ReSA

The Review School of Accountancy

R. Papa Cor. S. H. Loyola Sts. , Sampaloc, Manila
 Tel Nos. (02)82886922/09152303213/09086567516
New Era University
Advanced Financial Accounting & Reporting Cost Accounting–Joint & By-Product
antonio jaramillo dayag
Cost Accounting – Joint & By-Product Costing
Co-Products, Main Products, Joint Products, and By-Products
Distinguished:
Co-products refer to the production of two or more products at the same time but not
necessarily from the same processing operations or the same raw materials.
Main Products result from those manufacturing operations in which companies
simultaneously produced two or more products of significant sales value known as Joint
Products.
Joint Products refers to two or more products manufactured simultaneously by a common
series of processing operations with each product possessing more than a nominal value in
the form in which they are produced.
By-Products refer to one or more products of relatively small value that are produced
simultaneously with a product of greater value known as the Main Products.
Scrap and By-Products Compared
Occasionally, there is a problem to classify a product as a by-product or as a scrap.
The basic difference between the two is that by-products have a greater value than scrap.
Also, scrap is generally sold immediately, whereas by-products may undergo further
processing after split-off point. Scrap is salable materials resulting from the
manufacturing process and having a limited value. The classification of products as either
joint products, by-products, or scrap may change as new uses of the products are
discovered or old ones abandoned. Because of technological discoveries, a product may
change from a by-product to a joint product. For example, in the petroleum industry,
gasoline was originally a by-product of the main product kerosene. But, after the
invention of the automobile, gasoline became the main product.
In many cases, uses have been found for by-products formerly considered as waste or
scrap. For example, sewage plants have found ways to convert their waste into fertilizer.
Another typical example is in the manufacturing of shirts, when employees lay and cut the
pattern, any excess fabric between the pattern pieces is scrap. The excess fabric may have
a minimal value or workers may throw it in the waste bin. Because scrap occurs while
producing shirts, manufacturers could classify it as a joint product or by-product.
However, it has so little value that it is questionable whether manufacturers should refer
to this scrap as a product at all. Product markets change relatively frequently; so a
product that may have a relatively small sales value today may have high sales value
tomorrow. Therefore, management should frequently examine product classifications and
evaluate when necessary.
The various methods illustrated previously for the treatment of scrap do not differ
significantly from the accounting methods for by-products.
Joint Costs and Common Costs Distinguished
To determine production costs for joint products and by-products, the distinction
between joint costs and common costs is necessary. While the objective of assigning
production costs to a costing center is the same for common costs and joint costs, it is
further believe, that the two terms should not be used interchangeably. The term joint
cost is more restrictive, it refers to costs incurred to simultaneously produce two or
more products. On the other hand, common costs refer to the sharing of facilities by two
or more users. Common costs differ from joint costs because we can obtain common costs
separately. Joint costs are the production costs incurred up to the point where products
are separately identified. Joint costs are indivisible and must be assigned to products to
properly determine the costs of such product. Common costs are divisible which normally
includes cost in the service department such as building repair and maintenance,
cafeteria, and utilities.
The Joint Costs, Split-off Point, and Further Processing Costs
1. Joint Costs – costs incurred up to the point of separation.
2. Split-off Point – occurs when each separate products having a sales value can be
separately identifiable.
3. Further Processing Costs – are materials, labor, and overhead necessary in
processing the products after the split-off point until they are completed and
become salable as finished products.
Characteristics of Joint Products and Co-Products:
1. The products must be the primary objective of the manufacturing operations.
2. Sales value must be relatively high compared with the by-product resulting at the
same time.
Characteristics of By-Products
1. The products is incidental to operations, therefore, they are not the primary
objective why there is a manufacturing operation.
2. Sales value of the by-product is relatively low as compared with the sales value of
the main product.
Page 1 of 5 0915-2303213/0908-6567516  www.resacpareview.com
 Advanced Financial Accounting & Reporting
Page 2

