Unit 7: JOINT AND BY-PRODUCT COSTING SYSTEM

Introduction
In the process of manufacturing one or more products, a
company may also produce other products which may either
be joint products or by-products depending upon their
importance to the firm. The problems encountered in the CPA
examinations relative to joint products and by-products accounting are the
following:
1. allocation of joint (common) costs at the point of split-off;
2. accounting for by-products.

Unit Learning Objectives

By the end of this unit, you should be able to:
 allocate joint costs at the split-off point; and
 account for by by-products.

Timing
Please allot six hours (6) to complete the unit – four (4) hours
for reading and comprehension and two (2) hours for
answering the assessments.

7.1 JOINT COST

In accounting, a joint cost is incurred in a joint process,
including direct material, direct labor, and overhead costs
incurred.

A joint process is a production process, ending at the split-off point, in

which one input yields multiple outputs that may or may not be processed
beyond the split-off point. The Joint (Common) Costs cannot be traced to
individual products.
7.2 BY-PRODUCT

A joint process may also result in the production of by-products. A

by-product has a minor sales value. However, even if its total sales revenue
is low compared with that of joint or main products, its presence can still
affect joint cost allocation.

7.3 ALLOCATION OF JOINT (COMMON) COSTS

The allocation of the joint costs among the individual products

produce is to be made at the split-off point, which is the point where the
joint products are separated from each other.
The following methods are usually used in allocating joint costs:
1. Relative market (sales) value method. The application of this
method will depend on whether the products are sold at the point
of separation or whether additional costs are incurred as a result
of additional processing. The following procedures should be
remembered:
a. Sale value at point of split-off. If the products are sold at
the point of separation, cost is allocated to each product
based on the relative market value at that point (split-off
point).
b. Sale value after further processing. Joint cost is to be
allocated on the basis of each product’s net realizable value.
Net realizable value is the difference between the final sales
value and the actual cost to complete and sell. (Further
processing cost).

2. Physical Measures (Units Produced) Method. This method

allocates joint costs to products based on a physical measure of
units. If the allocation is based on physical quantities, each unit of
each product is assigned at the same value regardless of the nature
or value of the product.

Illustrative Problem

The following information is available for the Guiller Company.

Joint Costs amounted to P164,000.

Product Units Disposal MV at Additional Final MV

Produced Costs SplitOff Processing
Costs
A 28,000 P4,000 P8.00 P50,000 P11.50
B 34,000 1,000 7.00 30,000 10.00
C 20,000 5,000 9.50 35,000 14.00
a. Physical Output Method/Average Unit Cost Method

Product Units Cost per Share in Additional Total

Produced Unit JC Processing
Costs
A 28,000 2 P56,000 P50,000 P106,000
B 34,000 68,000 30,000 98,000
C 20,000 40,000 35,000 75,000
P82,000 P164,000 P115,000 P279,000

Product A = 28,000/82,000 x 164,000 = P56,000

Product B= 43,000/ 82,000 x 164,000 = 68,000
Product C= 20,000/ 82,000 x 164,000 = 40,000
P164,000

2. Market Value at Split-off Method

Prod. Units MV at Total MV Share in JC Additional Total

Produced Split- at SO Processing
Off Costs
A 28,000 P8.00 P224,000 P56,344 P50,000 106,344
B 34,000 7.00 238,000 59,865 30,000 89,865
C 20,000 9.50 190,000 47,791 35,000 82,791
P82,000 P164,000 P115,000 279,000

Formula:
Joint Cost Allocation= Total Market value of each product X Joint cost
Total market value of all products

Product A = 224,000/652,000 x 164,000 = P56,344

Product B = 238,000/ 652,000 x 164,000 = 59,865
Product C = 190,000/ 652,000 x 164,000 = 47,791

3. Net Realizable value Method (approximated market value at split-

off)

Prod. Units Final Total MV Add’l Disposal

Produced MV (Units Pro. Cost Cost
x Final MV)
A 28,000 11.50 322,000 P50,000 4,000
B 34,000 10.00 340,000 30,000 1,000
C 20,000 14.00 280,000 35,000 5,000
P82,000 942,000 115,000 10,000

NRV Share in JC Total Cost

Total MV-(Add’l Cost (Add’l Cost + Share in JC)
+ Disposal Cost)
268,000 53,797 103,797
309,000 62,027 92,027
240,000 48,176 83,176
817,000 164,000 279,000
7.4 ACCOUNTING FOR BY-PRODUCTS

Again, by-products are those products of limited sales value

produced simultaneously with products of greater sales value known as
main or joint products.

The methods of accounting for by-products fall into the following

categories:
1. By-products are recognized when sold. Under this method no
income is recorded from them until they are sold. Net by-product
income equals actual sales revenue less any actual additional
processing costs and marketing and administrative expenses. Net
by- product income may be shown in the income statement as:
a. Addition to income, either as “other sales” or “other
income”.
b. A deduction from cost of goods sold of the main product.

