EMAC2714

Joint and by‐product

costing
Drury – Chapter 7
Week 11 April 2022
 To do list
1. Students should go through the slides and make references to the
chapter as they go through the slides. Students should also attempt
the examples question with out skipping to another slide.
2. Students should then attempt the questions from the Assessment
material at the end of the chapter.
3. Students should then attempt the homework questions and
document their answer in a way that can be submitted for marking.
Ch 7 P 187

Learning Outcomes covered in this unit

• Distinguish between joint products and by‐products;
• Explain and identify the split‐off point in joint‐cost allocation;
• Explain the alternative methods of allocating joint costs to products;
• Discuss the arguments for and against each of the methods of
allocating joint costs to products;
• Present relevant financial information for a decision as to whether a
product should be sold at a particular stage or further processed;
• Describe the accounting treatment of by‐product
Ch 7 P 188
Joint and by‐products
This unit is about the costing of products that are produced through
the same production process (Joint process), until a specific point in
the production process called a split‐off point.

JOINT PROCESS – is a process which inevitably produces more than one product.
Every joint process has a SPLIT OFF POINT ‐ products are not identifiable as different
products until this specific point in the production process. LA2
All the costs incurred until split off point are joint cost. The joint cost therefore has to
be allocated to the various products. These products are joint products and by‐
products. Refer to next slide for definitions. LA3
LA1 To meet the internal and external profit measurement and inventory valuation
requirements, it is necessary to assign all product related costs (including joint costs)
to products so that costs can be allocated to inventories and cost of goods sold.
Slide 4

LA1 why do we need to deternine the allocation of joint costs?

Lemlem Amhatsion, 2020/04/17

LA2 Note that all products may not split-off at the same time.
Lemlem Amhatsion, 2020/04/17

LA3 After split-off the products may be sold or may require further processing. Further processing costs can be allocated to the
relevant product.
Lemlem Amhatsion, 2020/04/17
Ch 7 P 188
Joint and by‐products cont…
• Joint products are a group of individual products that are produced
simultaneously, and each product has a significant relative sales value.
• Joint products are crucial to commercial viability of company.
For e.g., Extraction of gasoline from crude oil also produces gas, kerosene,
and diesel.

• By‐products are products that only have a minor sales value when
compared with the joint products. These are the products that result
incidentally from the main joint products.
• By‐products may have a considerable sales value, but the sales value is
small when compared with the values of the joint products.
• By‐products don't influence the decision as to whether or not to produce
the main product.
Ch 7 P 189

Split Further
Split off processing
point cost
point
Labour and Labour and
Joint product A
overhead overheads

Joint process Labour and

Joint product B
overheads

Raw materials By‐product C

Ch 7 P 189

1. Physical measures method LA15

• In this method the joint costs are simply allocated in proportion to volume:
Example 7.1
• Products X, Y, and Z became finished products at split‐off point. How much of
the £600 000 joint‐cost should be allocated to each product if the units
produced for X, Y, and Z, were 40 000, 20 000, and 60 000 respectively.
Solution
Total units produced = 40 000+20 000+60 000 = 120 000
Proportion to total is X =1/3 ; Y=1/6; and Z=1/2 LA7
Joint cost allocated is X =600 000 x 1/3 =200 000
Y = 600 000 x 1/6 =100 000
Z = 600 000 x ½ =300 000
Slide 7

LA7 X =40000/120000 ; Y =20000/120000; Z=60000/120000

Lemlem Amhatsion, 2020/04/17

LA15 Let us have a look at the various methods, of allocating joint costs, in detail. Please revise the advantages and disadvatages of
every method after studying each method.
Lemlem Amhatsion, 2020/04/18
Ch 7 P 191

2. Sales value at split‐off point method

• In this method, joint costs are allocated to joint products in proportion to the
estimated sales value of production. LA10
• A product with higher sales value will be allocated higher proportion of the
joint costs.
• Example 7.1 Additional information:
• Sales value of product X, Y, & Z is £300 000, £500 000, and £200 000
respectively. Total sales value is £1 000 000.
• Joint costs allocated will be X = 180 000; Y =300 000; Z= 120 000 LA11

As indicated in previous slide (slide 6), this can result in a product with low
sales value being allocated with small joint costs, thus giving the impression
that it is generating profits.
Slide 8

LA10 Sales value is the number of units produced mutiplied by unit selling price
Lemlem Amhatsion, 2020/04/17

LA11 X= (£300 000/£1 000 000) x 600 000 Y= (£500 000/£1 000 000) x 600 000...
Lemlem Amhatsion, 2020/04/17
Ch 7 P 191

3. Net realizable value method

• In cases where the products require further processing after split‐off
point, market value may not exist for the products at split‐off point.
• To estimate the sales value at split‐off point, it is therefore necessary
to use the estimated sales value at the point of sale and work
backwards. This method is called net realizable value.
• This is calculated by deducting the further processing costs from the
sales revenue. LA12
• The joint costs are therefore allocated in proportion to each product’s
net realizable value at split‐off point.
Slide 9

LA12 I.e selling price of the final product after production process after split-off point is completed
Lemlem Amhatsion, 2020/04/17
Ch 7 P 192

The overall gross profit is £200 000 ( which is calculated as Sales value (£1 000 000)
Less Total costs (£800 000).
Overall gross profit percentage is therefore 20%.
Solution 7.2 NRV method
Net realizable value (NRV) is sales value less further processing cost: LA13
NRV for product X = £300 000 ‐ £80 000 = £220 000 = 27.5% of total
NRV i.e. £800 000 (£220 000 + £400 000 + £180 000)
NRV for product Y = £500 000 ‐ £100 000= £400 000 = 50% of total
NRV i.e. £800 000
NRV for product Z = £200 000 ‐ £20 000= £180 000 = 22.5% of total
NRV i.e. £800 000

Joint cost of £600 000 will therefore be allocated as follows:‐

Product X allocation = £600 000 X 27.5% = £165 000
Product Y allocation = £600 000 X 50% = £300 000
LA14
Product Z allocation = £600 000 X 22.5% = £135 000
Slide 11

LA13 This is the estimated NRV at split-off point.