Methods of Allocating Joint Cost to Joint Products

1. Market Value or Sales Value Method. Under this method,, joint cost are allocated
according to the sales value of the individual products. Advocates of this method
argue that a direct relationship exist between cost and selling price. They contend
that selling prices of products are determined primarily by the costs involved in
producing that product, because, were it not for such costs, there would never be
any sales. Another argument for using the market or sales value method of allocating
joint costs is that, it is neutral for it does not affect the profitability of the
joint products.
a. Market Value or Sales Value at Split-off Point Approach
b. Net Realizable Value Approach (refer to Notes on page 3)
c. Approximated (Estimated) Net Realizable Value Approach or Hypothetical
Market Value Approach (refer to Notes below)
2. Average Unit Cost Method or Physical Output (Quantities/Measurement) Method. The
basic assumption of this method is that products produced by a common process should
be charged a proportionate share of the total joint costs based on the number of
units produced. It is assumed that the products are homogenous and one product does
not require more or less cost than any other product in the group. The disadvantage
of this method is that the physical units used for allocating joint costs may have
no relationship to the revenue producing capacity of the individual products.
3. Weighted Average Method or Survey Method. The main advantage of this method is that
it often yields a more logical allocation than other methods. Its main disadvantage
is that the determination of weights is often complicated and time-consuming,
especially when many products are involved.
4. Quantitative Unit Method based on same physical measurement such as, weight, linear
measure or volume. This is normally used by industrial engineers using some
scientific basis such tons, quartz, or any other basis.
Methods of Costing (Allocating Joint Costs) By-Products
1. No Joint Costs is allocated to by-products. Since by-products are of
minor importance, therefore, no cost of production is assigned to them. Any
revenue resulting from sales of by-product is credited to income or to cost
of the main product. In some cases, costs subsequent to split-off point may
be offset against the by-product revenue. For inventory costing, an
independent value may be assigned to the by-product. The methods most
commonly used:
Method 1 (Realized Value Approach): Gross Revenue from sales of by-
product is listed in the income statement as:
A. Treat Sales of By-Product as Income:
A.1. Additional Sales Revenue
A.2. Other Income
A.3. A deduction from the Cost of Goods Sold of the Main Product
Note: The net income derived from these three alternatives will
yield the same amount.
B. A deduction from the Total Production Cost of the Main
Product.
Note: The net income derived from this alternative will not yield
the same amount of net income computed under A above.
Method 2: Net Revenue from sales of by-product (gross selling price
less the cost of marketing and administrative expenses and any
additional processing costs). Presentation in the income statement
similar to the treatment in Method 1 above.
2. With Joint Cost Allocated to by-products. Inventory costs of the by-
product are based on the allocated cost plus any subsequent processing
cost. Included in this category are the following methods:
Method 3: Replacement Cost Method. This method credits production
cost of the main products at the current market or placement rate.
Method 4: Market Value or Reversal Cost Method/NRV (Net Realizable
Value) Approach.
Note: To avoid conflicting views of respected well-known foreign book authors, the following should
be observed:
1. At all times, if problem is silent use sales (market) value at split-off point.
2. If there is disposal cost at split-off point (separate costs if sold at split-off) the following should be
observed:
• Net Realizable Value is not the same with Approximated (Estimated) Net Realizable Method
(Hypothetical Market Value Method)
3. If there is no disposal/separate cost at split-off point the following should be observed:
• Net Realizable Value is the same with Approximated (Estimated) Net Realizable Method
(Hypothetical Market Value Method)
Page 2 of 5 0915-2303213/0908-6567516  www.resacpareview.com
 Advanced Financial Accounting & Reporting
Page 3

