ACCOUNTING FOR JOINT AND BY-PRODUCTS

Joint Process

With the increasing competition in the business arena at present, companies try their very best to
attain competitive advantage or for some to keep afloat and survive. They have different some
creative ways to do such like diversifying their investments through offering different products or
services.

Some of these products may have undergone the same process and came from the same raw
materials. For example, the production of chicken breasts, drumstick, back and thigh come from
a common material- chicken; the joint process of cutting logs into different lumber sizes; other
industries that produce both first-quality and factory seconds merchandise in a single operation
especially when the process is unstable and is unable to maintain output at a uniform quality level
and the output quality varies like extractive industries, agriculture industries, food industries and
chemical industries. The single process in which one product cannot be manufactured without
producing others is what you called as the joint process.

A chicken can produce a number of joint products and by-products.

In this chapter, the underlying objective is the allocation of the cost incurred during the joint
process up to the split-off point. Split-off point is the stage of production at which the joint
products are first identifiable as individual products. At split-off, joint costs are allocated to joint
products. Joint costs are sunk costs once the split-off point is reached.

The allocation of joint costs is important primarily for external reporting purposes, particularly for
profit and inventory valuation requirements.

Joint costs include material, labor, and overhead costs incurred during a joint process. These
costs will be arbitrarily allocated to main products of a joint process using different methods. Any

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cost incurred beyond the split-off point is known as separate cost, which is assignable to specific
primary products. Total Production Cost- involves both joint cost and separate, individual
product costs.

Outputs of the Joint Process

The joint process simultaneously produces different products which can be classified into two:
those intended by the organization and those that were not.

The products that cause the organization to undertake the production process are called joint
products, primary products, main products or co-products. These products contributes
substantial revenue to the organization, thus is crucial to the commercial viability of an
organization.

On the other hand, the incidental outputs of the joint process are as follows:

1) By-products - incidental output of a joint process with a higher sales value than scrap but
less than joint products
2) Scrap - incidental output of a joint process with a low sales value
3) Waste - residual output with no sales value.

A classic example of the output of the joint process is found in the meat packing industry, where
various cuts of meat and numerous by-products are processed from one original carcass with one
lump-sum cost. The classification of the outputs varies across companies. What is considered a
by-product for one company may be considered a main product for another company, or the other
way around. Most of the time, the classification is somewhat arbitrary on the part of management.
The distinction between a joint product and a by-product is based on relative sales value.

Joint (or severable) Products at the split-off point

In the manufacturing industry, it is common that processing of a raw material would lead to the
production of several joint products at the split-off point. Managers in these companies are faced
with the dilemma of whether to process further or not, with the ultimate goal of generating higher
profits if further processing is being undertaken. But before facing this type of decision-making
problem, proper costing and allocation of the costs-- before, and after the split-off point must be
done to enable the manager to make an informed decision.

To illustrate further, a coal being mined may be further processed into becoming coke, gas,
benzole, tar, or ammonia which can be sold at much higher price. Petroleum as raw material may
also produce crude oil, gas, or raw LPG as products undergoing joint process.

Processing of dairy on the one hand may produce milk, butter, cheese, ice cream, or skim milk
as emphasized in the diagram:

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 cheese

Joint cost in generating S

and processing of DAIRY P
MILK L
I ice cream
T

This needs to be O
allocated for costing F
F
butter

Accounting for By-Product, Scrap and Waste

The term "by product" is used to designate one or more products of relatively insignificant value
which are produced simultaneously with a product of greater total value. Generally, the
manufacturer has only limited control over the quantity of the by-product that will be provided.
However, the introduction of more advanced technological methods has permitted greater control
over the quantity of residual products.

By-products may arise from: leftover scrap or waste such as sawdust in lumber mills; the
cleansing of the main product such as gas and tar from coke manufacture; and preparing raw
materials before they are used in the manufacture of the main product. i.e. separation of cotton
seed from cotton, cores and seeds from apples and shells from cocoa beans.

By-product can be classified into the following two groups according to their marketable condition
at the split-off point:
1. Those sold in their original form without need of further processing.
2. Those which require further processing in order to be saleable.

