Joint Product and By-Product Costing 147

CHAPTER 7
Joint Product and By-Product Costing
LEARNI NG OBJECTI VES
After studying this chapter, you should be able to:
1. Identify the characteristics of the joint production process.
2. Allocate joint product costs according to the benefits-received approaches and the relative
ar!et value approaches.
3. "escribe ethods of accounting for by-products.
4. #$plain %hy joint cost allocations ay be isleading in anageent decision a!ing.
5. "iscuss %hy joint production is seldo found in service industries.
CHAPTER SUMMARY
&his chapter describes the joint production processes and their outputs'joint products and by-
products. (everal ethods are developed to allocate joint costs to joint products. By-products are
not usually allocated any of the joint costs. Instead, noncost ethods are fre)uently used to
account for by-products. &his chapter concludes %ith the caution that allocated joint costs are not
useful for output and pricing decisions. *urther processing costs are used in anageent
decision a!ing.
CHAPTER REVI EW
I. General Characteristics of Joint Production
Joint products are t%o or ore products produced siultaneously by the sae process.
Joint products becoe separate and identifiable at the split-off point.
Review textbook Exhibit 7-1, which depicts the joint production process.
A. Cost (eparability and the +eed for Allocation
,. Joint costs are the total of the ra% aterial, labor, and overhead costs incurred up
to the initial split-off point.
a. Joint costs can be allocated to the final product only in soe arbitrary anner
because such costs cannot be traced directly to the products they benefit.
b. Joint cost allocation is perfored to eet the re)uireents of financial
reporting -.AAP/ and federal incoe ta$ la% for incoe easureent and
inventory valuation. In addition, joint cost allocation is useful in costing for
0earning 1bjective 2,
148 Chapter 3
governent cost-type contracts and in justifying prices for legislative or
adinistrative regulations.
c. Joint cost allocation is uch less useful for cost control and anagerial
decision a!ing.
4. Separale costs are those costs incurred after the split-off point5 they can be easily
traced to individual products.
B. "istinction and (iilarity Bet%een Joint Products and By-Products
,. &he distinction bet%een joint products and by-products rests solely on the relative
iportance of their sales value.
4. A !-product is a secondary product %hose total sales value is relatively inor in
coparison %ith the sales value of the ain product -joint product/.
6. 7elationships bet%een joint products and by-products change over tie as
technology and ar!ets change.
a. By-products ay becoe ore and ore iportant, eventually becoing joint
products.
b. 8hen the relative iportance of individual products changes, the products
need to be reclassified and the costing procedures need to be changed.
Review textbook Exhibit 7-3, which gives examples o
joint products and b!-products or various industries.
II. "ccountin# for Joint Product Costs
A. Introduction
,. Joint cost allocations ust be done for financial reporting purposes: to value
inventory and to deterine incoe. An allocation ethod ust be found, though
arbitrary, to allocate the joint costs as reasonably as possible.
4. &he joint cost allocation approaches include the follo%ing:
a. Benefits-received approaches, %hich include the follo%ing ethods:
Physical units ethod
8eighted average ethod
b. Allocation based on the relative ar!et value, using the follo%ing ethods:
(ales-value-at-split-off ethod
+et reali9able value ethod
Constant gross argin percentage ethod
(ales-to-production-ratio ethod
B. Benefits-7eceived Approaches
,. Physical :nits ;ethod
a. :nder the ph!sical units $ethod, units of physical output, such as heat
content, volue, or %eight, that easure the benefits received are used to
0earning 1bjective 24
Joint Product and By-Product Costing 14%
distribute joint costs. &his ethod allocates to each joint product the sae
proportion of joint costs as the underlying proportion of units.
#$aple: ;anufacturers of forest products use the physical units
ethod to apply the average conversion cost to all finished products,
regardless of their type, grade, or ar!et value.
b. "isadvantages of the physical units ethod include the follo%ing:
It ignores the fact that not all costs are directly related to physical
)uantities.
It ay result in incorrect anagerial decisions because high profit
ay be reflected fro the sale of high-grade products, %ith lo% profit or
losses reflected fro the sale of lo%-grade products.
4. 8eighted Average ;ethod
&he %eighted average ethod uses the &ei#ht factors to include such diverse
eleents as aount of aterial used, difficulty to anufacture, tie consued,
difference in type of labor used, and si9e of unit.
'ei#hted ph!sical units ( )u$er of units * 'ei#ht factor
#$aple: &he canning industry uses %eight factors to distinguish bet%een
can si9es or )uality of product. &he %eighted average ethod allocates relatively
ore of the joint cost to the high-grade products because they represent ore
desirable and profitable products.
C. Allocation Based on 7elative ;ar!et <alue
&he ethods in this approach try to assign costs based on the product=s ability to
absorb joint costs. &hey are based on the assuption that the joint costs %ould not be
incurred unless the products yield enough revenues to cover all costs plus a
reasonable profit.
