1
PSBA-MANILA
ACCOUNTING 10
Prof. C. Gonzaga
COST ALLOCATION FOR
JOINT PRODUCTS AND BY-PRODUCTS
A.
Outputs of a Joint Process
1.
A joint process is a manufacturing process that simultaneously produces more than one product line.
The product lines resulting from a joint process and having a sales value are referred to as (1) joint
products, (2) by-products, and (3) scrap.
2.
A joint cost is the total of all costs (direct material, direct labor, and overhead) incurred in a joint process
up to the split-off point. These costs are recorded by the following journal entry:
Work-in-process-Department 1
Materials Inventory
Payroll (Direct Labor)
Factory Overhead
B.
xxx
xxx
xxx
3.
Joint products are the primary outputs of a joint process, each of which has substantial revenuegenerating ability.
4.
By-products are incidental outputs of a joint process; they are salable, but the sales value of by-products
is not substantial enough for management to justify undertaking the joint process; they are viewed as
having a higher sales value than scrap. Example, rice husk in rice-milling, sawdust in lumber production,
kerosene in oil refinery, etc.
5.
Scrap is an incidental output of a joint process; it is salable, but the sales value from scrap is not enough
for management to justify undertaking the joint process; it is viewed as having a lower sales value than a
by-product; leftover material that has a minimal but distinguishable disposal value.
6.
Waste is a residual output of a production process that must be disposed of because it has no sales
value.
The Joint Process
1.
The split-off point is the point at which the outputs of a joint process are first identifiable or can be
separated as individual products.
2.
A joint cost includes the costs incurred, up to the split-off point, for material, labor, and overhead during a
joint process.
3.
C.
xxx
a.
Costs incurred after split-off are assigned to the separate products for which those costs are
incurred.
b.
The joint cost is allocated, at the split-off point, to the primary output of the production process.
A sunk cost is a cost incurred in the past and not relevant to any future courses of action.
Management Decisions Regarding Joint Processes
1.
Managers need to make certain decisions before the company commits resources to a joint production
process.
a.
Total expected revenues from the sale of the joint process output must be estimated and
compared to total expected processing costs of the output. Other potential costs must be
considered in determining if the revenues are expected to exceed the costs.
b.
Managers must compare the net income from this use of resources to the net income that would
be provided by all other alternative uses of company resources if total anticipated revenues from
the basket of products exceed the anticipated joint and separate costs. Management would then
2
decide that this joint production process is the best use of capacity and would begin production if
joint process net income is greater than the net income that would be provided by other uses.
2.
D.
c.
Joint process output must be classified as primary, by-product, scrap, or waste.
d.
Management must then decide whether any (or all) of the joint process output will be sold (if
marketable) at split-off or whether it will be processed further.
Managers must have a sound estimate of the selling price for each type of joint process output in order to
make decisions at any potential point of sale. Expected selling prices should be based on both cost and
market factors.
Allocation of Joint Cost
1.
2.
Physical measurement allocation is a method of allocating a common cost to products that uses a
common physical characteristic as the proration base.
a.
The physical measurement allocation method treats each unit of measure as equally desirable
and assigns the same per unit cost to each.
b.
Physical measurement allocation, unlike monetary measure allocation, provides an unchanging
yardstick of output.
c.
A primary disadvantage of the method is that it ignores the revenue-generating ability of individual
joint products.
Monetary measure allocation uses the following steps to prorate joint costs to joint products:
a.
choose a monetary allocation base;
b.
list the values that comprise the base for each joint product;
c.
sum the values in step b to obtain a total value for the list;
d.
divide each individual value in step b by the total in step c to obtain a numerical proportion for
each value. The sum of these proportions should total 100 percent;
e.
multiply the joint cost by each proportion to obtain the amount to be allocated to each product;
and
f.
divide the prorated joint cost for each product by the number of equivalent units of production for
each product to obtain a cost per EUP for valuation purposes.
METHODS OF ACCOUNTING FOR JOINT PRODUCTS
1.
Market value or Relative Sales Value Method- This method of joint cost allocation uses the weighted
selling price of the product at split-off point.
The relative sales value at split-off allocation is a method of assigning joint cost to joint products that
uses the relative sales values of the products at the split-off point as the proration base; use of this
method requires that all joint products are marketable at split-off.