Scrap has a lower sales value than by-products, but will be accounted for the same way as that
of the by-product. Waste on the other hand, has no sales value, but any expense incurred related
to it will be recognized.

Methods of accounting for by-products

The company has two options on how to account for by-products they may use: (1) production
method- byproducts recognized at time production is completed; or (2) sales method wherein by-
products are recognized at the time of sale.

Under the production method, byproducts are recognized in financial statement when produced
and the estimated NRV of byproduct produced offsets against costs of main or joint products.
Byproduct inventories are at their selling price (variant of using estimated NRV reduced by normal
profit margin).

Under the sales method, Byproducts are recognized in financial statement when sold grouped
with other sales (other income) or deducted from cost of goods sold.

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 Methods of Costing By-Product/Scrap

1. Methods that do not allocate cost to the by-products.

a. Net Realizable Value Approach/ Offset Approach/ Production Method

b. Realized Value Approach/ Income Approach/ Sales method
 Gross Revenue Method
 Net Revenue Method
c. Replacement Cost Method

2. Methods that allocate cost to the by-product

a) Reversal cost / Market Value Method

Methods that do not allocate cost to the by-product

a. Under the Net Realizable Value Approach/ Production Method, the by-product/scrap is
recognized in the financial statements when it is produced. The net realizable value (NRV)
of the by-product/scrap should be deducted from the cost of the joint production process
prior to allocating the costs to the individual joint products. NRV is equal to the expected
selling price of the by-product/scrap produced minus the related processing, storing, and
disposal costs.

b. Under the Realized Value Approach/ Sales method, the value of the by-product/scrap is
only recognized when there is actual sale. This approach/method is more conservative as
compared to the previous method. The amount to be recognized is either its gross revenue
or its net revenue (revenue less additional costs of processing and disposal).

Gross Revenue Method- gross revenue from sales of the by-product is presented on the
income statement as any one of the following:
1. Other Income or
2. Additional Sales Revenue or
3. A deduction from the CGS of the main product or
4. A deduction from the cost of production of the main product.

*When by-product revenue is deducted from the total production cost of the MP, the unit
cost of the MP is reduced; consequently, the cost of the ending inventory changes also.
-With the gross revenue method, the final inventory cost of the main product is overstated
to the extent that some of the cost belongs to the by-product. But this flaw is somewhat
removed in procedure 4 (by product revenue deducted from the production cost), although
a sales value rather than a cost is deducted from the production cost of the main product.

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Illustrative Problem 3.1 (Accounting for proceeds of by-product)

Bahrami Company manufactures Product X as well as a by-product. The following data were
taken from the records of Bahrami Company.

(Product X) By-Product
Main Product
Inventory, Beginning 700@P48 -
Units Produced 5, 000 1, 000
Units Sold 4,500 800
Units Selling Price P 150 P5
Production Cost P 250, 000 -
Operating Expenses P 181, 600

Required: Determine the operating income if the gross revenue from by-product will be treated
as:
a. Other Income
b. Additional Sales Revenue
c. A deduction from CGS of the main product
d. A deduction from the total production cost of the main product.

Bahrami Company
Income Statement

Deduction
Other Additional
from
Income Revenue
COGS
Sales
Main Product (4,500 x P150) P 675,000 P 675,000 P 675,000
By-product 4,000
P 679,000
Cost of Goods Sold
Beginning Inventory (700 x P48) 33,600 33,600 33,600
Total Production Cost (5,000 x P50) 250,000 250,000 250,000
Cost of Goods Available for Sale 283,600 283,600 283,600
Less – Ending Inventory (1,200 x P50) 60,000 60,000 60,000
223,600 223,600 223,600
Revenue from sales of by-product 4,000
Cost of Goods Sold 223,600 223,600 219,600
Gross Profit 451,400 455,400 455,400
Less: Operating Expenses 181,600 181,600 181,600
Operating Income 269,800 273,800 273,800
Other Income: Revenue from sales of by-product 4,000
Income before income tax P273,800 P 273,800 P 273,800