&he relative ar!et value approach of allocation is better than the physical units
approach if -,/ the physical i$ of output can be altered by incurring ore -or less/ total
joint costs, and -4/ this alteration produces ore -or less/ total ar!et value.
,. (ales-<alue-at-(plit-1ff ;ethod
a. &he sales-+alue-at-split-off $ethod allocates joint cost based on each
product=s proportionate share of ar!et or sales value at the split-off point.
b. In this ethod, the higher the ar!et value, the greater the joint cost assigned
to the product.
4. +et 7eali9able <alue ;ethod
a. &he net reali,ale +alue $ethod allocates joint costs based on h!pothetical
sales +alues because there ay not be a ready ar!et for the product at the
split-off point.
b. &his ethod is particularly useful %hen one or ore products cannot be sold at
the split-off point but ust be processed further.
-!pothetical sales +alue (
.ar/et price 0 1urther processin# costs after split-off point
6. Constant .ross ;argin Percentage ;ethod
152 Chapter 3
a. &he constant #ross $ar#in percenta#e $ethod allocates joint costs such
that the gross argin percentage is the sae for each product.
b. &his ethod assues that the further processing yields an identical profit
percentage across all products.
c. :sing the constant gross argin percentage ethod, the joint cost allocation
steps include the follo%ing calculations:
Grand #ross $ar#in percenta#e (
re+enue 3otal
costs4 3otal 0 re+enue 53otal
Joint product #ross $ar#in ( .ar/et price * Grand #ross $ar#in
Joint cost allocated to product ( .ar/et +alue 0 Gross $ar#in 0 Separale
costs
>. (ales-to-Production 7atio
a. &he sales-to-production-ratio $ethod allocates joint costs in accordance %ith
a %eighting factor that copares the percentage of sales %ith the percentage
of production.
b. In this ethod, the products that sell the ost are allocated a larger share of
the joint cost of current production.
c. :sing the sales-to-production-ratio ethod, the joint cost allocation steps
include:
-,/ Copute the percentage of total sales based on the joint product units
sold.
-4/ Copute the percentage of total production based on the joint product
units produced.
-6/ Copute the sales-to-production ratio of the joint product.
Sales-to-production ratio (
production of Percenta#e
sales total of Percenta#e
->/ :se the sales-to-production ratio to allocate joint cost.
?. &he liitations of allocation based on relative ar!et value include the follo%ing:
All ethods are based on price. If price is used to deterine cost, then those
costs cannot be used to deterine price. &he decision %ould be circular.
Changes in relative ar!et prices %ill cause changes in the costs allocated
to the product, even %hen there has been no change in total costs or the
ethod of production.
:sing allocation based on relative ar!et value produces the sae argin
per dollar of allocated cost. &his could be isleading to anageent if the
ipression is created that all products are e)ually profitable.
Review textbook Exhibit 7-", which summari#es the joint cost allocation methods.
0earning 1bjective 26
Joint Product and By-Product Costing 151
III. "ccountin# for 6!-Products
A. Introduction
,. &he ain objective of by-product accounting is to deterine incoe and inventory
for financial reporting purposes. By-products are of less significance than the ain
products and ay not re)uire precise cost allocation.
4. 7elevant factors that influence by-product valuation and accounting include:
&he uncertainty of by-product value at the tie of production.
&he use of the by-product in other production.
&he use of the by-product as an alternative to ain products.
&he need for separate profit calculations for sales incentives or for control.
6. By-products can be accounted for using the follo%ing:
a. +oncost ethods
1ther incoe
By-product revenue deducted fro ain product cost
b. Cost ethods
7eplaceent cost ethod
&otal costs less by-products valued at standard price ethod
Joint cost proration ethod
B. +oncost ;ethods of Accounting for By-Products
)oncost $ethods a!e no attept to allocate joint cost to the by-product or its
inventory but instead a!e soe credit either to incoe or to the ain product.
,. 1ther Incoe ;ethod
a. &he net sales of by-products for the current period is recogni9ed as @1ther
IncoeA or @;iscellaneous IncoeA and is reported in the incoe stateent.
&he ar!et value of by-product inventory, if aterial, should be reported in a
footnote to the balance sheet.
b. &he other incoe ethod is used by those firs %here:
&he value of the by-product is sall,
Any other allocation %ould be ore e$pensive than the benefits
received, or
Carrying by-products %ith the ain products %ould not appreciably
affect the cost of the ain product.
c. "isadvantages of this ethod include the follo%ing:
Inventories on the balance sheet are isstated since no value is
placed on the by-products.
;atching of revenues %ith e$penses is iproper if production of by-
products occurs in one accounting period and sales occur in another. +o
entry for by-products is ade at the tie of production, only at the tie of
sale.
152 Chapter 3
+o attept is ade to control the inventory of by-products and to
prevent the fro losses due to fraud or errors.
