expense 32,000
Net income 50,560
 2. Reversal Cost Method (Normal Net Profit)
 Estimated sales value less estimated additional processing cost, marketing and
administrative expenses and normal gross profit are deducted from the gross revenue,
the remaining portion is the estimated cost of producing the by product at split-off
point.

 Journal entries to record cost applicable to by-products and subsequent costs:

a) Work in Process – By Product J 7,800

Work in Process – By-Product K 4,500
Work in Process 12,300
To record cost applicable to by-products.

b) Work in Process – By Product J 5,700

Work in Process – By-Product K 4,300
Direct Material/Conversion Costs 10,000
To record subsequent costs incurred

c) By-Product Inventory – J 13,500

By Product Inventory – K 8,800
Work in Process - By Product J 13,500
Work in Process - By Product K 8,800
To record by-products completed.

Solution:
By-Product J By-Product K
Units produced 6,000 4,000
Sales price/unit P 3.00 P 2.75
Total estimated sales P 18,000 P 11,000
Less:
Subsequent costs P 5,700 4,300
Selling and adm. Expenses 2,500 1,000
Desired profit 2,000 10,200 1,200 6,500
Share in joint cost P 7,800 P 4,500

MCQ Corporation
Income Statement
For the Month of October, 2020

MN By-Product J By-Product K
Sales P 160,000 P 18,000 P 11,000
Less: Cost of goods sold:
Share in Joint costs P 37,700 P 7,800 P 4,500
Subsequent costs 62,300 5,700 4,300
Total Manufacturing costs 100,000 P P 8,800
13,500
Less: Inventory, end – 20,000 ___-___ ___-__
Gross Profit 80,000 4,500 2,200

Less: Selling and Adm. expense 32,000 2,500 1,200

Net income 48,000 2,000 1,000
Unit V - Joint and By-Product Costing

Activity 1 -
1. Marina company produces Products N, P and R and a by-product, XY, all of which are produced
from a common process. Two of this products were processed further to be salable . The following is
available:

P R O D U C T S
N P R XY
Units Produced 14,000 16,000 10,000 2,000
Units sold 12,000 13,000 8,000 2,000
Sales value at split off P 282,000 P 294,000 174,000
point
Additional Processing P 42,000 None P 25,000 None
costs
Final Sales value P 324,000 P 294,000 P 204,000 P 4,000

The total joint costs before separation is P 550,000.

REQUIRED: A. Allocate the joint costs if by-products are recognized when sold and treated as (1)
other
income; (2) reduction from the cost of the main products using:
1. Physical output method
2. Sales value at split-off point method
3. Net – Realizable value Method (Adjusted sales value)

B. Prepare the entry to record the sale of by-products if by products are recognized when
sold:
a) treated as other income
b) treated as a reduction from the cost of the main products.

C. Determine the cost to be allocated to by-products if by-products are recognized when

produced, assuming additional processing costs of P 1,000 for the by-products to be salable
and selling expenses of P 300 were incurred and desired profit of P 700 ; using:
a) Net realizable value
b) Reversal method

D. Using req. C, prepare the necessary journal entries , including the sale of the by-product.

Problem 2: The Blast Company uses a process cost system and present you with the following
information.
Main - Products By-Products
Units produced 25,000 1,200
Units sold 20,000 900
Selling price per unit P 10 P 3
Marketing and Administrative expenses P 60,000 P 300
Additional processing cost (Dept. 2) ---- P 800
Expected gross profit ---- 30%
Total Cost in Department 1 P 150,000

The main products and by-product split-off at the end of Dept. 1. The by-product is transferred to Dept.
2 for additional processing . The main products need no additional processing. No beginning or ending
work in process inventory exist.
REQUIRED: Prepare income statements for the Blackberry Company if :
A) by products are recognized when sold:
1) treated as other income
2) treated as a reduction from the cost of the main products.
B) by-products are recognized when produced, using:
1) Net realizable value
2) Reversal method
Unit V - Joint and By-Product Costing

Activity 2 – Multiple Choice Problems

For 1 – 3:

SWAN Company manufactures XXX, YYY and ZZZ from a joint process. Relevant data for
September production show:

XXX YYY ZZZ Total

Units produced 50,000 40,000 10,000 100,000
Joint Costs ? ? ? 450,000
Sales Value at split-off 420,000 270,000 ? 750,000
Additional processing cost 88,000 30,000 12,000 130,000
Sales value if processed 538,000 320,000 78,000 936,000

1. If Joint costs are allocated on the basis of market value at split-off, what is the joint cost allocated to
XXX? _____________

2. Using a physical measurement method, what amount of joint processing cost is allocated to Product
YYY? _______________

3. Using net realizable value, what amount of joint processing cost is allocated to Product ZZZ?
__________

For 4-6:
Solmix Company produces for solvents from the same process: A, B, C and D. Joint product costs are
P 45, 000.( Round all answers to the nearest peso.)