If the by-product revenue is deducted from the production cost, the P4,000 revenue from by-
product sales is deducted from the P250, 000 total production cost, giving a new production cost
of P 246,000. This revised cost results in a new average unit cost of P49.20 for the main product.
The final inventory will consequently be P59, 040 instead of P60,000. The income statement
would appear as follows:

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 Sales Main Product (4, 500 x P150) P 675,000
Cost of Goods Sold
Beginning Inventory (700 x P48) 33,600
Net Production Cost
Total Production Cost (5, 000 x P50) 250,000
Less: Revenue from sales of by-product 4,000 246,000
Cost of Goods Available for Sale (5,000 x P49.20) 279,600
Less- Ending Inventory ( 1, 200 x P49.20) 59,040
Cost of Goods Sold 220,560

Gross Profit 454,440

Less: Operating Expenses 181,600
Operating Income P 272,840

The preceding method requires no complicated journal entries. The revenue received from by
product sales is debited to cash or accounts receivable. In the first three cases, income from sales
of by product is credited in the fourth case, the production cost of the main product is credited.

Net Revenue Method- the revenue from sales of the by-product less the marketing and
administrative costs of placing the by-product on the market and less nay cost of processing
the by-product after split-off- is shown on the income statement in any of the four ways listed
in the preceding method.

This method recognizes the need for assigning some cost to the by-product. It does not
attempt, however, to allocate any main product cost to the by product. Any expenses
involved in further processing or marketing the by-product are recorded in separate
accounts. All figures are shown on the income statement, following one of the procedures
described at recognition of gross revenue method.

Illustrative Problem 3.2 (Accounting for by-product)

Assume that the by-product in Illustration 1 requires further processing at a cost of P1, 200 and
that operating expenses directly related to it, amounted P300 (P0.375 per unit). Prepare the
Income Statement presenting the net revenue from by-product treated as:
a. Other Income
b. Additional Sales Revenue
c. A deduction from CGS of the main product
d. A deduction from the total production cost of the main product.
(Assume the unit cost of beginning inventory is P47.45)

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 Bahrami Company
Income Statement

Other Additional Deduction

Income Revenue from COGS
Sales
Main Product (4,500 x P150) P 675,000 P 675,000 P 675,000
By-product 2,740
677,740
Cost of Goods Sold
Beginning Inventory (700 x P48) 33,600 33,600 33,600
Total Production Cost (5,000 x P50) 250,000 250,000 250,000
Cost of Goods Available for Sale 283,600 283,600 283,600
Less – Ending Inventory (1,200 x P50) 60,000 60,000 60,000
223,600 223,600 223,600
Revenue from sales of by-product 2,740
Cost of Goods Sold
Gross Profit 451,000 454,140 454,140
Less: Operating Expenses 181,600 181,600 181,600
Operating Income 269,800 272,540 272,540
Other Income: Revenue from sales of by-product 2,740
Income before income tax 272,540 272,540 272,540

If the by-product revenue is deducted from the production cost, the income statement would
appear as follows:

Sales Main Product (4,500 x P150) P 675,000

Cost of Goods Sold
Beginning Inventory (700 x P47.45) 33,215
Net Production Cost
Total Production Cost (5,000 x P50) 250,000
Less: Revenue from sales of by-product 2,740 247,260
Cost of Goods Available for Sales (5,000 x P49.452) 280,475
Less: Ending Inventory (1,200 x P49.452) 59,342
Cost of Goods Sold 221,133

Gross Profit 453,867

Less: Operating Expenses 181,600
Operating Income P 272,267

Journal entries in this method would involve charges to by-product revenue for the additional work
required and perhaps for factory overhead. The marketing and administrative expenses might
also be allocated to the by product on some predetermine basis. Some firms carry an account
called by product to which all additional expenses are debited and all income is credited. The
balance of this account would be presented in the income statement, following one of the
procedures outlined at recognition of gross revenue method page. However, accumulated
manufacturing costs applicable to by product inventory should be reported on the balance sheet.