4. By-Product 7evenue "educted fro ;ain Product Cost
a. &he net sales of by-products %ill be treated as a deduction fro the cost of the
ain product.
#$aple: &he beef-pac!ing industry uses this ethod because of
the great variety of products resulting fro operations and the cople$ity
of the processing.
b. "isadvantages of this ethod include the follo%ing:
&he ethod tends to understate the value of the ain product.
&he cost of the ain product can vary fro onth to onth
because of the varying )uantities of by-products sold.
C. Cost ;ethods of Accounting for By-Products
Cost ethods attept to allocate soe joint costs to by-products and to carry
inventories at the allocated cost levels.
,. 7eplaceent Cost ;ethod
&he replace$ent cost $ethod values the by-product inventory at its opportunity
cost of purchasing or replacing the by-products.
#$aple: In the oil refining industry, increasing output of one product %ill
cause a reduction in the output and the profit of the other product.
4. &otal Costs 0ess By-Products <alued at (tandard Price ;ethod
a. By-products are valued at a standard price to avoid fluctuations in by-product
value.
b. &he standard price approach shelters the ain product cost fro any
fluctuations in the by-product price.
c. &he standard price ay be set arbitrarily, or it ay reflect an average price
over tie.
d. A variance account is used to account for the difference bet%een actual and
standard prices.
6. Joint Cost Proration ;ethod
&he by-product is allocated soe portion of the joint costs using any one of the
joint cost allocation ethods entioned in (ection II. &his ethod is rarely used in
practice.
Review textbook Exhibit 7-", which summari#es the b!-product accounting treatments.
I7. 8ffect of Joint Product Costs on
Cost Control and 9ecision .a/in#
Joint product costing ay affect cost control and decision a!ing in the follo%ing areas:
output decisions, further processing of joint products, and pricing jointly produced products.
0earning 1bjective 2>
Joint Product and By-Product Costing 153
A. 1utput "ecisions
,. 1utput decisions are norally based on the coparison of total cost of the joint
products and the cobined sales revenues for easuring profitability at any given
point.
4. If anageent cannot change the product i$ or the product i$ is deterined by
custoer deand, cost allocation is useless for output decisions because the
entire pac!age has to be produced.
B. *urther Processing "ecisions
,. In a!ing decisions on %hether to sell a joint product at split-off or to process it
further, only the costs and revenues incurred after the split-off point are pertinent.
4. Joint costs include those costs incurred prior to the split-off point and, thus, are
considered sun! costs %ith respect to further processing decisions -that is, the joint
cost is not a relevant cost/.
C. Pricing Joint Products
;ethods used to set joint product prices include:
,. (ales or ar!et price ethod
a. &his ethod aintains a constant relationship of cost to ar!et prices, but it
cannot be used to set prices since price has to be !no%n in order to deterine
cost.
b. &he ethod is circular but useful in liited situations.
#$aple: &he eat-pac!ing industry uses the ar!et value of by-
products as an iportant deterinant of the ain product=s price.
#$aple: &he natural gas industry uses it to justify prices and
e$isting price relationships to regulatory bodies. Joint cost allocation is
used to deterine inventory values, not as a basis to deterine a cost to
be used in price regulation.
4. Bistorical ar!et differentials bet%een products ethod
8hen ar!et differentials are stable over tie, this ethod provides a guide to
pricing individual products by giving figures coparable to those of copetitors.
". Pricing Based on Cost of *urther Production
&his ethod differs fro the benefits-received approaches because it does not assign
average cost based on physical or %eighted units. It is different fro the relative
ar!et value because the joint product itself does not have a ar!et value.
#$aple: &he practice of organ transplant sets the costs of the jointly
available organs based on the eventual cost of the subse)uent transplant
operation.
7. Joint Production of Ser+ices
+orally services do not yield a true joint output because a service can be directed to one
effect rather than to t%o effects siultaneously.
Joint cost allocation issues %ith services usually relate to pricing probles.
0earning 1bjective 2?
154 Chapter 3
#$aple: An insurance copany ay allo% only a portion of a assage therapy
charge to be allocated to the therapeutic aspect.
#$aple: &he I7( ight allo% the cost of a t%o-day seinar as a deductible business
e$pense. But if the seinar %ere offered on a cruise ship and spread out over a five-
day period, the I7( %ould loo! closely if claied as a deduction and not separated
fro the overall cost of the cruise.
Joint Product and By-Product Costing 155
KEY TERMS TEST
From the list that follows, select the term that best completes each statement and write it in the
space provided.
net reali9able value ethod
noncost ethods
physical units ethod
replaceent cost ethod
sales-to-production-ratio ethod
sales-value-at-split-off ethod
separable costs
split-off point
%eight factor
1. Costs that are easily traced to individual products are CCCCCCCCCCCCCCCCCCCCCCCCC.
2. &he CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC allocates joint pro-
duction costs by coparing the percentage of sales to the percentage of production.