Example:
Products
A-wan
Atu
Units Produced
100
50
Selling Price
Per Unit
P120
80
Ratio/ Fraction
Allocated Joint
Costs
12/16
4/16
P15,000
5,000
P20,000
Total
P12,000
4,000
P16,000
An alternative method of joint cost allocation based on relative sales where products are not in salable
condition at the point of split-off, therefore, would require subsequent costs, is the use of the
hypothetical market value in place of market or sales value at split-off-point, computed as follows:
Units produced
X Final sales price per unit
Total final sales value
Less: Subsequent costs
Hypothetical market value per product
xxx
Pxx
Pxxx
Xxx
Pxxx
3
The hypothetical market value is the assumed market value at point of split-off.
Percentage to allocate joint production costs:
Total joint production cost/ Total hypothetical market value = xx%
Allocated joint cost to a specific product: Hypothetical MV multiplied by xx%
2.
Average Unit Cost Method (or the Physical Measure Method) This a method of joint cost allocation to
various main products on the basis of an average unit cost computed as follows:
Total joint costs / Total number of units produced = Average Unit Cost
Products
Units Produced
Average unit
Allocated Joint
cost (P20,000/
Costs
150 units=
P133.33)
A-wan
Atu
3.
100
50
@133.33
@133.33
P13,333
6,664
P20,000
Weighted Average Method- This method allocates joint cost to the different main products on the basis of
the quantity produced weighted by factors or points assigned to individual products. Finished production
of every kind is multiplied by weight factors assigned to the main products.
Cost per unit = Total joint production costs/ Total number of weighted units = Px/ unit
Example:
Products
Units Produced
Weighted units
Cost per unit
(P20,000/1,000
points)
Allocated joint
cost
600
400
1,000
@P20
@P20
P12,000
8,000
P20,000
Assigned
Points per unit
A-wan
Atu
100
50
6
8
4.
Quantitative Unit Method- This method allocates joint cost on the basis of some common unit of
measurement, such as pound, gallons, tons, or board feet. If the joint products are not normally measured
in the same measurement unit, then their measures are converted to a common unit.
5.
Reversal Sales Method- This method allocates the joint cost by considering Sales as the sum total of all
costs, expenses and net profit, such that, if the sum of subsequent cost, operating expenses, and the
estimated net profit is deducted from Sales, the difference is considered as the estimated joint cost per
product which will serve as the basis to allocate the actual joint costs. (NOTE: This method may also be
used in accounting for by-products.)
Example:
Sales
Less: Estimated Net Profit (assuming 10% of Sales)
Selling & Administrative Expenses
Subsequent cost
Total
Estimated Joint Product Costs (basis of allocation)
Product A-wan
P12,000
1,200
1,800
3,000
6,000
P6,000
Allocated actual joint cost:
P20,000 x 6/8
P20,000 x 2/8
E.
Accounting for By-Products and Scrap
METHODS OF ACCOUNTING FOR BY-PRODUCTS
(1) The By-Products are not entitled to share in the joint production cost:
Product A-tu
P4,000
400
600
1,000
2,000
P2,000
15,000
5,000
4
GENERAL RULE: Using the NET REALIZABLE VALUE METHOD, the Net Realizable Value of the By-Product is
Is treated as a deduction from the Cost of the Joint Products.
The net realizable value (or offset) approach is a method of accounting for by-products or scrap that requires
the net realizable value of such products to be treated as a reduction in the cost of the joint products; joint product
cost may be reduced by decreasing either
(1) cost of goods sold when the joint products are sold or
(2) the joint process cost allocated to the joint products, to wit:
Total joint production cost
Less: Net realizable value of the By-Product
By-product Sales Value
Less: Cost of disposal (selling expense)
Net joint production cost to be allocated to the joint products
Pxxx
Pxxx
xxx
xxx
Pxxx
a.
Cost of Goods Sold for the joint products is reduced when the joint products are sold under the
indirect method.
b.
The joint cost of the primary products is reduced by the net realizable value of the byproduct/scrap produced under the direct method.
OTHER METHODS
2.