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 c. Replacement cost method. This method is ordinarily used by firms whose by products
are being utilized within the company, thereby avoiding the necessity of acquiring
materials and supplies from outside suppliers. The production cost of the main product is
credited, and the offsetting debit is to the department that uses the by-product. The cost
assigned to the by-product is the purchase or replacement cost existing in the market.

Methods that allocate cost to the by-product

Reversal Cost (Market value) Method - The procedure is to work backwards from the selling
prices to the "costs" at the time of separation. This method reduces the manufacturing cost of
the main product, not by the actual revenue received, but by an estimate of the by product's
value at the time of recovery. This is based on the idea that the cost of a by-product is related to
its sales value. The by-product account is charged with this estimated amount and the
production (manufacturing) cost of the main product is credited. Any additional costs of
materials, labor, or factory overhead incurred after the by-product is separated from the main
product are charged to the by product. The proceeds from sales of the by-product are credited
to the by-product account.

This method is similar to the last technique (By Product Revenue deducted from Production Cost)
illustrated at recognition of gross revenue method portion, except that the manufacturing cost
applicable to by product inventory should be reported in the balance sheet. This method maybe
used either for joint main products or by products.

The market value method (reversal cost method) of ascertaining main product and by-product
costs may be illustrated as shown in the example below:

Illustrative Problem 3.3. Daghlas Company

Item Main By Product

Product
Materials P 5,000
Labor 7,000
Factory Overhead 4,000
Total production cost (4,000 units) P 16,000

Market value (500 units @ P1.80) P 900

Less: Estimated gross profit consisting of:
(20% of selling price, assumed) P180
Marketing and selling expenses 5% of selling price 45 P225
P675
Less: Estimated production cost after split-off:
Materials P100
Labor 120
Factory Overhead 30 250

Less: Estimated value of by product at split-off to be 425 P 425

credited to main product

Net cost of main product P 15,575

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 Add actual production cost after split-off 230
Total P655

Divide by Total number of units 4,000 500

Unit cost P 3.894 P1.31

The example in illustrative problem 3.3 indicates that an estimated value of the by-product at the
split-off point results when estimated gross profit and production cost after split-off are subtracted
from the by-products ultimate market value. Alternatively, if the by-product has a market value at
the split-off point, the by-product account is charged with this market value and the main product's
production cost would be credited. It is also possible to use the total market values of the main
product and the by-product at the split-off point as a basis for assigning a share of the prior split-
off costs to the by product, applying the offsetting credit to the production cost of the main product.
In any event, subsequent to split-off cost related to the by-product would be charged to the by
product.

Allocation of Joint Cost to Main Products

As discussed in the previous section, joint cost must be allocated to the joint products practically
for inventory valuation purposes after deducting the value of any by-product/scrap. The joint
production process yields individual products that are either sold this period or held as inventory
to be sold in subsequent periods. Hence, the joint costs need to be allocated between total
production rather than just those sold this period.

In this section, we will be discussing the different approaches of allocating the joint costs to the
main/joint products. The product profitability is determined largely by the allocation method being
used, thus careful interpretation of costs allocated must be done because actually a true joint cost
is indivisible. The approaches are classified into two, the physical measure allocation and the
monetary measure allocation.

1. The physical measure allocation approach makes use of the physical characteristics or
attributes of the products in allocating the joint costs, such as quantity, weight, volume or
length at split-off point.

This type of allocation approach has no relationship to the revenue-producing power of the
individual product; hence it has no relationship to benefits-received criterion. The physical
measure approach may also require assistance from technical personnel outside of accounting
because comparable physical measures for all products are not always straightforward.

Illustrative Problem 3.4 (Physical Measure Allocation)

Kawamura Company operates a chemical process which produces three different products Zee,
Jee and Yee. The three products are saleable at split-off point. The joint cost for the period is
P250, 000. The production data are as follows:

Products ZEE JEE YEE

Units of Production 500 300 200
Quality Grade of the Outputs 10 stars 8 star 5 stars

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 Weight Per Unit 4 ounces 3 ounces 3 ounces

Allocate the joint cost to products Zee, Jee and Yee based on the following methods:
a. Quantitative or Physical method.
b. Average unit cost (or units of production) method.
c. Predetermined standard or index of production or weighted method average

a. Quantitative or physical unit method attempts to distribute the total joint cost on the basis
of some common unit of measurement, such as pounds, gallons, tons, or board feet. Of
course, the unit products must be measurable by the basic measurement unit. If this isn't
possible, the joint units must be converted to a denominator common to all units produced,
For example, in manufacture of Zee, Jee and Yee, the yield of these recovered units is
measures on the basis of the ounces of the products extracted.