3. &he CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC allocates joint production costs based on
each product=s share of total units.
4. &he CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC allocates joint production
costs based on each product=s share of revenue at the split-off point.
5. &he CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC allocates joint production
costs based on the proportionate share of the product=s eventual revenue less further
processing costs.
:. A-n/ CCCCCCCCCCCCCCCCCCCCCCC tries to incorporate the relative si9e of products or the
difficulty to produce the.
7. CCCCCCCCCCCCCCCCCCCCCCCCCCCCC a!e no attept to cost the by-product or its inventory.
8. &he CCCCCCCCCCCCCCCCCCCCCCCCC is %here the joint products becoe separate and
identifiable.
%. &he CCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCCC values by-products at the opportu-
nity cost of purchasing or replacing the products.
MULTI PLE- CHOI CE QUI Z
Complete each of the following statements by circling the letter of the best answer.
1. 8hich of the follo%ing is not an acceptable ethod of accounting for by-productsD
a. &he revenue fro the sale of by-products is credited to @1ther Incoe.A
. &he by-product is valued at its opportunity costs of purchasing or replacing the product.
c. &he revenue fro the sale of by-products is deducted fro the costs of the ain
products.
d. &he by-product is valued at a standard price5 any fluctuations in the price are isolated in a
variance account.
e. All of the above ethods are acceptable approaches to accounting for by-products.
15: Chapter 3
2. 8hich of the follo%ing is a true stateent regarding joint costsD
a. Joint costs are easily traced to individual products.
. &he priary reason for allocating joint costs is to deterine %hether a product should be
sold iediately or processed further.
c. &he priary reason for allocating joint costs is for inventory valuation for financial reporting.
d. Joint costs consist only of overhead, never of aterials or direct labor.
e. +one of the above stateents are true.
3. 8hich of the follo%ing costs of a joint process %ould be allocated to the joint productsD
a. aterials, labor, and overhead
. labor and overhead only
c. aterials and labor only
d. conversion costs less by-product values
e. prie costs less by-product values
4. &he joint cost allocation ethod that yields the sae gross argin percentage for each
product is the:
a. net reali9able value ethod.
. sales-to-production-ratio ethod.
c. physical units ethod.
d. constant gross argin percentage ethod.
e. sales-value-at-split-off ethod.
5. &he joint cost allocation ethod that assigns joint production costs based on the proportionate
share of eventual revenues less further processing costs is the:
a. net reali9able value ethod.
. sales-to-production-ratio ethod.
c. physical units ethod.
d. constant gross argin percentage ethod.
e. sales-value-at-split-off ethod.
:. &he secondary product recovered in the course of anufacturing a priary product during a
joint process is:
a. a by-product.
. a joint product.
c. a replaceent product.
d. a split-off product.
e. none of the above.
7. 8hich of the follo%ing joint cost allocation ethods is not acceptable for financial reporting
under generally accepted accounting principlesD
a. net reali9able value ethod
. sales-value-at-split-off ethod
c. physical units ethod
d. constant gross argin percentage ethod
e. All of the ethods are acceptable under .AAP.
Joint Product and By-Product Costing 157
Use the following information for Questions 8 through 10
Allison, Inc., produces t%o products, E and F, in a single joint process. 0ast onth the joint costs
%ere G3?,HHH %hen ,H,HHH units of Product E and ,?,HHH units of Product F %ere produced.
Additional processing costs %ere G,?,HHH for Product E and G,H,HHH for Product F. Product E
sells for G,H, and Product F sells for G?.
8. &he joint cost allocations to Products E and F using the net reali9able value ethod %ould
be:
; <
a. G6H,HHH G>?,HHH
. G>4,?HH G64,?HH
c. G>4,I?3 G64,,>6
d. G>?,HHH G6H,HHH
e. none of the above.
%. &he joint cost allocations to Products E and F using the physical units ethod %ould be:
; <
a. G6H,HHH G>?,HHH
. G>4,?HH G64,?HH
c. G>4,I?3 G64,,>6
d. G>?,HHH G6H,HHH
e. none of the above.
12. &he joint cost allocations to Products E and F using the constant gross argin percentage
ethod %ould be:
; <
a. G6H,HHH G>?,HHH
. G>4,?HH G64,?HH
c. G>4,,>6 G64,I?3
d. G>?,HHH G6H,HHH
e. none of the above.
11. +athan Copany produces three products -A, B, and C/ in a single joint process. All of the
products are salable iediately upon split-off. Alternatively, any of the products could be
processed further and sold at a higher price. Cost and price inforation is as follo%s:
Product Price at Split-=ff "dditional Processin# Cost Price "fter Processin# >nit 7olu$e
A G,H G,H,HHH G,4 ,H,HHH
B ,? 4?,HHH ,I ?,HHH
C 4H ?H,HHH 6H I,HHH
&he decision that %ould a$ii9e profits %ould be:
" 6 C
a. sell no% sell no% sell no%
. process further process further process further
c. sell no% process further sell no%
d. process further sell no% process further
e. none of the above.
