INTEGRATED ACCOUNTING REVIEW CLASS IN ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

AFAR 16 – Joint Costs and By-Products

NATURE OF JOINT PROCESS

Joint processes are production processes in which the creation of one product also creates other products. It is a
process in which one input yields multiple outputs. The point at which joint process outputs are first identified as
individual products is called the split-off point. Joint production processes are common in the agriculture industry,
the food manufacturing industry, and the chemical industry.

OUTPUTS OF A JOINT PROCESS

Products resulting from a joint process are classified into:
1. Joint products – the primary outputs of a joint process. They are sometimes referred to as primary products
or main products.
2. By-products – incidental outputs of a joint process.

The main output of a joint process is called joint products.

NATURE OF JOINT COST

Cost incurred in a joint process is called joint cost. Joint cost includes direct material, direct labor, and overhead
costs incurred during a joint production process.

METHODS OF ALLOCATING JOINT COSTS

Since multiple products result from a joint process, there is a need to allocate the joint cost incurred up to the split-
off point among the joint products. Joint cost can be allocated under one of the following methods:

1. PHYSICAL MEASURE ALLOCATION

- Joint cost allocation method that is based on physical characteristic such as units produced, pounds or
tons produced or some other physical measure.

2. MONETARY MEASURE ALLOCATION

(a) Sales value at split-off method
- This method assigns joint cost to joint products based on the relative split-off point sales values for
the products.
- All joint products must be salable at split-off.

(b) Net realizable value at split-off method

- This method assigns joint cost based on an inventory valuation amount for the joint products at the
split-off point.
- This method requires that all joint products be salable at split-off and considers the costs that must
be incurred at split-off to realize the estimated sales value.

(c) Approximated net realizable value at split-off method

- This method may be used if not all of the joint products are salable at split-off.
- Underlying assumption: additional revenue must equal or exceed additional costs of further processing
and selling.
✓ If it is not economical to process one or more products beyond split-off, the base used for allocating
joint cost will become a mixture of actual and approximated NRVs at split-off.
✓ Products that will not be processed further will be valued at their actual NRVs at split-off.
✓ Products that will be processed further are valued at approximated NRVs at split-off.

ACCOUNTING FOR BY-PRODUCTS

- The specific method that will be used to account for by-products must be determined before the joint cost is
allocated to the joint products.
- No joint cost shall be allocated to the by-products.

• By-products are recognized when realized or sold – net revenue of the by-product is presented in the income
statement as:
a. Other revenue
b. Deduction to CGS
c. Deduction to production costs

• By products are recognized when produced – NRV is deducted from the joint costs.

BRIAN CHRISTIAN S. VILLALUZ, CPA, MBA

CPA Reviewer, Advanced Review Solutions
YouTube Content Creator, Accounting Lessons with BCV
Book Author Page 1 of 3
DISCUSSION PROBLEMS
Problem 1:
Syntax Company produces three products: A, B, and C from the same process. Joint costs for this production run are as
follows: Materials - P1,050; Labor - P840; Overhead - P210.

Sales price Disposal cost Further processing Final sales price

Pounds per lb. at split-off per lb. at split-off per pound per pound
A 800 P6.50 P3.00 P2.00 P 12.00
B 1,100 8.25 4.20 3.00 13.75
C 1,500 8.00 4.00 3.50 13.00

If the products are processed further, Syntax Company will incur the following disposal costs upon sale: A, P3.00; B,
P2.00; and C, P1.00.

1. Using the physical measurement method, what amount of joint processing cost is allocated to Product A
(round to the nearest peso)?
2. Using the physical measurement method, what amount of joint processing cost is allocated to Product B
(round to the nearest peso)?
3. Using the physical measurement method, what amount of joint processing cost is allocated to Product C
(round to the nearest peso)?
4. Using sales value at split-off, what amount of joint processing cost is allocated to Product A (round to the
nearest peso)?
5. Using sales value at split-off, what amount of joint processing cost is allocated to Product B (round to the
nearest peso)?
6. Using sales value at split-off, what amount of joint processing cost is allocated to Product C (round to the
nearest peso)?
7. Using net realizable value at split-off, what amount of joint processing cost is allocated to Product A (round
to the nearest peso)?
8. Using net realizable value at split-off, what amount of joint processing cost is allocated to Product B (round
to the nearest peso)?
9. Using net realizable value at split-off, what amount of joint processing cost is allocated to Product C (round
to the nearest peso)?
10. Using approximated net realizable value at split-off, what amount of joint processing cost is allocated to
Product A (round to the nearest peso)?
11. Using approximated net realizable value at split-off, what amount of joint processing cost is allocated to
Product A (round to the nearest peso)?
12. Using approximated net realizable value at split-off, what amount of joint processing cost is allocated to
Product A (round to the nearest peso)?

Problem 2:
The Anwar Company processes apples into pies, spread, and dressing. During 2023, the joint cost of processing the apples
was P750,000. There were no beginning inventories. Production and sales value information for the year were as follows:

Products Units produced SV at split-off Separable costs Final selling Units in the
price ending inventory
Pies 20,000 P12/unit P20/unit P35/unit 7,000
Spread 50,000 P15/unit P10/unit P28/unit 24,000
Dressing 25,000 P9/unit P8/unit P20/unit 10,000

The joint cost is allocated using the approximated NRV.

What is the value of the ending inventory at the end of 2023?

A. 721,500
B. 750,000
C. 788,500
D. 1,140,000

Problem 3:
Prieto Manufacturers produces three products from a common manufacturing process. The total joint cost of producing
2,000 pounds of Product A; 1,000 pounds of Product B; and 1,000 pounds of Product C is P7,500. Selling price per pound
of the three products are P15 for Product A; P10 for Product B; and P5 for Product C. Joint cost is allocated using the
sales value method.

Required:
1. Compute the cost per pound of Products A, B, and C if all three products are main products.
2. Compute the cost per pound of Products A and B if Products A and B are main products and Product C is a
by-product for which the cost reduction method is used.

BRIAN CHRISTIAN S. VILLALUZ, CPA, MBA

CPA Reviewer, Advanced Review Solutions
YouTube Content Creator, Accounting Lessons with BCV
Book Author Page 2 of 3
Problem 4:
Pringles Manufacturing Company makes three products: A and B are considered main products and C a by-product.

Production and sales for the year were:

220,000 lbs. of Product A, salable at P6.00
180,000 lbs. of Product B, salable at P3.00
50,000 lbs. of Product C, salable at P0.90

Production costs for the year:

Joint costs P276,600

Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900

REQUIRED: Using the by-product net revenue as a cost reduction and net realizable value method of assigning joint costs,
compute unit costs if:
1. C is a by-product of the process.
2. C is a by-product of B.

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BRIAN CHRISTIAN S. VILLALUZ, CPA, MBA

CPA Reviewer, Advanced Review Solutions
YouTube Content Creator, Accounting Lessons with BCV
Book Author Page 3 of 3