Product Total Joint Cost Allocated

Ounces Amount
Zee 2,000 P250,00 x (2,000/3,500) P 142,857
Jee 900 P250,00 x (900/3,500) 64,286
Yee 600 P250,00 x (600/3,500) 42,857
TOTAL 3,500 250,000

b. Average unit cost method tries to apportion total joint production cost to the various
products with the use of an average unit cost. An average unit cost is obtained by dividing
the total number of units produced into the total joint production cost. As long as all units
produced are measured in terms of the same unit and do not differ greatly, the method can
be used without too much worry. When the units produced are not measured in like terms,
the method cannot be applied.

Total Joint Cost P250,000

Average Unit Cost = = = P250/ unit
Total Units Produced 1,000 units

Product Joint Cost Allocated Amount

Zee P250 x 500 units P125,000
Jee P250 x 300 units 75,000
Yee P250 x 200 units 50,000
TOTAL P250,000

c. Weighted Average Method. The average method described above oftentimes does not give
a satisfactory answer to the joint cost apportionment problem. For this reason, weight factors
are often assigned to each unit, based upon size of the unit, the type of materials used, the
difficulty of manufacture, time consumed in making the unit, difference in type of labor
employed, amount of materials used etc. Finished production of every kind is multiplied by
weight factors to apportion to total joint cost to individual units.

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 Product Total Stars Joint Cost Allocated
Amount
Zee 5,000 P250,00 x (5,000/8,400) P 148,810
Jee 2,400 P250,00 x (2,400/8,400) 71,429
Yee 1,000 P250,00 x (1,000/8,400) 29,762
TOTAL 8,400 250,000
* Zee = 500 x 10 stars = 5,000 stars
Jee = 300 x 8 stars = 2,400 stars
Yee = 200 x 5 stars = 1,000 stars

2. For the monetary measure allocation approach, market-based information, like for
instance the expected revenue of the product, are considered. This approach will consider
the revenue-generating capacity of the outputs. The methods used under this approach are
as follows and will be shown using illustrative problem 3.5:

a. Sales Value at Split-off Method

b. Net-Realizable Value Method
c. Alternative NRV Method or Approximated/Hypothetical Net-Realizable Value Method
d. Constant gross-margin percentage NRV method

a. Under the sales value at split-off methods, joint cost are allocated in accordance with the
revenue-producing ability of each product. In this way, products will not show a loss due to
joint cost allocation. To use this method, all joint products must be marketable at split-off. The
physical units method may be easier to apply and does not have the disadvantage of
changing prices.

This method enables product-line income statements to show individual product costs and
gross margins. It likewise follows benefits-received criterion of cost allocation – costs
allocated to products in proportion to their potential revenues.

Sales value at split-off method required and uses market demand and selling prices for all
products at split-off point – which makes it straightforward and intuitive.

Illustrative Problem 3.5 (Monetary Measure Allocation)

Ellis Company produces two products from a joint process: X and Z. Joint processing costs for
this production cycle are P8,000.

Product Yards Sales price Disposal cost Further Final sale

per yard at per yard at processing price per
split-off split-off per yard yard
X 1,500 P6.00 P 3.50 P1.00 P 7.50
Y 2,200 P9.00 P 5.00 P2.00 P11.25

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 Using the sales value at split-off.
Product Yards Sales Total Proportion Joint Allocated
price at Expected Cost Cost
Split-off Revenue
X 1,500 P6.00 P 9,000 (9,000/28,800) P 8,000 P 2,500
Y 2,200 P9.00 P 19,800 (19,800/28,800) P 8,000 5,500
TOTAL P28,800 8,000

b. The Net Realizable Value (NRV) method will allocate costs based on the relative net
realizable values of the products at the split-off point. Net realizable value is equal to product
sales revenue at split-off point minus any costs necessary to prepare and dispose of the
product.. This method requires that all joint products be marketable at split-off point. The net
realizable value of each product is computed by subtracting the cost at split-off from the
selling price at split-off.

