Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

LEARNING PACKET
COSMAN2 – Strategic Cost Management
Session 1, First Semester, SY 2020-21

LEARNING PACKET NO. 7 DATE: September 13,2020

TOPIC: Joint and By-product costing Week No.: 6
Session: 1

INTENDED LEARNING OUTCOME:

At the end of this learning units, the learners shall:

1.) Allocate joint costs using physical measure and sales-value methods
2.) Decide whether to sell or process further a joint product
3.) Account for By-products

I. CONCEPT NOTES

Joint costs
Are the costs of a production process that yields multiple products simultaneously. Consider the
distillation of coal, which yields coke, natural gas, and other products. The costs of this distillation are
joint costs.

Splitoff point
Is the juncture in a joint production process when two or more products become separately identifiable.
An example is the point at which coal becomes coke, natural gas, and other products.

Separable costs
Are all costs—manufacturing, marketing, distribution, and so on—incurred beyond the split off point that
are assignable to each of the specific products identified at the split off point

1.) When a joint production process yields one product with a high total sales value, compared with total
sales values of other products of the process, that product is called a main product.
2.) When a joint production process yields two or more products with high total sales values compared
with the total sales values of other products, if any, those products are called joint products.
3.) The products of a joint production process that have low total sales values compared with the total
sales value of the main product or of joint products are called by-products.

Approaches to Allocating Joint Costs

Two approaches are used to allocate joint costs.

Approach 1. Allocate joint costs using market-based data such as revenues. This
chapter illustrates three methods that use this approach:
1. Sales value at splitoff method
2. Net realizable value (NRV) method
3. Constant gross-margin percentage NRV method
Approach 2. Allocate joint costs using physical measures, such as the weight, quantity (physical units),
or volume of the joint products.

Discussion with example :

Case 1: Joint products are sold at the split off point without further processing.
Example 1: Farmers’ Dairy purchases raw milk from individual farms and processes it until the splitoff
point, when two products—cream and liquid skim—emerge. In May 2012, Farmers’ Dairy processes
110,000 gallons of raw milk. During processing, 10,000 gallons are lost due to evaporation and spillage,
yielding 25,000 gallons of cream and 75,000 gallons of liquid skim.

Summary data follow:

Joint Costs

Joint costs (costs of 110,000 gallons liquid milk and P400,000

processing to split-off point )

Cream Liquid Skim

Beginning Inventory 0 0

Production 25,000 75,000

Sales 20,000 30,000

Ending Inventory 5,000 45,000

Selling price per gallon P8 P4

How much of the P400,000 joint costs should be allocated to the Cream and Liquid Skim?
1.) SALES VALUE AT SPLITOFF METHOD

The sales value at splitoff method allocates joint costs to joint products produced during the accounting
period on the basis of the relative total sales value at the splitoff point.

This method uses the sales value of the entire production of the accounting period (25,000 gallons of
cream and 75,000 gallons of liquid skim), not just the quantity sold (20,000 gallons of cream and 30,000
gallons of liquid skim).

Cream Liquid Total

Skim
Sales Value of total production at split-off point P 200,000 P300,000 P500,000
Weighting 0.4 0.6
Joint costs allocated P160,000 P240,000 P400,000
(0.4 X P400,000 + 0.6 X P400,000 )
Joint production per gallon P 6.4 P 3.2
( P160,000 / 25,000 gallons ; P240,000/75,000 gallons )

2.) PHYSICAL-MEASURE METHOD

The physical-measure method allocates joint costs to joint products produced during the accounting
period on the basis of a comparable physical measure, such as the relative weight, quantity, or volume
at the splitoff point. In Example 1, the P400,000 joint costs produced 25,000 gallons of cream and 75,000
gallons of liquid skim. Using the number of gallons produced as the physical measure, the table below
shows how joint costs are allocated to individual products to calculate the cost per gallon of cream and
liquid skim.

Cream Liquid Skim Total

Physical measure of total production (gallons) 25,000 75,000 100,000
Weighting ( 25,000 /100,000 gallons ; 75,000 gallons / 0.25 0.75
100,000 gallons )
Joint costs allocated ( 0.25 X400,000 ; 0.75 X 400,000 ) P100,000 P300,000 P400,000
Joint production cost per gallon ( P100,000 / 25,000 P4 P4
gallons ; P300,000/75,000 gallons )

Case 2 : Joint production processes that yield products that require further processing beyond the
split off point.

3.) NET REALIZABLE VALUE METHOD

In many cases, products are processed beyond the splitoff point to bring them to a marketable form or to
increase their value above their selling price at the splitoff point. For example, when crude oil is refined,
the gasoline, kerosene, benzene, and naphtha must be processed further before they can be sold. To
illustrate, let’s extend the Farmers’ Dairy example.
Example 2: Assume the same data as in Example 1 except that both cream and liquid skim can be
processed further:

Cream ➞ Buttercream: 25,000 gallons of cream are further processed to yield 20,000 gallons of
buttercream at additional processing costs of P280,000. Buttercream, which sells for P25 per gallon, is
used in the manufacture of butter-based products.

