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Joint Product Joint Product and By-and By-Product Product CostingCosting

Prepared by Douglas Cloud

Pepperdine University

Prepared by Douglas Cloud

Pepperdine University

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1. Identify the characteristics of the joint production process.

2. Allocate joint product costs according to the benefits-received approaches and the relative market value approaches.

3. Describe methods of accounting for by-products.

ObjectivesObjectivesObjectivesObjectives

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

After studying this After studying this chapter, you should chapter, you should

be able to:be able to:

ContinuedContinuedContinuedContinued

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4. Explain why joint cost allocations may be misleading in management decision making.

5. Discuss why joint production is seldom found in service industries.

ObjectivesObjectivesObjectivesObjectives

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Joint Production ProcessJoint Production ProcessJoint Production ProcessJoint Production Process

Material: Material: Hog Hog ProcessingProcessing

Split-Off

Point

Pork MeatPork Meat

HidesHides

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Independent Multiple-Independent Multiple-Product ProductionProduct Production

Independent Multiple-Independent Multiple-Product ProductionProduct Production

ProcessingProcessing

ProcessingProcessing

MustangMustang

TaurusTaurus

Material: Material: Steel Steel

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Joint Production ProcessJoint Production Process

Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.

The split-off point is the point at which the joint products become separate and identifiable.

Separable costs are easily traced to individual products and offer no particular problem.

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The distinction between joint and by-products rests solely on the relative importance of their sales value.

A by-product is a secondary product recovered in the course of manufacturing a primary product.

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By-products can be characterized by their By-products can be characterized by their relationship to the main products in the relationship to the main products in the following manner:following manner:

By-product resulting from scrap, trimmings, and so forth, of the main products in essentially nonjoint product types of undertakings (e.g., fabric trimmings from clothing pieces).

Scrap and other residue from essentially joint product types of processes (e.g., fat trimmed from beef carcasses).

A minor joint product situation (fruit skins and trimmings used as animal feed).

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Examples of Joint Products and Examples of Joint Products and By-ProductsBy-Products

Examples of Joint Products and Examples of Joint Products and By-ProductsBy-Products

Agriculture and Food Industries:

Flour milling Patent flour, clear flour, bran, and wheat germ

Extractive Industries:Copper mining Copper, gold, silver, and

other metalsChemical Industries:

Soap making Soap and glycerineManufacturing:

Cement Concrete pipe and aggregate

IndustryIndustry Joint Products and By-ProductsJoint Products and By-Products

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Accounting For Joint Product Costs

Benefits-Received Approaches Physical Units Method

Weighted Average Method

Allocation Based on Relative Market Value Sales-Value-at-Split-Off-Method

Net Realizable Value Method

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A sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows:

Accounting For Joint Product Costs

Physical Units MethodPhysical Units Method

Percent Joint Cost Grades Board Feet of Units Allocation

First and second 450,000 0.15 $ 27,900

No. 1 common 1,200,000 0.40 74,400

No. 2 common 600,000 0.20 37,200

No. 3 common 750,000 0.25 46,500

Totals 3,000,000 $186,000

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Accounting For Joint Product Costs

Weighed Average MethodWeighed Average Method

A peach canning factory purchases $5,000 of peaches and grades and cans them by quality. The following data pertains to this operation: Number Weight Weighted No. AllocatedGrades of Cases Factor of Cases Percent Joint Cost

Fancy 100 1.30 130 0.21667 $1,083

Choice 120 1.10 132 0.22000 1,100

Standard 303 1.00 303 0.50500 2,525

Pie 70 0.50 35 0.05833 292

Totals 600 $5,000

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Accounting For Joint Product Costs

Sales-Value-at-Split-Off MethodSales-Value-at-Split-Off Method

Using the lumber mill example from earlier-- Price at Percent

Quantity Split-Off Sales of Total Allocated Produced (per 1,000 Value at Market Joint Grades (board ft.) board ft.) Split-Off Value Cost

First and second 450,000 $300 $135,000 0.2699 $ 50,201No. 1 common 1,200,000 200 240,000 0.4799 89,261No. 2 common 600,000 121 72,600 0.1452 27,007No. 3 common 750,000 70 52,500 0.1050 19,530 Totals 3,000,000 $500,100 $185,999*

*Rounding error

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Accounting For Joint Product Costs

Net Realizable Value MethodNet Realizable Value Method

A company manufactures two products, Alpha and Beta, from a joint process. One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta. Neither product is salable at the split-off point, but must be further processed. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.

Further Hypothetical Hypothetical Allocated Market Processing Market Number Market Joint Price Cost Price of Units Value Cost

Alpha $5 $1 $4 1,000 $ 4,000 $2,300Beta 4 2 2 3,000 6,000 3,450

$10,000 $5,750

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Accounting For Joint Product Costs

Constant Gross Margin Percentage MethodConstant Gross Margin Percentage Method

PercentRevenue ($5 x 1,000) + ($4 x 3,000) $17,000 100 %Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,750 75 % Gross margin $ 4,250 25 %

Alpha Beta

Eventual market value $ 5,000 $12,000Less: Gross margin at 25% of market value 1,250 3,000Cost of goods sold $ 3,750 $ 9,000Less: Separable costs 1,000 6,000 Allocated joint costs $2,750 $ 3,000

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Accounting For Joint Product Costs

Sales-to-Production Ratio MethodSales-to-Production Ratio Method

Sales-to- % of % of Production Costs AssignedProduct Total Sales Production Ratio Percent Sales/Production

A 10 10 1.0000 19.9338 % $ 199,338B 20 15 1.3333 26.5778 % 265,778C 15 25 0.6000 11.9603 % 119,603D 40 30 1.3333 26.5778 % 265,778E 15 20 0.7500 14.9504 % 149,504

100 100 5.0166 100.001 % $1,000,001*

*rounding error

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Accounting for By-Accounting for By-Product CostsProduct Costs

Accounting for By-Accounting for By-Product CostsProduct Costs

One possibility is to show net sales of by-products in the

“Other Income” section of the income statement.

One possibility is to show net sales of by-products in the

“Other Income” section of the income statement.

By-product revenue also can be treated as a

deduction from the cost of the main product.

By-product revenue also can be treated as a

deduction from the cost of the main product.

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Effect of Joint Product Costs on Cost Control and Decision Making

It is important to understand when the use of allocated joint product costs may be misleading.

In making decisions relative to jointly produced articles, it must be remembered that the products are necessarily produced jointly.

Some areas that can be affected by joint cost allocations are:

Output decisions

Further processing of joint products

Pricing jointly produced products

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