Using the information in illustrative problem 3.5, the allocation of the joint cost using net
realizable value is:
Product Yards *NRV@ Total NRV Proportion Joint Allocated
Split-off Cost Cost
X 1,500 P2.50 P 3,750 (3,750/12,550) P 8,000 P 2,390
Y 2,200 P4.00 P 8,800 (8,800/12,550) P 8,000 5,610
P12,550 8,000
*NRV @ Split-Off = Sales Price- Disposal Cost
X = P6.00 – 3.50 = P2.50
Y = P9.00 – 5.00 = P4.00

Oftentimes, there are products not stable in their stage of completion at the split-off point and
therefore without any market value. Because they are not saleable at split-off point, these
products require additional processing to place them in marketable condition. In such cases,
the basis for allocation of the joint production cost is hypothetical/approximated/artificial NRV
at the split-off point.

Approximated NRV at split-off is computed on a per-product basis, as FINAL SALES PRICE

minus INCREMENTAL SEPARATE COSTS. An underlying assumption of this method is that
the incremental revenue from further processing is equal to or greater than the incremental
cost of further processing and selling.

To illustrate the procedure using the approximated net realizable value at split-off, information
in illustration 3.5 will be used in allocating the joint processing cost to X and Y.

Product Yards *Approximated Total Proportion Joint Allocated

NRV@ Split- NRV Cost Cost
off
X 1,500 3.00 P 4,500 (4,500/13,850) P 8,000 P 2,599
Y 2,200 4.25 P 9,350 (9,350/13,850) P 8,000 5,401
P13,850 8,000
*Approximated NRV @ Split-Off =Final Sales Price-Separate Cost (including disposal)
X = P 7.50 – 4.50 = P3.00
Y = P11.25 – 7.00 = P4.25

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3. In constant gross-margin percentage NRV method, the premise is that there is a uniform
relationship between the sales value and the cost of all joint products. This method believes
that the joint products should earn the same gross profit percentages because these products
were produced from a single production process. The following steps may be followed when
applying this method (Information in illustration 4 will be used):

1. The overall gross margin percentage of all outputs produced must be determined;

2. Compute for the total production cost of each product by getting the difference between
the total expected sales value of the outputs produced and the gross margin. The gross
margin is equal to the sales value of the product multiplied by the computed overall gross
margin percentage;

3. Compute for the joint cost to be allocated to each product by deducting from the total
production cost of each product the related separable cost.

Using the information in illustrative problem 3.5, the application of the constant margin
percentage NRV method is shown:

Product X Product Y Overall

Sales Value P 11,250 P 24,750 P 36,000
Gross Margin 4,275 9,405 13,680
Total Production Cost 6,975 15,345 22,320
Less: Separable Costs 1,500 4,400 5,900
Allocated Joint Cost P 5,475 P10,945 P 16,420

*Total Gross margin percentage = Total Gross margin/ Total Sales Value
P 13,680 / 36,000 = 38%

Choosing a method

Sales value at split-off method is useful when selling price is data available (even if further
processing is being done). If this is done, it shall measure the value of the joint product
immediately at end of joint process--best measure of benefits received relative to other methods
of allocating joint costs. There is also no anticipation of subsequent management decisions as
required by NRV and constant gross-margin percentage NRV methods

Based on company practices, as to availability of meaningful basis to allocate joint products:

i. Market-based measures have meaningful basis (revenues)

ii. Physical measures methods lack meaningful basis

As to Simplicity:

i. Sales value at split-off is simple

ii. NRV and constant gross-margin percentage NRV methods can be complex for processing
operations having multiple products and multiple split-off points

Other methods are appropriate to use when selling prices of all products at split-off point not
available.

