Principles of Management Accounting 3e

Solutions to Basic and Long Questions

Chapter 9 – Joint and by-product costing

Suggested solutions to Basic questions

Ch 9 BQ 1

In a process that produces batches of identical products, it is possible to trace the

majority of process costs incurred directly to the product being produced (the
exception being indirect overheads). However, in a process in which different joint
and by-products emerge, it will not be possible to trace the process costs to the
various products as the products are separately identifiable only at the end of the
process. It is therefore necessary to allocate the process costs to the joint products
using one of the four commonly-recognised allocation methods. It should be noted
that process costs are not allocated to by-products as they are only coincidental to
the manufacture of the joint products.

Ch 9 BQ 2

The allocation of joint costs is arbitrary as all of the joint products, by-products, scrap
and waste have to be produced in the joint process. The method according to which
they are allocated should therefore have no bearing on the course of action taken.

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
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The first s Ct ehp 9wBheQn 3allocating joint costs is to calculate the net realisable
value by subtracting the further process costs from the sales value:

Details Yonela Simphiwe Total

R R R
Sales 1 800 000 1 500 000 3 300 000
Further processing costs 500 000 600 000 1 100 000
Net realisable value 1 300 000 900 000 2 200 000

Secondly, the joint costs will then be allocated based on the net realisable value as
follows:

Yonela: R1 536 364 (R 2 600 000 x R1 300 000 / R2 200 000)

Therefore, the correct answer is (d).

Ch 9 BQ 4

The joint costs should be reduced by the net proceeds from the sale of the joint
product i.e. the sales value less the further processing costs. Therefore, the joint
costs will be R2 600 000 – R100 000 (R200 000 sales value – R100 000 further
processing costs) = R2 500 000.

Therefore, the correct answer is (a).

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
to another party as acknowledged in the source line of the question in the textbook.
 Principles of Management Accounting
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Ch 9 BQ 5

The joint costs now allocated to Yonela are R1 477 273 (R2 500 000 x R1 300 000 /
R2 200 000). Therefore, the profit relating to Yonela will be:

Sales R1 800 000

Joint costs R1 477 273
Further processing costs R500 000
Production costs R1 977 273
Closing inventory (R360 000 / R1 800 000 x R1 977 273) (R395 455)
Cost of sales R1 581 818
Gross profit R218 182

The correct answer is therefore (e).

Ch 9 BQ 6

The joint costs of R300 000 (R125 000 + R175 000) are allocated as follows:

Product Units Joint cost allocation Cost per unit

R
Alpha 2 000 2 000 / 12 000 x R300 000 = R50 000 25,00
Beta 4 000 4 000 / 12 000 x R300 000 = R100 000 25,00
Charlie 6 000 6 000 / 12 000 x R300 000 = R150 000 25,00
12 000 R300 000

Alternative method:

R300 000 / 12 000 units = R25,00 per unit

Answer:

Each product line is allocated a joint cost of R25 per unit. The total joint costs allocated
are R50 000 to Alpha, R100 000 to Beta and R150 000 to Charlie.

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
to another party as acknowledged in the source line of the question in the textbook.
 Principles of Management Accounting
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Ch 9 BQ 7

The joint costs are allocated as follows:

Product Units Sales value Joint cost allocation Cost per unit
R R
Alpha 2 000 120 000 R120 000 / R600 000 x R300 000 = R60 000 30,00
Beta 4 000 300 000 R300 000 / R600 000 x R300 000 = R150 000 37,50
Charlie 6 000 180 000 R180 000 / R600 000 x R300 000 = R90 000 15,00
12 000 600 000 R300 000

Alternative: R300 000 / R600 000 = R0,50 per rand of sales

The resulting gross profit would be as follows:

Product Unit gross profit Gross profit Total gross profit

R % R
Alpha 30,00 50 60 000
Beta 37,50 50 150 000
Charlie 15,00 50 90 000
300 000

Ch 9 BQ 8

The joint costs are allocated as follows:

Product Units Net

Joint cost allocation Cost per unit
realisabl
e value
R R
Alpha 2 000 180 000 R180 000 / R600 000 x R300 000 = R90 000 45,00
Beta 4 000 360 000 R360 000 / R600 000 x R300 000 = R180 000 45,00
Charlie 6 000 60 000 R60 000 / R600 000 x R300 000 = R30 000 5,00
12 000 600 000 R300 000

Alternative method: R300 000 / R600 000 = R0,50 per R net realisable value

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
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 Principles of Management Accounting
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The resulting gross profit would be as follows:

Product Profit Profit per unit Gross profit

R R %
Alpha 180 000 – 90 000 = 90 000 45,00 R45 / (R300 000 / 2 000 units) 30
Beta 360 000 – 180 000 = 180 000 45,00 R45 / (R450 000 / 4 000 units) 40
Charlie 60 000 – 30 000 = 30 000 5,00 R5 / (R90 000 / 6 000 units) 33.33
300 000

Ch 9 BQ 9

The overall gross profit percentage from the process is:

R R

Sales value (total sales value if processed further, BQ7) 840 000
Less: Joint costs (300 000)
Further processing costs (total, BQ7) (240 000) (540 000)
Gross profit 300 000

Gross profit percentage: R300 000 / R840 000 = 35,7143%

Applying this gross profit percentage to all products:

Alpha (R) Beta (R) Charlie (R) Total (R)

Sales revenue 300 000 450 000 90 000 840 000
Gross profit (35,7143%) 107 143 160 714 32 143 300 000
Total costs 192 857 289 286 57 857 540 000
Further processing costs 120 000 90 000 30 000 240 000
Joint costs apportioned 72 857 199 286 27 857 300 000

Ch 9 BQ 10

R
Incremental revenue (50 000 units x (R10 – R8)) 100 000
Incremental costs 60 000
Incremental revenue 40 000

Based on financial considerations alone, further processing should be undertaken, as

profits will increase. It should be noted that, for this decision, the joint costs are all
irrelevant. Only the incremental revenue per unit of Product N and the incremental
additional processing costs are taken into account.

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
to another party as acknowledged in the source line of the question in the textbook.
 Principles of Management Accounting
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Suggested solutions to Long questions

Ch 9 LQ 1

In order to produce 4 000 units of Voy, the company will have to undertake the joint
processing of both En and Voy, as the products emerge as distinct products only at
the split-off point. Joint processing costs will have to be incurred.

The company has 20 per cent spare capacity, meaning it can produce 75 000 units of
En (60 000 units / 0.8) and 50 000 units of Voy (40 000 / 0.8). It could produce an
additional 15 000 units of En (75 000 – 60 000 units) and 10 000 units of Voy (50 000
– 40 000 units). The fixed production overheads are therefore irrelevant – they are
sunk costs which would have to be incurred whether or not the company accepted
the order, which is for only 4 000 units.

R
Incremental revenue (4 000 units of Voy at R8,00 each) 32 000
Incremental variable costs:
(R100 000 + R200 000) x 4 000 / 40 000 units 30 000
Incremental profit 2 000

Based on financial considerations alone, the order should be accepted as an

additional R2 000 in profit is made. This is, however, a small profit and should be
carefully considered.
If the special order is accepted, 6 000 units of En will also be produced (because the
joint process yields 6 units of En for every 4 units of Voy). As the market is saturated,
they cannot be sold. Can they be stored in anticipation of a market improvement, or
are they perishable and will have to be dumped (possibly at a cost)? In that case, the
storage cost and future revenue or the disposal cost would also have to be
considered when making the decision. Such costs may result in a loss. Qualitative
considerations should also be taken into account in the final decision, for example
whether the customer placing the special order is likely to become a repeat customer.

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
to another party as acknowledged in the source line of the question in the textbook.
 Ch 9 LQ 2

a) Total process costs

Product 3 has only a minor sales value in comparison with products 1 and 2 and
should therefore be treated as a by-product. Process costs should therefore be
reduced by the net sales revenue of product 3, which is calculated as follows:

Gross proceeds (45 000 litres x R2) R90 000

Less additional processing costs R40
000
R50 000

Toxic waste of 0,5 per cent of inputs is considered normal. Therefore, costs of
disposing of waste equal to 0,5 per cent need to be included in process costs, while
the remainder must be charged directly to the income statement as periodic cost:

Total inputs (litres) Raw material 1 300 000

Raw material 2 200 000
500 000

Expected toxic waste at 0,5% (litres) 2 500

Cost of disposal per litre R100
Total disposal costs included R250 000

Total joint costs are therefore:

Raw materials: Raw material 1 (300 000 litres x R15) R4 500 000
Raw material 2 (200 000 litres x R50) R10 000 000 R14 500 000
Toxic waste disposal R250 000
Less net revenue from sale of by-product (R50 000)
R14 700 000

b) Allocation of joint costs based on market value

Output Sales price Sales value Allocation Costs

proportion allocated
Product 1 200 000 R40 R8 000 000 40% 5 880 000
Product 2 250 000 R48 R12 000 000 60% 8 820 000
R20 000 000 100% R14 700 000

Solutions to questions in Principles of Management Accounting 3e. © Oxford University Press Southern Africa 2020, unless copyright is attributed
to another party as acknowledged in the source line of the question in the textbook.