Lemlem Amhatsion, 2020/04/17

LA14 The sales value less the costs beyond split-off and the allocated joint cost will then give the profit per product. Try to calculate
the profit per product and gross profit percentage and compare your answer with the book.
Lemlem Amhatsion, 2020/04/18
Ch 7 P 192

4. Constant gross profit percentage method

• As seen in the previous method (NRV), the gross profit percentage for
the three products is different. It could be argued that, since the three
products arise from a single productive process, they should earn
identical gross profit percentages.
• The constant gross profit percentage method allocates joint costs so
that the overall gross profit percentage is identical for each individual
product.
• Note: Gross profit percentage = Gross Profit/sales value
• The overall gross profit percentage for Example 7.2 is calculated as
follows:
£200 000/ £1 000 000= 20%.
Ch 7 P 193

Constant gross profit percentage method cont..

Now that the overall gross profit percentage is calculated as 20%, the
required gross profit for each product is calculated as follows:
Product X (£) Product Y (£) Product Z (£) Total (£)

Sales value 300 000 500 000 200 000 1 000 000

Less: Gross profit (20% of sales value) 60 000 100 000 40 000 200 000

Cost of goods sold 240 000 400 000 160 000 800 000

Less: Separable further processing costs 80 000 100 000 20 000 200 000

Allocated joint costs 160 000 300 000 140 000 600 000
Ch 7 P 194
Methods of allocating joint costs LA5
LA6

LA4
LA8

LA9
Slide 14

LA4 Examples of physical measurement are weight and volume.

Lemlem Amhatsion, 2020/04/17

LA5 There are various methods of allocation. Refer to table below. Companies try to choose a method that seems to provide a
reasonable cost distribution.
Lemlem Amhatsion, 2020/04/17

LA6 The various methods have advantages and disadvantages

Lemlem Amhatsion, 2020/04/17

LA8 This is because the allocation is made without considering the sales value of the products.
Lemlem Amhatsion, 2020/04/17

LA9 for example when some of the products are solids and others are liquid or gas.
Lemlem Amhatsion, 2020/04/17
Ch 7 P 195
Irrelevance of joint cost allocations for decision
making
• Let us say a company that produces two joint products( Y and Z),is trying to
make a decision on whether to convert product Y to product Z by incurring
additional costs. This would result in additional revenue as the selling price
of product Z is higher than product Y. Would joint costs be relevant for
decision making?
• For decision making only relevant costs should be used and these represent
the incremental costs relating to a decision. Refer to Chapter 2 for relevant
costing.
• Joint‐cost allocations are thus irrelevant for decision making as it will be
incurred irrelevant of the decision to convert product Y to Z.
• Only the additional revenue obtained, and additional costs incurred will be
relevant.
• Please refer to example 7.3 on page 195‐196. The general rule is that it will
be profitable to extend the processing of a joint product as long as the
additional revenues exceed the additional costs.
Ch 7 P 196
Accounting for by‐products
• By‐products are products that have a minor sales value and that emerge
incidentally from the production of the major product. LA17
LA18
• As such it can be argued that joint costs should not be allocated to by‐products
and by‐products should only be allocated with costs that are incurred on the
by‐product, after split‐off point.
Example 7.4
The Neopolitan Company operates a manufacturing process which produces joint
products A and B and by‐product C. The joint costs of the manufacturing process
are £3 020 000, incurred in the manufacture of:
Product A 30 000kg
Product B 50 000kg
Product C 5 000kg

By‐product C requires further processing at a cost of £1 per kg, after which it can
be sold at £5 per kg.
Slide 16

LA17 That is; the main objective of a company is to produce a major product or products which can be joint products.
Lemlem Amhatsion, 2020/04/18

LA18 I.e. costs incurred before split-off point

Lemlem Amhatsion, 2020/04/18
Ch 7 P 196
Solution: Example 7.3
• The by‐product revenue less the cost after split‐off, should be
deducted from the cost of the joint products or the main product from
which it emerges. In the case of example 7.3, it will be deducted from
the joint costs of product A and B.
By‐product revenue = £5 x 5000kg = £25 000
By‐product further processing cost = £1 x 5000kg = £5 000
Net revenue = £25 000 ‐ £5 000 = £20 000
The net revenue of £20 000 will then be deducted from the joint costs of
£3 020 000. The balance of £3 000 000 will then be allocated as joint
cost.
 Review questions and Home‐work for the
week:
• Drury – Ch7 Review Questions and Problems 7.1 – 7.18
• Homework Questions – Charlie chocolate (HW 1)
Vuyo Butchery (HW 2)