Unit 3, Section 3: Joint & By-Product Costing

COST ACCOUNTING
& CONTROL
Unit 3, Section 3: JOINT & BY-PRODUCT
COSTING
Learning Outcomes: At the end of the unit, you will be able to:

1. Differentiate joint product from main product and by-

product.
2. Explain why joint costs are allocated.
3. Allocate joint costs using the appropriate method.
4. Account for by-products.
5. Prepare the necessary journal entries related to joint and by-
products.

Introduction:

Bagay City Lumber Company takes a log (the single input) and mills it into
two types of products: high quality Grade A lumber, and lower quality Grade
B lumber.

To produce the lumbers,

P25,000 joint cost was spent. If
you will be asked to allocate the
P25,000 joint costs to the Grade
A and Grade B lumbers, how
will you do it? Figure it out – by
board feet or by sales value?

In this module, you will discover

the accounting for joint and by-
product costs. It may seem
complicated but only for the
novices. You already did more
intricate apportionments in the
course covering the distribution of partnership profits/losses!

Activating Prior Learning

AXC Partnership has got P200,000 net income for the past six months and the
three partners, AXC, are asking you to compute how much each of them
would be receiving. What information will you need to ask them to be able to

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 Unit 3, Section 3: Joint & By-Product Costing

complete the allocation? Are you going to allocate as you wish or do you need
to follow a certain guideline?

Topic 1: Allocation of Joint Costs

Learning Objectives:

At the end of this lesson, you will be able to:

a. Define Joint costing.

b. Explain why joint costs are allocated.
c. Cite several joint cost situations.

Presentation of Content

What is Joint Costing?

Processing costs incurred prior to the split-off point are the joint costs.

The stage of processing at which the two products are separated is called the
split-off point.

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 Unit 3, Section 3: Joint & By-Product Costing

Managers often are interested in another issue. Should a product be sold at the
split-off point or processed further? In our example, rather than selling the
grade B lumber at the split-off point, should Bagay City Lumber Company
process it further? This requires additional processing costs, but the sales value
for grade B lumber processed with additives is higher than that for grade B
lumber at the split-off point.
Other joint situations:

Industry Separable Products

Agriculture &
Food
Processing
1 Palay Rice, binlid, rice hull
Breast, wings, drumstick, thighs, liver, gizzard, feather
2 Chicken and poultry meal.
3 Lumber Lumber of different grades and shapes
4 Hogs Butterfly cut, adobo cut, spare ribs, ham
5 Cocoa beans Cocoa butter, cocoa powder, tanning cream

Extractive
1 Salt Hydrogen, chlorine, caustic soda
Crude oil, natural gas, premium gasoline, regular
2 Petroleum gasoline
3 Copper ore Copper, silver, lead, zinc

Why Allocate Joint Costs? Joint costs are allocated for several reasons. I will
list two:

• Compensation Package.
Cost allocations are frequently used to determine departmental or
division costs for evaluating managerial performance. Companies may
compensate employees on the basis of departmental or division
earnings for the year.
• Valuation of Inventory.
Industrial companies must allocate joint costs to determine the
inventory value of the goods that result from the joint process.

Topic 2: Joint Cost Allocation Methods

Learning Objectives:

At the end of this lesson, you will be able to:

a. Explain the two common joint cost allocation methods

b. Allocate joint costs using the net realizable value method.
c. Allocate joint costs using the physical quantities method.

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 Unit 3, Section 3: Joint & By-Product Costing

Presentation of Content

What are the two most common Joint Cost Allocation Methods?

The two main methods of allocating joint costs are: (1) the net realizable value
method and (2) the physical quantities method.

1. Net Realizable Value Method.

This value method allocates joint costs to products based on their net
realizable values at the split-off point.

Net realizable value (NRV) is the estimated sales value of

each product at the split-off point. NRV can be the
a. market value or sales price - if the joint products can be
sold at the split-off point.
b. estimate the net realizable value - if the products require
further processing before they are marketable.
You can determine this by taking the sales value after
further processing and deducting the additional
processing costs. Joint costs are then allocated
to the products in proportion to their net realizable
values at the split-off point. Thus, this method is also
referred to as the workback method.

2. Physical Quantities Method.

In this technique, joint costs are assigned to products based on a
physical measure such as volume, weight, or any other common
measure of physical quality. This mode of allocation is frequently used
when output product prices are highly unstable or when substantial
processing occurs between the split-off point and the first point of
marketability or when product prices are not set by the market.

Why some companies do not allocate Joint Costs.

A number of companies prefer non-allocation of joint costs to products. They

reason out that their production or extraction processes are too complex and
there is much difficulty gathering adequate data for proper allocations.

In the absence of joint cost allocation, a company may just subtract the joint
costs directly from total revenues. If substantial inventories exist, then firms
that do not allocate joint costs often carry their product inventories at NRV.

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 Unit 3, Section 3: Joint & By-Product Costing

Application:

Multiple Choices. Choose the best alternative to answer the question.