158 Chapter 3
12. 0a!er Copany produces t%o products along %ith a single by-product. &he joint process costs
total G4HH,HHH. Product A can be sold for G>?H,HHH after additional processing of
G4?H,HHH5 Product B can be sold for GJHH,HHH after additional processing of G4HH,HHH. &he
by-product BP can be sold for G4?,HHH after pac!aging costs of G?,HHH. &he by-product is
accounted for using the by-product revenue deducted fro the ain product cost approach.
8hat %ould be the joint cost allocation using the net reali9able value ethodD
" 6
a. GJH,HHH G,4H,HHH
. GJJ,JJ3 G,66,666
c. G33,,>6 G,H4,I?3
d. GI?,3,> G,,>,4IJ
e. none of the above
13. 0an!ip Copany produces t%o ain products and a by-product out of a joint process. &he
ratio of output )uantities to input )uantities of direct aterial used in the joint process
reains consistent fro onth to onth. 0an!ip eploys the physical units ethod to
allocate joint production costs to the t%o ain products. &he net reali9able value of the by-
product is used to reduce the joint production costs before the joint costs are allocated to
the ain products. "ata regarding 0an!ip=s operations for the current onth are presented
belo%. "uring the onth, 0an!ip incurred joint production costs of G4,?4H,HHH. &he ain
products are not ar!etable at the split-off point and, thus, have to be processed further.
1irst .ain Product Second .ain Product 6!-Product
;onthly output in pounds............ KH,HHH ,?H,HHH JH,HHH
(elling price per pound............... G6H G,> G4
(eparable process costs............ G?>H,HHH GJJH,HHH
&he aount of joint production cost that 0an!ip %ould allocate to the (econd ;ain Product
by using the physical units ethod to allocate joint production costs %ould be:
a. G,,4HH,HHH.
. G,,4JH,HHH.
c. G,,?HH,HHH.
d. G,,?3?,HHH.
e. G,,J?H,HHH.
Use the following information for Questions 1! and 1"
Petro-Che, Inc., is a sall copany that ac)uires high-grade crude oil fro lo%-volue
production %ells o%ned by individuals and sall partnerships. &he crude oil is processed in a single
refinery into &%o 1il, (i$ 1il, and ipure distillates. Petro-Che does not have the technology or
capacity to process these products further and sells ost of its output each onth to ajor
refineries. &here %ere no beginning inventories for finished goods or %or! in process on
+oveber ,. &he production costs and output of Petro-Che for +oveber are as follo%s:
Crude oil ac)uired and placed in production........................... G?,HHH,HHH
"irect labor and related costs.................................................. 4,HHH,HHH
*actory overhead.................................................................... 6,HHH,HHH
Production and sales:
&%o 1il: 6HH,HHH barrels produced5 IH,HHH barrels sold at G4H each
(i$ 1il: 4>H,HHH barrels produced5 ,4H,HHH barrels sold at G6H each
"istillates: ,4H,HHH barrels produced and sold at G,? per barrel
Joint Product and By-Product Costing 15%
14. &he portion of the joint production costs assigned to (i$ 1il based on physical output %ould
be:
a. G6,J6J,HHH.
. G6,3?H,HHH.
c. G,,I,I,HHH.
d. G3,?HH,HHH.
e. G>,IHH,HHH.
15. &he portion of the joint production costs assigned to &%o 1il based on the relative sales
value of output %ould be:
a. G>,IHH,HHH.
. G>,HHH,HHH.
c. G4,4IJ,HHH.
d. G4,?HH,HHH.
e. G>,>>?,HHH.
1:2 Chapter 3
PRACTI CE TEST
8;8?CIS8 1
7on Cheicals produces four products fro a joint process costing G,?H,HHH per onth. After
leaving the joint process, the products ust be further refined before they are salable. Fou
have been provided %ith the follo%ing inforation:
Product 7olu$e 1urther Processin# Costs Sellin# Price per >nit
A-, ,?,HHH G6?H,HHH GIH
B-6 4?,HHH >HH,HHH >H
C-4 ,H,HHH ,HH,HHH 44
L-K ?H,HHH 4?H,HHH ,H
#e$uired
1. Allocate the joint costs using the physical units ethod.
2. Allocate the joint costs using the net reali9able value ethod.
Joint Product and By-Product Costing 1:1
8;8?CIS8 2
Bishop Corporation produces three products at a joint anufacturing cost of G,,4?H,HHH. &he
follo%ing inforation has been provided:
Product 7olu$e 1urther Processin# Costs Sellin# Price per >nit
A 4?,HHH G3?H,HHH G>H
B >H,HHH 3?H,HHH ?H
C 6?,HHH 4,H,HHH 4H
#e$uired
Allocate the joint costs using the constant gross argin percentage ethod.