Sales price Per Disposal cost Further Final sales

Barrels barrel at split-off per barrel at processing price
split-off costs per barrel
A 2,250 P 30.00 P 19.50 P 6.00 P 40.50
B 3,000 P 24.00 P 12.00 P 7.50 P 30.00
C 4,200 P 33.00 P 21.00 P 12.00 P 46.50
D 6,000 P 45.00 P 28.50 P13.50 P 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

4. Using a physical measurement method, what amount of joint processing cost is allocated to Product
B?
a) P 6,555 b) P 8,738 c) P 12,235 d) P 17,475

5. Using sales value at split-off, what amount of joint processing cost is allocated to Product A?
a) P 5,542 b) P 5,910 c) P 11,380 d)P 22,165
6. Using net realizable value at split-off, what amount of joint processing cost is allocated to Product C?
a) P 5,085 b) P 7,750 c) P10,850 d) P 21,315

7. MM company produces joint products A and B together with by product C. A is sold at split off but B
and C undergo additonal processing. Production data pertaining to these products for year ended
December 31,2020 are as follows:
A B. C Total
Joint Costs 1,200, 000
Separable costs 435, 000. P 56, 000 P 491, 000
Production in pounds 100,000 150,000 40,000 290,000
Sales price per pound P5 P9 P2.5

There are no beginnings 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.

8. How much is the share of B in the joint cost?

a ) P430,000 b) P726,000 c) P747,520 d) P843,658

9. DJ Corporation manufactures two joint products ( DD and MM) DJ produced 12,000 units of DD with
an
after split-off sales value of P 45,000. However if DD were to be processed further, additional cost of
P 6,000 will be incurred but the sales value will increase to P 60,000.

DJ produced 6,000 units of MM with an after split-off sales value of P30,000.However if MM were to be
further processed, additional cost of P 3,000 will be incurred but the sale value will go up to P36,000.
Under the relative sales value at split-off approach, the allocation to DD from the total production cost
is
P 27,000.

What is the total product cost?

a) P 75,000 b) P 45,000 c) P 27,000 d) P 67,500

10. Dennis Manufacturing Co. manufactures two joint products. Product A sells at P30 while Product b
sells at P60. The company uses net realizable value method for allocating joint costs. For the month of
June 2020, the production activity were as follows:

Joint product costs:

Raw materials P 30, 000

Direct labor 15, 000
Factory overhead 10, 000

Further processing costs after the split-off point in order to finish the products into their final form were
P24, 000 for Product A and P36, 000 for Product B. Total numbers of units produced during the month
were 2,000 for Product A and 1,000 for Product B.

The joint costs allocated to A was:

a) P22, 000 b. 33, 000 c. 27, 500 d. Answer not
given

EE Company produces chemical H and I. the processing also yields by product X, another chemical.
The joint cost 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 P 2, 500,000
X 500 P 500, 000

An additional P120, 000 were spent to complete the processing of X. the company uses the NRV
method of allocating joint costs.

11. How much is the amount of joint cost allocated to I?

a) P840,000 b) P1,260,000 c) P 1,600,000 d) P1,680,000
12. Sunrise Company which began operations in 2020, produces gasoline and a gasoline by-product.
The
following information is available pertaining to 2020 sales and production:

Total production costs o split-off point 120,000

Gasoline sales 270,000
By-products sales 30,000
Gasoline inventory, Dec. 31, 2015 15,000
Additional by-product costs:
Marketing 10,000
Production 15,000

Sunrise accounts for the by-product at the time of production. What are Sunrise 2020 cost of sales for
gasoline and the by-product?

Gasoline By-product Gasoline By-product

a) P 105,000 P 25,000 c) P 108,000 P 37,000
b) P 115,000 -0- d) P 100,000 - 0-

13. SSS Corporation produces two products which go through single process. The same amount of
disposal cost is incurred whether the products are sold at split-off or after further processing. On May
2020, the joint cost of the production process amounted to P 840,000.

Products Units produced Net realizable value

XY 4,000 40
PZ 12,000 20
Remnants 4,000 32

Remnants are considered a by-product of the process and are sold to other factories. If the
corporation accounts for the by-product using the NRV method and if it costs the company an
additional P 12/unit to process product XY, how much is the total cost of producing product XY?

a) P 284,800 b) P 332,800 c) P 427,200 d) P 475,200

End