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NRV method attempts to approximate sales value at split-off by subtracting separable costs
incurred after split-off point on each product from selling prices-assuming markup or profit margin
attributable to joint process and not to separable costs. (adapted; Horngren, 2009)

Irrelevance of Joint Costs

A number of methods in allocating joint costs to joint products have been discussed for the
purpose of determining the cost to be included in the cost of goods sold and for inventory
valuation. The use of method must be consistent. But it should be remembered that for decision-
making, joint costs are irrelevant unless they are expected to affect the result of the decision.
Usually, only separable costs are relevant. The only relevant items as incremental revenues and
incremental costs when making decisions about selling products at the split-off point or processing
them further.

It is worth noting that a joint cost is a common cost but a common cost is not necessarily a joint
cost. Many overhead costs are common to the products manufactured in a factory but do not
signify a joint production process.

Four Management Decisions Concerning Joint Processes.

The four decisions that managers must make regarding joint processes are as follows. They must
try to determine what joint costs, selling costs, and separate processing costs are expected to
occur when certain products are manufactured. Next, management must decide on the best use
of resources that are available. Managers must next classify, as joint products and/or by-
products/scrap, the output of production. The last decision that must be made is whether some
or all of the products will be processed further or sold at split-off. This decision is made based on
the incremental costs that would be incurred to process further and the incremental revenue if
processed further. Joint production costs are irrelevant to this decision (adapted; Raiborn).

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 POINTS TO PONDER!
Is it Good or Bad?

Good Bad
Sales value at Costs are allocated to products in We use the sales value of
split-off proportion to their potential the entire production of the
revenues. This is a fairly simple accounting period
method to implement.
Estimated net Can be used when the market Can be very complex in
realizable value prices of the products are not operations with multiple
method known or available. products and multiple split-
off points.
The constant Account is taken of the profits The assumption that all
gross margin earned either before or after the have the same ratio of cost
method split-off point when allocating the to sales value. This is likely
joint costs. not true.
A physical Fairly simple Has no relationship to the
measure such as revenue-producing power of
volume individual products

Terminologies

Approximated net realizable value at split-off allocation: a method of allocating joint costs to
joint products using a simulated net realizable value at the split-off point; Approximated value is
computed as final sales price minus incremental separate costs

By-product: an incidental output of a joint process; is salable, but the sales value is not batantial
enough for management to justify undertaking the joint process; it is viewed as having a higher
sales value than scrap

Joint costs: the total of all costs (direct material, direct labor, and overhead) incurred during a
joint process up to the split-off point

Joint process: a manufacturing process that simultaneously produces more than one product
line

Joint product: the primary outputs of a joint process; each joint product individually has
substantial revenue-generating ability

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Net realizable value (NRV): an amount equal to the product's sales revenue at split-off minus
any costs necessary to prepare and dispose of the product

Net realizable value approach: a method of accounting for by-products or scrap that requires
that the net realizable value of these products be treated as a reduction in the cost of the primary
products; primary product cost may be reduced by decreasing either (1) cost of goods sold when
the joint products are sold or (2) the joint process cost allocated to the joint products

Net realizable value at split-off allocation: a method of allocating joint costs to joint products
that uses as the proration base sales value at split-off minus all costs necessary to prepare and
dispose of the products; it requires that all joint products be salable at the split-off point

Physical measurement allocation: a method of allocating a joint cost to products that uses a
common physical characteristic as the proration base

Realized value approach: a method of accounting for by-products or scrap that does not
recognize any value for these products until they are sold; the value recognized upon sale can be
treated as other revenue or income

Sales value at split-off allocation: a method of assigning joint costs to joint products based on
the relative sales value of the products at the split-off point as the proration base; use of this
method requires that all joint products be salable at the split-off point

Scrap: an incidental output of a joint process; it is salable but the sales value from scrap is not
enough for management to justify undertaking the joint process; it is viewed as having a lower
sales value than a by-product; leftover material that has a minimal but distinguishable disposal
value

Separate costs: costs incurred in later stages of production that are assignable to specific
primary products

Split-off point: the point at which the outputs of a joint process are first identifiable or can be
separated as individual products Waste: a residual output of a production process that has no
sales value

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