1) What type of cost is the result of an event that results in more than
one product or service simultaneously?
A) separable cost B) joint cost C) byproduct cost D) main cost

2) All costs incurred beyond the splitoff point that are assignable to
one or more individual products are called:
A) joint costs B) byproduct costs C) main costs D) separable
costs

3) In joint costing:
A) costs are assigned to individual products as assembly of the
product occurs
B) a single production process yields two or more products
C) costs are assigned to individual products as disassembly of
the product occurs
D) Both B and C are correct.

4) The ________ point is the juncture in a joint production process

when two or more products become separately identifiable.
A) process B) joint product C) end D) splitoff

5) The focus of joint costing is on allocating costs to individual

products:
A) at the splitoff point B) at the end of production
C) after the splitoff point D) before the splitoff point

6) When a single manufacturing process yields two products, one of

which has a relatively high sales value compared to the other, the two
products are respectively known as:
A) main products and byproducts
B) main products and joint products
C) joint products and byproducts
D) joint products and scrap

7) When a joint production process yields two or more products with

high total sales values, these products are called:
A) scrap B) byproducts C) main products D) joint products

8) Byproducts and main products are differentiated by the:

A) number of units per processing period
B) amount of total sales value
C) weight or volume of outputs per period
D) None of these answers is correct.

9) Products with a relatively low sales value are known as:

A) byproducts B) scrap C) joint products D) main products

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 Unit 3, Section 3: Joint & By-Product Costing

10) All of the following changes may indicate a change in product

classification of a manufacturing process which has a splitoff point
EXCEPT a:
A) main product becomes technologically obsolete
B) main product becomes a joint product
C) byproduct increases in sales value due to a new application
D) byproduct loses its market due to a new invention

Short Answer: Compute for the required.

1) BSACC-AIS Company processes sugar cane into three products.

During August, the joint costs of processing were P240,000.
Production and sales value information for the month were as follows:

Product Units Produced Sales Value @ Splitoff Separable costs

Sugar 6,000 P80,000 P24,000

Sugar Syrup 4,000 70,000 64,000
Fructose Syrup 2,000 50,000 32,000

Required: Determine the amount of joint cost allocated to each product

if the sales value at splitoff method is used.

2) CBEA Chemicals processes pine rosin into three products:

turpentine, paint thinner, and spot remover. During May, the joint costs
of processing were P240,000. Production and sales value information
for the month is as follows:

Product Units Produced Sales Value at Splitoff Point

Turpentine 6,000 liters P60,000
Paint thinner 6,000 liters 50,000
Spot remover 3,000 liters 25,000
Required: Determine the amount of joint cost allocated to each product
if the physical-measure method is used.

3) White Tigers Corporation processes tomatoes into catsup, tomato

juice, and canned tomatoes. During July of 2020, the joint costs of
processing the tomatoes were P420,000. There was no beginning or
ending inventories for the summer. Production and sales value
information for the summer is as follows:

Product Cases SV @ Splitoff Separable Costs Price

Catsup 100,000 P6/case P3.00/case
P28/case
Juice 150,000 8/case 5.00/case
25/case
Canned 200,000 5/case 2.50/case
10/case

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 Unit 3, Section 3: Joint & By-Product Costing

Required: Determine the amount allocated to each product if the

estimated net realizable value method is used, and compute the cost per
case for each product.

Check figures: For MC: BDDDA, ADBAB

1. Fructose syrup P60,000

2. Spot remover P48,000
3. Juice P930,012; Catsup cost per case P4.50

Topic 3: Accounting for By-products

Learning Objectives:

At the end of this lesson, you will be able to:

a. Define by-product and differentiate it from a main and joint

product.
b. Explain and execute the production method of accounting
for by products.
c. Explain and execute the sales method of accounting for by
products.
d. Prepare journal entries related to accounting for by-
products.

Presentation of Content

What are By-products? By-products are goods from a joint production

process that have low total sales values compared with the total sales value of
the main product or of joint products.

The presence of by-products in a joint production process can influence the

allocation of joint costs. In this module, you will discover two accounting
methods for by-products: (1) production method, (2) sales method.

➢ Production method. Recognizes by-products in the financial

statements at the time production is completed.
➢ Sales method. Delays the recognition of by-products until the time
of sale.

Now, which method should you use in your company?

✓ Production method. Theoretically correct because of its consistency

with the matching principle.

✓ However, the sales method is simpler and is often used in practice,

mostly justified on the justification that the amounts of byproducts are
immaterial.
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 Unit 3, Section 3: Joint & By-Product Costing

✓ You, beware!!! The sales method permits managers to “smoothen”

reported income. They may pile up by-products and sell them when
revenues from the main product or joint products are short the target.

Application:

You may consider solving this sample case to become well versed with the
two methods of accounting for by-products.

The Lagum Woods Corporation processes timber into fine-grade lumber

and wood chips that are used as mulch in gardens and lawns. Information
about these products follows:
• Fine-Grade lumber (the main product)—sells for P6 per board foot
(b.f.)
• Wood chips (the byproduct)—sells for P1 per cubic foot (c.f.)