The realized value (or other income) approach is a method of accounting for by-products or scrap that
does not recognize any value for these products until they are sold; the value recognized at the time of
sale can be treated as other revenue or as other income.
a.
The total sales price of the by-product/scrap is shown on the income statement as other
revenue under the other revenue method. Additional processing or disposal costs of the byproduct/scrap are included with the cost of producing the primary products, so little useful
information is provided to management since the cost of producing the by-product/scrap is not
matched with the revenues generated by those items.
Entry: Cash/Accounts Receivable
By-Product Sales
b.
3.
xxx
xxx
The net by-product revenue is presented as an enhancement of net income in the period of sale
as other income under the other income method. By-product/scrap revenue is matched with
related storage, further processing, transportation, and disposal costs. Detailed information on
financial responsibility and accountability is provided, and control and performance may be
improved.
Alternative presentations include depicting the realized value from the sale of the by-product or scrap as:
a.
an addition to gross margin;
b.
a reduction of the cost of goods manufactured; or
Entry: By-product Inventory
xxx
Work-in-process inventory
xxx
To take up the sales value of the by-product at split-off point.
By-product inventory
xxx
Materials inventory
Payroll
Factory Overhead
To take up additional cost incurred in
processing further the by-products.
Cash/ Accounts receivable
By-Product Inventory
Gain/Loss on Sale of By-Products
To take up the sale of by-products.
c.
a reduction of the cost of goods sold.
Entry: By-product Inventory
Cost of Goods Sold (of Joint Products)
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
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To take up the realized value of the by-product
By-product inventory
xxx
Materials inventory
Payroll
Factory Overhead
To take up additional cost incurred in
processing further the by-products.
Cash/ Accounts receivable
By-Product Inventory
Gain/Loss on Sale of By-Products
To take up the sale of by-products.
F.
xxx
xxx
xxx
xxx
xxx
xxx
By-Products or Scrap in Job Order Costing
1.
Job order costing systems can have by-products or scrap even though joint products are not normally
associated with such systems.
2.
The value of by-products/scrap in a job order costing system should be credited to manufacturing
overhead if the by-products/scrap value is created by a significant proportion of all jobs undertaken.
3.
The by-products/scrap value, in contrast, can be credited to the specific jobs in process if only a few
specific jobs generate a disproportionate share of by-products/scrap.
CLASS PROBLEMS
Problem 1
The Unique Products Corporation produces (3) main products from a single manufacturing process, namely: A-Wan, A-tu;
and A-tri. For the month of February, the records show the following production data:
A-Wan
Cost before split-off, P240,000
Subsequent costs
Units produced
A-tu
P60,000
8,000
A-tri
P40,000
12,000
P20,000
6,000
Assume that the sales value for each of the products are (in total), P200,000; P240,000, and P160,000, respectively.
Assume further that the following point equivalence were assigned to each product: A-wan, 1.50; A-tu, 1; and Atri, 2.0.
REQUIRED: Apportion the total joint production cost using:
1) Market value method
2) Average Cost method
3) Weighted average method
Problem 2
The following data were furnished by the Trans-Asia, Inc. relating to its multiple products:
Elite
De-Luxe
Units produced and sold
60,000
50,000
Unit selling price
P250
P300
Joint production costs: P600,000
Costs after separation
P300,000
P200,000
Selling & administrative expenses
500,000
150,000
Estimated net profit percentage
20%
30%
Estimated point equivalence per unit
1.5
2.6
REQUIRED: Prepare schedules showing the joint costs apportionment under each of the following methods:
a) Market value
b) Average unit cost
c) Weighted average method
d) Reversal sales method
Classic
40,000
P250
P400,000
100,000
40%
4.5
6
Problem 3
GAB Company produces three products from the same process and incurs joint processing costs of P3,000.
Gallons
2,300
1,100
500
Mat
Nat
Qat
Sales price
per gallon
at split-off
P 4.50
6.00
10.00
Disposal
cost per
gallon at
split-off
P1.25
3.00
8.00
Further
processing
costs
P1.00
2.00
2.00
Final sales
price per
gallon
P 7.00
10.00
15.00
Disposal costs for the products if they are processed further are:
Mat, P3.00; Nat, P5.50; Qat, P1.00.
(1) What amount of joint processing cost is allocated to the three products using sales value at split-off?