1:2 Chapter 3
8;8?CIS8 3
Luoru, Inc., has joint processing costs of G,,HHH,HHH. &here are no further processing costs. &he
deand for Luoru=s products has been fluctuating greatly5 production has reained relatively
constant. &he follo%ing inforation for the past year has been provided:
Product >nits Sold Sellin# Price per >nit >nits Produced
L-IH 4?,HHH G>.HH 6H,HHH
7-6> >H,HHH ?.HH 6H,HHH
(-KK 6?,HHH 4.HH ?H,HHH
&-,> ?H,HHH ,.?H JH,HHH
:-J4 3?,HHH 6.?H IH,HHH
#e$uired
Allocate the joint costs using the sales-to-production-ratio ethod.
Joint Product and By-Product Costing 1:3
8;8?CIS8 4
.ranite City ;onuent 8or!s is a anufacturer of ceetery headstones and architectural
granite slabs. .ranite City e$cavates bloc!s of granite fro its )uarry fro its joint processes of
Luarry and Cutting. &%o joint products -ceetery onuents and architectural granite/ are
produced along %ith a by-product called grit.
Ceetery onuents are cut, polished, and engraved in a variety of standard shapes, si9es,
and patterns and sold to funeral hoes. Architectural granite slabs are special-ordered by
contractors for office buildings. &hese slabs are cut and polished to e$acting specifications. &he
sall pieces of granite resulting fro the cutting process are crushed and sold to far-supply
outlets as poultry grit.
.ranite City has provided the follo%ing costs and output inforation:
Process Cost 3ons of =utput
Luarry G6?H,HHH ,HH,HHH
Cutting 4?H,HHH KH,HHH
;onuents 6HH,HHH 4?,HHH
.ranite slabs >HH,HHH JH,HHH
.rit ,H,HHH ?,HHH
Luarry and Cutting are joint processes. A local far-supply distributor purchases all of the grit
that is produced at G>H per ton. Assue that .ranite City uses the physical units ethod to
allocate joint costs.
#e$uired
1. 8hat %ould be the cost per ton of onuents and granite slabs, assuing that the grit is
accounted for as @1ther IncoeAD
1:4 Chapter 3
8;8?CIS8 4 %Continued&
2. 8hat %ould be the cost per ton of onuents and granite slabs, assuing that the grit is
accounted for as by-product revenue deducted fro the ain product costD
8;8?CIS8 5
&aldot Copany produces three products -E, F, and M/ in a joint process costing G,HH,HHH. &he
products can be sold as they leave the process, or they can be processed further and sold. &he
cost accountant has provided you %ith the follo%ing inforation:
Sales Price Separale 1urther Sales Price "fter
Product >nit 7olu$e at Split-=ff Processin# Costs 1urther Processin#
E 6,HHH G,H GJH,HHH G4?
F >,HHH ,? ?H,HHH 6H
M I,HHH 4H KH,HHH 6?
Assue that all processing costs are variable costs.
#e$uired
8hich products should &aldot sell at split-off, and %hich products should be processed furtherD
Joint Product and By-Product Costing 1:5
CAN YOU? CHECKLI ST
Can you define the ters joint product, split-o point, b!-product, and separable costsD
Can you allocate joint product costs using a benefits-received approach such as the:
physical units ethodD
%eighted average ethodD
Can you allocate joint product costs using a relative ar!et value approach such as the:
sales-value-at-split-off ethodD
net reali9able value ethodD
constant gross argin percentage ethodD
sales-to-production-ratio ethodD
Can you identify different ethods for accounting for by-productsD Can you e$plain ho% to
distinguish bet%een a by-product and a ain productD
Can you e$plain joint cost allocations related to:
output decisionsD
further processing decisionsD
pricing of joint productsD
pricing based on the cost of further productionD
Can you e$plain ho% joint production costing could be used in a service industryD
ANSWERS
@8< 38?.S 38S3
1. separable costs
2. sales-to-production-ratio ethod
3. physical units ethod
4. sales-value-at-split-off ethod
5. net reali9able value ethod
:. %eight factor
7. +oncost ethods
8. split-off point
%. replaceent cost ethod
.>A3IPA8-C-=IC8 B>IC
1. e
2. c
3. a
4. d
5. a
:. a
7. e
1:: Chapter 3
8. b +et reali9able values are coputed as follo%s:
E: -,H,HHH units N G,H/ O G,?,HHH P G I?,HHH
F: -,?,HHH units N G ?/ O G,H,HHH P J?,HHH
&otal net reali9able value P G,?H,HHH
Joint cost allocation ratios are coputed using the net reali9able value ethod, and joint cost allocation is
perfored as follo%s:
E: -GI?,HHH Q G,?H,HHH/ N G3?,HHH P G>4,?HH
F: -GJ?,HHH Q G,?H,HHH/ N G3?,HHH P G64,?HH
%. a Joint cost allocation ratios are coputed using the physical units ethod, and joint cost allocation is
perfored as follo%s:
E: -,H,HHH units Q 4?,HHH units/ N G3?,HHH P G6H,HHH
F: -,?,HHH units Q 4?,HHH units/ N G3?,HHH P G>?,HHH
12. c Joint cost allocation ratio is coputed using the constant gross argin percentage ethod as follo%s:
#stiated gross argin P G,3?,HHH O G3?,HHH O G4?,HHH P G3?,HHH
#stiated gross argin ratio P G3?,HHH Q G,3?,HHH P >4.I?3R
Joint cost allocation is coputed as follo%s:
E: G,HH,HHH O G,?,HHH O -G,HH,HHH N >4.I?3R/ P G>4,,>6
F: G3?,HHH O G,H,HHH O -G3?,HHH N >4.I?3R/ P G64,I?3
11. d A: Increental revenue if processed further P -G,4 O G,H/ N ,H,HHH units P G4H,HHH
Additional processing cost P G,H,HHH
Conclusion: Process further because the increental revenue is higher than the increental costs.