Data for July 2020 are as follows:

Beginning Production Sales Ending

Inventory Inventory
Fine-Grade lumber (b.f.) 0 50,000 40,000 10,000
Wood chips (c.f.) 0 4,000 1,200 2,800

Joint manufacturing costs for these products in July 2020 are P250,000
comprising P150,000 for direct materials and P100,000 for conversion costs.
Both products are sold at the splitoff point without further processing.

Illustrating of the two techniques

1) Production Method: By-products are recognized at time production is

complete. This method recognizes the byproduct in the financial
statements—the 4,000 cubic feet of wood chips—in the month it is
produced, July 2020. The NRV from the byproduct produced is offset
against the costs of the main product. You, study cautiously the following
journal entries:

1. Work in Process ……………………………………………..150,000

Accounts Payable …………………….…………………….…150,000
To record direct materials purchased and used in production
during July.

2. Work in Process ………………………….…………………..100,000

Various accounts ………………………………………………100,000
To record conversion costs in the production process during
July.

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 Unit 3, Section 3: Joint & By-Product Costing

3. Byproduct Inventory—Wood Chips (4,000 c.f. * P1 per c.f.) ….4,000

Finished Goods—Fine-Grade Lumber (P250,000 - P4,000) …246,000
Work in Process(P150,000+P100,000) ……………………..…250,000
To record cost of goods completed during July.

4a. Cost of Goods Sold [(40,000 b.f./50,000 b.f.) * P246,000] ….196,800

Finished Goods—Fine-Grade Lumber ………………………196,800
To record the cost of the main product sold during July.

4b. Cash or Accounts Receivable (40,000 b.f. * P6 per b.f.) … 240,000

Revenues—Fine-Grade Lumber ……………………………….240,000
To record the sales of the main product during July.

5. Cash or Accounts Receivable (1,200 c.f. * P1 per c.f.) …..……1,200

Byproduct Inventory—Wood Chips ……….…………………… 1,200
To record the sales of the by-product during July.

The production method reports the byproduct inventory of wood chips in the
balance sheet at its P1 per cubic foot selling price [(4,000 cubic feet - 1,200
cubic feet) P1 per cubic foot P2,800].

2) Sales Method: This method makes no journal entries for byproducts until
they are sold. Revenues of the by-product are reported as a revenue item in the
income statement at the time of sale. Again, you be cautious to learn the
technique of journalizing:

1. and 2. Same as for the production method.

Work in Process ……………………………………………150,000
Accounts Payable ……………………………………………150,000

Work in Process ……………………………………...…… 100,000

Various accounts …………………………………………….100,000

3. Finished Goods—Fine-Grade Lumber …………...…………250,000

Work in Process ……………………………………………… 250,000
To record cost of main product completed during July.

4a. Cost of Goods Sold[(40,000 b.f./50,000 b.f.)*P250,000] ….200,000

Finished Goods—Fine-Grade Lumber ………………………...200,000
To record the cost of the main product sold during July.

4b. Same as for the production method.

Cash or Accounts Receivable (40,000 b.f. * P6 per b.f.) …..240,000
Revenues—Fine-Grade Lumber ………………………..…… 240,000

5. Cash or Accounts Receivable ………………………………....1,200

Revenues—Wood Chips ………………………………………..……..1,200
To record the sales of the byproduct during July.

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 Unit 3, Section 3: Joint & By-Product Costing

Of course, if I were you, as an excellent student, I will prepare the income

statement. You check with this! You got it? Treat yourself some…ice cream?

Production Sales
Method Method
Total Revenue P240,000 P241,200
Gross margin 43,200 41,200
Inventory:
Main product: Fine-grade P 49,200 P 50,000
lumber
Byproduct: Wood chips 2,800 0

Summary of the Unit:

➢ joint costs ➢ Sales method

➢ joint products ➢ split-off point
➢ by-products ➢ Net Realizable Value
➢ main products Method
➢ Physical Quantities Method.
➢ Production method

Assessment: A 30 items, 30 pts. Graded Multiple Choice Quiz will be

conducted at the end of this unit.

Reflection on Learning: Now that you were done with the unit, take
time to internalize what you have absorbed so far by answering these
questions:

1. What learning interest you the most in this unit? Why do you
think so?
2. Did you happen to notice any firm in your area whereby you
can apply joint costing? Do you think they are willing to utilize
this concept? Why or why not?
3. What topic in the unit you feel most incompetent and desire to
know more?

References:

1. Lanen, Anderson & Maher (2017) Fundamentals of Cost Accounting.

New York, NY: McGraw-Hill Education.
2. Flores, M. (2016) Integrated Cost Accounting Principles and
Applications. Quezon City, PH. REX Book Store Inc.
3. Brewer, P., Garrison, R., & Noree, E. (2016) Introduction to
Managerial Accounting. Penn Plaza, New York, NY: McGraw-Hill
Education.
4. Horngren, T., Datar, S., & Rajan, M. (2012) Cost Accounting. A
Managerial Emphasis. Upper Saddle River, New Jersey. Pearson
Prentice Hall.

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