Liquid Skim ➞ Condensed Milk: 75,000 gallons of liquid skim are further processed to yield 50,000
gallons of condensed milk at additional processing costs of P520,000. Condensed milk sells for P22 per
gallon.

Sales during May 2012 are 12,000 gallons of buttercream and 45,000 gallons of condensed milk.

The net realizable value (NRV) method allocates joint costs to joint products produced during the
accounting period on the basis of their relative NRV—final sales value minus separable costs.

(a) Raw milk is converted into cream and liquid skim in the joint production process, and
(b) How cream is separately processed into buttercream and liquid skim is separately processed into
condensed milk.

Joint Cost Allocation using NRV Method

Joint Costs Buttercream Condensed

Milk

Joint costs ( costs of 110,000 gallons raw milk P400,000

and processing to split-off point

Separable cost of processing 25,000 gallons P 280,000

cream into 20,000 gallons buttercream

Separable cost of processing 75,000 gallons P520,000

liquid skim into 50,000 galons condensed milk

Beginning inventory ( gallons ) 0 0 0

Production (gallons) 25,000 75,000

Transferred for further processing 25,000 75,000

Sales ( gallons ) 12,000 45,000

Ending inventory ( gallons ) 0 0 8,000 5,000

Selling price per gallon P8 P4 P25 P22

Buttercream Condensed Total

Milk

Final sales value of total production during P 500,000 P1,100,000 P1,600,000

accounting period ( 20,000 X P25 per gallon ;
50,000 gallons X P22 per gallon)

Deduct separable costs 280,000 520,000 800,000

NRV at split-off point P220,000 P580,000 P800,000

Weighting ( P220,000/800,000; 0.275 0.725

P580,000/800,000)

Joint cost allocated ( 0.275 X 400,000 ; 0.725 X P110,000 P290,000 P400,000

400,000 )

Production cost per gallon ( P110,000 + 280,000 ) P 19.5 P 16.2

/ 20,000 gallons ( P290,000 +P520,000 ) /50,000
gallons

4.) CONSTANT GROSS-MARGIN PERCENTAGE NRV METHOD

The constant gross-margin percentage NRV method allocates joint costs to joint products produced
during the accounting period in such a way that each individual product achieves an identical gross-
margin percentage. The method works backward in that the overall gross margin is computed first. Then,
for each product, this gross-margin percentage and any separable costs are deducted from the final sales
value of production in order to back into the joint cost allocation for that product.
Step 1: Compute overall gross margin percentage. The overall gross-margin percentage for all joint
products together is calculated first. This is based on the final sales value of total production during the
accounting period, not the total revenues of the period
Step 2: Compute total production costs for each product. The gross margin (in dollars) for each
product is computed by multiplying the overall gross-margin percentage by the product’s final sales
value of total production. The difference between the final sales value of total production and the gross
margin then yields the total production costs that the product must bear.
Step 3: Compute allocated joint costs. As the final step, the separable costs for each product are
deducted from the total production costs that the product must bear to obtain the joint-cost allocation for
that product.

Step 1

Final sales volume of total production during P 1,600,000

accounting period (20,000 gallons X P25 per
gallon) + ( 50,000 X P22 per gallon )

Deduct joint and separable costs ( P400,000 + 1,200,000

P280,000 + P520,000 )

Gross Margin 400,000

Gross margin percentage ( 400,000/1,600,000 ) 25%

Step 2 Buttercream Condensed Milk Total

Final Sales volume of P500,000 P1,100,000 P1,600,000

total production during
accounting period
(20,000 gallons X P25
per gallon) + ( 50,000 X
P22 per gallon )

Deduct gross margin, 125,000 275,000 400,000

using overall gross
margin percentage (
25% X P500,000 + 25%
X P1,100,000 )

Total production costs 375,000 825,000 1,200,000

Step 3

Deduct separable costs P280,000 P520,000 P800,000

Joint costs allocated P 95,000 P 305,000 P400,000

Decision making: Sell or Process Further?

The decision to incur additional costs for further processing should be based on the incremental
operating income attainable beyond the split off point. Example 2 assumed it was profitable for both
cream and liquid skim to be further processed into buttercream and condensed milk, respectively. The
incremental analysis for the decision to process further is as follows:

Further processing cream into buttercream

Incremental revenues
(P25 / gallon X 20,000 gallons) – (P8/gallon X 25,000 gallons) P300,000
Deduct incremental processing costs 280,000
Increase in operating income from buttercream 20,000

Further processing liquid skim into condensed milk

Incremental revenues
(P22 / gallon X 50,000 gallons) – (P4/gallon X 75,000 gallons) P800,000
Deduct incremental processing costs 520,000
Increase in operating income from buttercream 280,000

In this example, operating income increases for both products, so the manager decides to process cream
into buttercream and liquid skim into condensed milk. The P400,000 joint costs incurred before the split
off point are irrelevant in deciding whether to process further. Why? Because the joint costs of P400,000
are the same whether the products are sold at the split off point or processed further.