PROBLEM 4
A Manufacturing Company makes three products: A and B are considered main products and C a by-product.
Production and sales for the year were:
220,000 lbs. of Product A, salable at P6.00
180,000 lbs. of Product B, salable at P3.00
50,000 lbs. of Product C, salable at P0.90
Production costs for the year:
Joint costs
Costs after separation:
Product A
Product B
Product C
P276,600
320,000
190,000
6,900
Required: Using the by-product revenue as a cost reduction and net realizable value method of assigning joint
costs, compute unit costs (a) if C is a by-product of the process and (b) if C is a by-product of B.
MULTIPLE CHOICE PROBLEMS
Use the following information for questions 14.
Sun Co. produces three products from the same process that has joint processing costs of P4,100. Products RR, SS, and
TT are produced in the following gallons per month, respectively: 250, 400, and 750. Sun also incurred advertising costs
of P60,000; the ad was used to run sales for all three products. They occupy floor space in the following ratio: 5:4:9.
(Round all answers to the nearest peso.)
1. Using gallons as the physical measurement, what amount of joint processing cost is allocated to SS?
a.
P2,196
b.
P1,171
c.
P1,367
d.
P732
2. Using gallons as the physical measurement, what amount of joint processing cost is allocated to TT?
a.
P2,196
b.
P732
c.
P1,367
d.
P1,171
3.
4.
Assume that Sun chooses to allocate its advertising cost among the three products. What amount of advertising cost
is allocated to RR using the floor space ratio?
a.
P20,000
b.
P17,806
c.
P1,139
d.
P16,667
Love Co. manufactures products A and B from a joint process. Sales value at split-off was P700,000 for 10,000
units of A, and P300,000 for 15,000 units of B. Using the sales value at split-off approach, joint costs properly
allocated to A were P140,000. Total joint costs were
a.
P98,000.
b.
P200,000.
c.
P233,333.
d.
P350,000.
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5.
Lite Co. manufactures products X and Y from a joint process that also yields a by-product, Z. Revenue from sales
of Z is treated as a reduction of joint costs. Additional information is as follows:
Units produced
Joint costs
Sales value at
split-off
X
20,000
?
Products
Y
20,000
?
Z
10,000
?
Total
50,000
P262,000
P300,000
P150,000
P10,000
P460,000
Joint costs were allocated using the sales value at split-off approach. The joint costs allocated to product X were
a.
P75,000.
b.
P100,800.
c.
P150,000.
d.
P168,000.
Use the following information for questions 611.
Rax produces four products from the same process: Cep, Dap, Eek, and Gok. Joint product costs are P9,000. (Round all
answers to the nearest peso.)
Disposal
Final
Sales price
cost
Further
sales
per barrel
per barrel
processing
price
Barrels
at split-off
at split-off
costs
per barrel
Cep
750
P10.00
P6.50
P2.00
P13.50
Dap
1,000
8.00
4.00
2.50
10.00
Eek
1,400
11.00
7.00
4.00
15.50
Gok
2,000
15.00
9.50
4.50
19.50
If Rax sells the products after further processing, the following disposal costs will be incurred: Cep, P2.50; Dap, P1.00;
Eek, P3.50; Gok, P6.00.
6.
Using a physical measurement method, what amount of joint processing cost is allocated to Dap?
a.
P1,748
b.
P2,447
c.
P1,311
d.
P3,495
7.
Using a physical measurement method, what amount of joint processing cost is allocated to Eek?
a.
P3,495
b.
P2,447
c.
P1,748
d.
P1,311
8.
Using sales value at split-off, what amount of joint processing cost is allocated to Dap?
a.
P4,433
b.
P2,276
c.
P1,108
d.
P1,182
9.
Using sales value at split-off, what amount of joint processing cost is allocated to Gok?
a.
P4,433
b.
P1,182
c.
P1,108
d.
P2,276
10.
Using net realizable value at split-off, what amount of joint processing cost is allocated to Cep?
a.
P1,550
b.
P1,017
c.
P4,263
d.
P2,170
11.
Using net realizable value at split-off, what amount of joint processing cost is allocated to Eek?
a.
P1,017
b.
P1,550
c.
P2,170
d.
P4,263