B: Increental revenue if processed further P -G,I O G,?/ N ?,HHH units P G,?,HHH
Additional processing cost P G4?,HHH
Conclusion: (ell iediately because the increental revenue is lo%er than the increental costs.
C: Increental revenue if processed further P -G6H O G4H/ N I,HHH units P GIH,HHH
Additional processing cost P G?H,HHH
Conclusion: Process further because the increental revenue is higher than the increental costs.
12. a Adjusted joint cost after reduction of net sale of by-product P G4HH,HHH O -G4?,HHH O G?,HHH/ P G,IH,HHH
Joint cost allocation ratios are coputed using the net reali9able value ethod as follo%s:
A: G>?H,HHH O G4?H,HHH P G4HH,HHH
B: GJHH,HHH O G4HH,HHH P >HH,HHH
&otal net reali9able value P GJHH,HHH
Joint cost allocation is coputed as follo%s:
A: G4HH,HHH Q GJHH,HHH N G,IH,HHH P GJH,HHH
B: G>HH,HHH Q GJHH,HHH N G,IH,HHH P G,4H,HHH
13. c &otal revenue G4,?4H,HHH O By-product net sales -JH,HHH pounds N G4/ P G4,>HH,HHH
Allocation ratio for (econd ;ain Product P ,?H,HHH pounds Q -KH,HHH pounds S ,?H,HHH pounds/ P H.J4?
Joint cost allocated to (econd ;ain Product P G4,>HH,HHH N H.J4? P G,,?HH,HHH
14. a &otal units produced P 6HH,HHH S 4>H,HHH S ,4H,HHH P JJH,HHH barrels
Allocation ratio for (i$ 1il P 4>H,HHH barrels Q JJH,HHH barrels P H.6J6J
Joint cost allocated to (i$ 1il P -G?,HHH,HHH S G4,HHH,HHH S G6,HHH,HHH/ N H.6J6J P G6,J6J,HHH
15. b &%o 1il -G4H N 6HH,HHH barrels/ P G J,HHH,HHH
(i$ 1il -G6H N 4>H,HHH barrels/ P 3,4HH,HHH
"istillates -G,? N ,4H,HHH barrels/ P ,,IHH,HHH
&otal G,?,HHH,HHH
Allocation ratio P GJ,HHH,HHH Q G,?,HHH,HHH P >HR
Joint cost allocation P -G?,HHH,HHH S G4,HHH,HHH S G6,HHH,HHH/ N >HR P G>,HHH,HHH
Joint Product and By-Product Costing 1:7
P?"C3IC8 38S3
8;8?CIS8 1
5?on Che$icals4
1. Physical :nits ;ethod
ProductD "-1 6-3 C-2 B-% 3otal
:nits............................................................ ,?,HHH 4?,HHH ,H,HHH ?H,HHH ,HH,HHH
Allocation R................................................ ,?R 4?R ,HR ?HR
Joint cost allocated -R N G,?H,HHH/.......... G44,?HH G63,?HH G,?,HHH G3?,HHH G,?H,HHH
2. +et 7eali9able <alue ;ethod
ProductD "-1 6-3 C-2 B-% 3otal
:nits............................................................ ,?,HHH 4?,HHH ,H,HHH ?H,HHH
:nit price..................................................... N GIH N G>H N G44 N G,H
&otal revenue............................................... G,,4HH,HHH G,,HHH,HHH G44H,HHH G?HH,HHH
0ess: *urther processing costs.................. 6?H,HHH >HH,HHH ,HH,HHH 4?H,HHH
+et reali9able value..................................... G I?H,HHH G JHH,HHH G,4H,HHH G4?H,HHH G,,I4H,HHH
Allocation R................................................ >J.3R 66.HR J.JR ,6.3R
Joint cost allocated -R N G,?H,HHH/T......... G3H,H?>.K? G>K,>?H.?? GK,IKH.,, G4H,JH>.>H G ,?H,HHH
T"ifferences due to rounding
8;8?CIS8 2
56ishop Corporation4
Constant .ross ;argin Percentage ;ethod
ProductD " 6 C 3otal
:nits............................................................ 4?,HHH >H,HHH 6?,HHH
:nit price..................................................... N G>H N G?H N G4H
7evenue...................................................... G,,HHH,HHH G4,HHH,HHH G3HH,HHH G6,3HH,HHH/
0ess: Joint processing cost........................ -,,4?H,HHH/
0ess: (eparable further processing costs. . G3?H,HHH G3?H,HHH G4,H,HHH -,,3,H,HHH/
.ross argin.............................................. G 3>H,HHH/
.ross argin ratio P G3>H,HHH Q G6,3HH,HHH P 4HR
Joint Cost "llocation
7evenue...................................................... G,,HHH,HHH/ G4,HHH,HHH/ G 3HH,HHH/ G6,3HH,HHH/
0ess: .ross argin at 4HR........................ -4HH,HHH/ ->HH,HHH/ -,>H,HHH/
0ess: (eparable further processing costs. . -3?H,HHH / -3?H,HHH / -4,H,HHH/
Joint cost allocated..................................... G ?H,HHH / G I?H,HHH/ G 6?H,HHH/ G,,4?H,HHH/
8;8?CIS8 3 5
Buoru$E Inc.