I
Kilimanjaro Company produces four products, which have a manufacturing cost of
P224,000 at the split-off point. Data pertaining to these products (KK, LL, MM
and NN) follow:
Separate Costs after Split-Off
Disposal/ Separate Ultimate/ (pounds)
Sales price Separate costs if Final sale Weight
Units per unit at cost at processed price per Factor
Produced split-off split-off* further Total unit Per Unit
KK 20,000 P 12.00 P18,000 P22,000 P 40,000 P 15.00 3.0
LL 32,000 3.50 14,000 11,000 25,000 5.00 5.5
MM 36,000 6.00 16,000 14,000 30,000 8.00 5.0
NN 24,000 5.50 12,000 9,000 21,000 7.00 6.0
112,000 P60,000 P56,000 P116,000
*marketing costs regardless when sold at split-off point.
Allocating the joint cost using:
I. Physical measure/average unit cost/production output method, determine the:
1. The average unit cost amounted to:
a. None c. P1
b. P0.40 d. P2
2. The share in joint cost for Product KK amounted to:
a. None c. P20,000
b. P 8,000 d. P40,000
II. Weighted average method or Survey method, determine the:
3. The joint cost per weight factor
a. None c. P0.40
b. P0.32 d. P2.00
4. The share in joint cost for Product LL amounted to:
a. None c. P 70,400
b. P40.000 d. P176,000

III. Sales/market value at split-off point approach, determine the:

5. The percentage of joint cost to sales value:
a. 32% c. 100%
b. 40% d. 600%
6. The share in joint cost for Product MM amounted to:
a. None c. P70,400
b. P69,120 d. P72,000

IV. Net realizable value at split-off point approach, determine the:

7. The percentage of joint costs to net realizable value (NRV) at split-off:
a. 32% c. 40%
b. 35% d. 600%
8. The share in joint cost for Product NN amounted to:
a. None c. P42,240
b. P42,000 d. P48,000
V. Approximated (estimated) net realizable value at split-off or hypothetical market value approach,
determine the:
9. The percentage of joint costs to approximated/estimated NRV at split-off:
a. 28% c. 35%
b. 32% d. 40%
3

10. The total unit cost for Product KK amounted to:

a. P4.54 c. P5.64
b. P4.74 d. P6.00
II – Joint Cost Allocation and Gross Profit Computation –Market Value Method
Nokia Company manufactures three different products from a single raw material. A summary of
production costs shows:
Products
G S M Total
Output in kilograms 80,000 200,000 160,000 440,000
Sales in kilograms 70,000 180,000 150,000 400,000
Sales price per kilogram P .75 P 1.00 P 1.50 -
Page 3 of 5 0915-2303213/0908-6567516  www.resacpareview.com
 Advanced Financial Accounting & Reporting
Page 4

Separable Costs
G S M Total Cost
Production Costs:
Materials P -0- P -0- P -0- P 90,000
Direct labor 3,000 20,000 30,000 80,000
Variable factory OH 2,000 10,000 16,000 45,000
Fixed factory OH 15,000 34,000 30,000 115,000
Total P 20,000 P 64,000 P 76,000 P 330,000
All separable costs have been assigned to products but the joint cost has not been allocated.
1. The amount of joint costs attributable to materials:
a. None c. P 53,000
b. P27,000 d. P 90,000

2. The amount of joint costs attributable to direct labor:

a. None c. P 53,000
b. P 27,000 d. P 80,000

3. The amount of joint costs attributable to variable factory overhead:

a. None c. P28,000
b. P17,000 d. P45,000

4. The amount of joint costs attributable to fixed factory overhead:

a. None c. P 79,000
b. P36,000 d. P115,000
5. Determine the amount of joint costs to be allocated:
a. None c. P170,000
b. P160,000 d. 330,000
For items 6 - 11, using Market Value Method in allocating joint cost:
6. The percentage of joint cost to market value needed to allocate the joint cost:
a. 12% c. 48%
b. 40% d. 50%
7. The unit cost assigned to Product G:
a. None c. P0.40
b. P0.25 d. P0.50

8. The amount of sales of Product S to be reported in the income statement amounted to:
a. None c. P180,000
b. P136,000 d. P200,000

9. The cost of goods sold of Product M amounted to:

a. None c. P148,125
b. P 82,000 d. P158,000

10. The total gross profit amounted to:

a. None c. P155,575
b. P 82,000 d. P157,000
11. The total cost assigned to ending inventory amount to:
a. None c. P155,575
b. P 28,075 d. P157,000
III – Joint Cost Allocation – Market Value Method; By-Product Cost Allocation
– Market Value or Reversal Cost Method
Ericsson Company manufactured joints products X and Y as well as by-product Z. Cumulative joints
cost data for the period show P204,000, representing 20,000 completed units process through the
Refining Department at an average cost of P10.20. Costs are assigned to X and Y by the market
value method, which considers further processing costs in subsequent operations. To determine the
cost allocation to Z, the market value (reversal cost) method is used. Additional data:
Z X Y
Quantity processed 2,000 8,000 10,000
Sales price per unit P 6 P 20 P 25
Further processing cost per unit 2 5 7
Marketing & administrative expenses per unit 1 - -
Operating profit per unit 1 - -
Page 4 of 5 0915-2303213/0908-6567516  www.resacpareview.com
 Advanced Financial Accounting & Reporting
Page 5