Method for Accounting of By-Products

Production Method: By-products Recognized at Time Production Is Completed

This method recognizes the by-product in the financial statements in the month it is produced. The NRV
from the by-product produced is offset against the costs of the main product.

Sales Method: By-products Recognized at Time of Sale

This method makes no journal entries for by-products until they are sold. Revenues of the by-product are
reported as a revenue item in the income statement at the time of sale. These revenues are either
grouped with other sales, included as other income, or are deducted from cost of goods sold.

IV. INTEGRATION

CASE 1
Michigan Timber uses a joint process to manufacture two grades of wood: A and B. During October 2010,
the company incurred P16,200,000 of joint production cost in producing 27,000,000 board feet of Grade
A and 9,000,000 board feet of Grade B lumber. The company allocates joint cost on the basis of board feet
of lumber produced. The company can sell Grade A lumber at the split-off point for P0.70 per board foot.
Alternatively, Grade A lumber can be further processed at a cost of P0.75 per board foot and then sold for
P1.50 per board foot. No opportunity exists for processing Grade B lumber after split-off .
a. How much joint cost should be allocated to Grade A and to Grade B lumber?
b. If Grade A lumber is processed further and then sold, what is the incremental effect on Michigan
Timber’s net income? Should the additional processing be performed?

CASE 2
Cal-C-Yum produces milk and sour cream from a joint process. During June, the company produced
240,000 quarts of milk and 190,000 pints of sour cream (there are two pints in a quart). Sales value at
split-off point was P377,400 for the milk and P177,600 for the sour cream. The milk was assigned
P125,800 of the joint cost.

a. Using the sales value at split-off approach, determine the total joint cost for June.
b. Assume, instead, that the joint cost was allocated based on the number of quarts produced. What was
the total joint cost incurred in June?

CASE 3
Winnovia Mills processes cotton in a joint process that yields two joint products: fabric and yarn. May’s
joint cost is P120,000, and the sales values at split-off are P360,000 for fabric and P300,000 for yarn. If
the products are processed beyond split-off , the final sales value will be P540,000 for fabric and
P420,000 for yarn. Additional costs of processing are expected to be P120,000 for fabric and P102,000
for yarn.

a. Should the products be processed further? Show computations.

b. Were any revenues and/or costs irrelevant to the decision? If so, what were they and why were they
irrelevant?

V. INDEPENDENT LEARNING

CASE 1
Illinois Soybeans operates a processing plant in which soybeans are crushed to create soybean oil and
soybean meal. The company purchases soybeans by the bushel (60 pounds). From each bushel, the
normal yield is 11 pounds of soybean oil, 44 pounds of soybean meal, and 5 pounds of waste. For March,
Illinois Soybeans purchased and processed 5,000,000 bushels of soybeans. The yield in March on the
soybeans was equal to the normal yield. The following costs were incurred for the month:

Soybeans P47, 500,000

Conversion costs 2,300,000
At the end of March there was no in-process or raw material in inventory. Also, there was no beginning
Finished Goods Inventory. For the month, 60 percent of the soybean oil and 75 percent of the soybean
meal was sold.

1.) a.) Allocate the joint cost to the joint products on the basis of pounds of product produced.
b. Calculate the cost of goods sold for March.
c. Calculate the cost of Finished Goods Inventory at the end of March
2.) Assume the net realizable values of the joint products are as follows:
Soybean oil P0.50 per pound
Soybean meal P0.20 per pound
a. Allocate the joint cost incurred in March on the basis of net realizable value.
b. Calculate the cost of goods sold for March using the answer to (a).
c. Calculate the cost of Finished Goods Inventory at the end of March based on the answer to (a).
d. Compare the answers to (b) and (c) of Problem 40 to the answers to (b) and (c) of this problem.
Explain why the answers are different

CASE 2
Keiffer Production manufactures three joint products in a single process. The following information is
available for August 2010:

Sales Value Cost after Final Selling

Product Gallons at Split-Off Split-Off Price
per Gallon

JP-4539 4,500 P14 P4 P24

JP-4587 18,000 P8 P5 P15
JP-4591 13,500 P18 P2 P22

Allocate the joint cost of P558,000 to the production based on the

a. number of gallons.
b. sales value at split-off .
c. approximated net realizable values at split-off .
(Round all percentages to the nearest whole percentage.)

CASE 3
The Bishop’s Falls Lumber Corporation harvests lumber and prepares it for sale to wholesalers of lumber
and wood products. The main product is finished lumber, which is sold to wholesale construction
suppliers. A by-product of the process is wood pellets, which are sold to wholesalers of wood pellet
stoves. During December 2010, the manufacturing process incurred P664, 000 in total costs; 160,000
board feet of lumber were produced and sold along with 40,000 pounds of pellets. The finished lumber
sold for P10 per board foot and the pellets sold for P4 per 100-pound bag. There was no beginning or
ending inventories.
a. Compute the December 2010 gross margin for Bishop’s Falls Lumber Corporation assuming that by-
product revenues reduce joint production costs.
b. How would your answer change if by-products are accounted for as revenue when sold?