4
(ales-to-Production-7atio ;ethod
Percenta#e Percenta#e Sales-to- Joint Cost
>nits of 3otal >nits of 3otal Production "llocation Joint Cost
Product Sold Sales Produced Production ?atio ?atio "llocation
L-IH 4?,HHH ,,.,,R 6H,HHH ,4.HHR H.K4?K ,3.K3R G ,3K,JK?
7-6> >H,HHH ,3.3IR 6H,HHH ,4.HHR ,.>I,? 4I.3?R 4I3,?,,
(-KK 6?,HHH ,?.?JR ?H,HHH 4H.HHR H.333I ,?.HKR ,?H,K>6
&-,> ?H,HHH 44.44R JH,HHH 4>.HHR H.K4?K ,3.K3R ,3K,JK?
:-J4 3?,HHH 66.66R IH,HHH 64.HHR ,.H>,3 4H.44R 4H4,,?J
&otal 44?,HHH 4?H,HHH ?.,?4I G,,HHH,HHH
1:8 Chapter 3
8;8?CIS8 4 5
Granite Cit! .onu$ent 'or/s
4
(ales of grit -?,HHH tons N G>H/............................ G4HH,HHH
0ess: (eparable costs of processing................... ,H,HHH
(ho%n as @1ther IncoeA..................................... G,KH,HHH
1. .rit accounted for as @1ther IncoeA:
Joint cost to be allocated P G6?H,HHH Luarry S G4?H,HHH Cutting P GJHH,HHH
ProductD .onu$ents Slas 3otal
&ons................................................................. 4?,HHH JH,HHH I?,HHH
Allocation ratio................................................ 4K.>,4R 3H.?IIR
Joint cost allocation -R N GJHH,HHH/............. G,3J,>34 G>46,?4I GJHH,HHH
Add: (eparable further processing costs....... 6HH,HHH >HH,HHH
&otal................................................................ G>3J,>34 GI46,?4I
"ivided by tons............................................... U 4?,HHH U JH,HHH
Cost per ton.................................................... G ,K.HJ G ,6.36
2. .rit accounted for as by-product revenue deducted fro ain product cost:
Joint cost to be allocated P G6?H,HHH Luarry S G4?H,HHH Cutting O G,KH,HHH By-product net sales P G>,H,HHH
ProductD .onu$ents Slas 3otal
&ons................................................................. 4?,HHH JH,HHH I?,HHH
Allocation ratio................................................ 4K.>,4R 3H.?IIR
Joint cost allocation -R N G>,H,HHH/............. G,4H,?IK G4IK,>,, G>,H,HHH
0ess: (eparable further processing costs...... 6HH,HHH >HH,HHH
&otal................................................................ G>4H,?IK GJIK,>,,
"ivided by tons............................................... U 4?,HHH U JH,HHH
Cost per ton.................................................... G ,J.I4 G ,,.>K
8;8?CIS8 5
53aldot Co$pan!4
Incre$ental ?e+enue Separale 1urther "dditional
Product if Processed 1urther Processin# Costs Contriution .ar#in
E G >?,HHH -G4? O G,H/ N 6,HHH GJH,HHH G-,?,HHH/
F JH,HHH -G6H O G,?/ N >,HHH ?H,HHH ,H,HHH
M ,4H,HHH -G6? O G4H/ N I,HHH KH,HHH 6H,HHH
Based on the analysis above, Product E should be sold iediately at the split-off point. Products F and M should be
processed further and then sold because they can generate ore profit if processed further.