1. The joint costs allocated to by-product Z amounted to:

a. Zero c. P 4,000
b. P 2,000 d. P12,000
2. The joint costs allocated to joint products – X and Y amounted to:
a. Zero c. P200,000
b. P 4,000 d. P204,000
3. The joint costs allocated to joint product – X amounted to:
a. Zero c. P120,000
b. P80,000 d. P209,000
4. The joint costs allocated to joint product – Y amounted to:
a. Zero c. P120,000
b. P80,000 d. P209,000
5. If the by-product Z is treated as other income, the joint cost allocated to by-product amounted to:
a. Zero c. P120,000
b. P80,000 d. P209,000

Solutions:
Problem I:
I. Average Unit Cost Method
Units Average Share in
Product Produced Unit Cost Joint Cost
KK 20,000 P 2 P 40,000
LL 32,000 2 64,000
MM 36,000 2 72,000
NN 24,000 2 48,000
112,000 P224,000
Ave. UC = P224,000/112,00 = P2

II. Weighted Average Method

Units Weight Total Joint Cost per Share in
Product Produced Factor/Unit Weight Weight Factor Joint Costs
KK 20,000 3.00 60,000 P0.40 P 24,000
LL 32,000 5.50 176,000 0.40 70,400
MM 36,000 5.00 180,000 0.40 72,000
NN 24,000 6.00 144,000 0.40 57,600
560,000 P224,000
Jt. Cost per Weight = P224,000/P560,000 = P.40

III. Sales Value at Split-off Method

Units Sales Value Total Sales % of Jt. C Share in
Product Produced at SOPt Value at SOPt. to SV Joint Costs
KK 20,000 P 12.00 240,000 0.32 P 76.800
LL 32,000 3.50 112,000 0.32 35,840
MM 36,000 6.00 216,000 0.32 69,120
NN 24,000 5.50 132,000 0.32 42,240
700,000 P224,000
% of Joint Cost to Sales Value at Split-off = P224,000/P700,000 = 32%

IV. Net Realizable Value at Split-off Method

Disposal/
Separate
Units Sales Value Total Sales Costs at NRV at % of Jt. C Share in
Product Produced at SOPt at Split-off Split-off SOPT. to NRV Joint Costs
KK 20,000 P12.00 P240,000 P18,000 P222,000 0.35 P 77,700
LL 32,000 3.50 112,000 14,000 98,000 0.35 34,300
MM 36,000 6.00 216,000 16,000 200,000 0.35 70,000
NN 24,000 5.50 132,000 12,000 120,000 0.35 42,000
P700,000 P60,000 P640,000 P224,000
% of Joint Cost to NRV at split-off = P224,000/P640,000 = 35%

V. Approximated/Estd. NRV at Split-off Method or Hypothetical MV Approach

Hyp. MV /
Ultimate/Final Separate Approximated
Units Sales Price Total Ultimate Costs after NRV at % of Jt. C Share in
Product Produced per Unit Market Value Split-off SOPT. to NRV Joint
Costs
KK 20,000 P15.00 P300,000 P 40,000 P260,000 0.28 P 72,800
LL 32,000 5.00 160,000 25,000 135,000 0.28 37,800
MM 36,000 8.00 288,000 30,000 258,000 0.28 72,240
NN 24,000 7.00 168,000 21,000 147,000 0.28 41,160
P916,000 P116,000 P800,000 P224,000
% of Joint Cost to Approximated NRV at split-off = P224,000/P800,000 = 28%

Page 5 of 5 0915-2303213/0908-6567516  www.resacpareview.com