2. By-products are recognized when produced. Under this

category the cost of the by- product is computed by using the
following methods:
a. Net realizable value method. Under this, the expected
sales value of the by- product produced is reduced by the
expected additional processing cost and marketing and
administrative expenses. The resulting net realizable value
of the by-product is deducted from the total production
costs of the main product.

b. Reversal cost method. The expected value of the by-

product produced is reduced by the expected additional
processing costs and normal gross profit of the by product
(or by the marketing and administrative expenses and net
income). This method is called the reversal cost method
because you have to work backward from the gross
revenue to arrive at the estimated joint cost of the by-
product at the point of split-off. The joint cost allocated to
the production of the by-product is deducted from the total
production cost of the main product, and charge to a by-
product inventory account. Proceeds from the sale of by-
products are treated the same as sales of the main product.
Illustrative Example 1:
The manufacturing costs of the main product and by-product up to
the point of separation for the three month period ending March 31, 2012
follow:
Materials P30,000
Labor 17,400
Overhead 17,400

The units processed were 20,000 pounds of the main product and 2,000
pounds of the by-product. During the period 18,000 pounds of the main
product were sold at P10.00 a pound and 1,000 pounds of the by-product.
Selling and administrative expenses applicable to the main product is 30%
of sales.
Required:
1. Income statement assuming that the sales of the by-product is
treated as income, using the different methods.
2. Income statement assuming that the sales of the by-product is
treated as reduction of the production cost of the main product.

Solution:
1. a. Revenue from by-product shown as additional sales
Sales
Main product 180,000
By-product 1,000
181,000
Less: Cost of Goods Sold
Materials 30,000
Labor 17,400
Overhead 17,400
Cost of Goods Manufactured 64,800
Less: Inventory, end 6,480 58,320
Gross Profit 122,680
Less: Selling and administrative expenses 54,000
Net Income 68,680

b. Revenue from by-product shown as deduction from cost of Goods sold.

Sales
Main Product 180,000
Less: Cost of Goods sold
Materials 30,000
Labor 17,400
Overhead 17,400
Cost of Goods manufactured 64,800
Less: inventory end 6,480
Cost of Goods Sold 58,320
Less: revenue from by-product 1000 57,320
Gross Profit 122,680
Less: Selling and administrative expenses 54,000
Net Income 68,680
c. Revenue from by-product as other income
Sales
Main Product 180,000
Less: Cost of Goods sold
Materials 30,000
Labor 17,400
Overhead 17,400
Cost of Goods Manufactured 64,800
Less: Inventory, end 6,480
Cost of Goods sold 58,320
Gross Profit 121,680
Less: Selling and administrative expenses 54,000
Net operating income 67,680
Other income- Revenue from by=product 1,000
Net Income 68,680

2. Revenue from by-product shown as deduction from production cost of

main product
Sales
Main product 180,000
Less: Cost of goods sold
Materials 30,000
Labor 17,400
Overhead 17,400
Total mfg. cost/cofg manufactured 64,800
Less: Rev. from by-product 1,000
Net manufacturing cost 63,800
Less: Inventory, end 6,380
Cost of goods sold 57,420
Gross profit 122,580
Less: Selling and administrative expenses 54,000
Net income 68,580

Illustrative Example 2:
Answer the problem and provide solution for each item.

Monique Company manufactures product MN from a process that

also produces by-product J and by-product K. The following pertains to
operations for March, 2011.
MN J K TOTAL
Units Produced 10,000 6,000 4,000 20,000
Sales price/unit P20.00 P3.00 P2.75
Units Sold 8,000 6,000 4,000 18,000
Subsequent cost P62,300 P5,700 P4,300 P72,300
Selling and Admin. 32,000 2,500 1,000 35,500
Desired profit 2,000 1,200

Required:
1. Share of the by-product in the joint cost of P50,000 using reversal cost
method
2. Income Statement for the main product, MN and the by-product J and K.
Solution:

By-Product J By-Product K
Sales P18,000 P11,000
Less:
Subsequent Cost 5,700 4,300
Selling and Admin 2,500 1,000
Desired Profit 2,000 10,200 1,200 6,500
P7,800 P4,500

Monique Company
Income Statement
For the month ended March 31,2011

MN BP-J BP-K TOTAL

Sales P160,00 P18,000 P11,000 P189,000
Less: CGS
Shre in JC 37,700 7,800 4,500 50,000
Subs. Cost 62,300 5,700 4,300 72,300
Total mfg.cost 100,000 13,500 8,800 122,300
Less: Inventory 20,000 - - 20,000
CGS 80,000 13,500 8,800 102, 300
Gross profit 80,000 4,500 2,200 86,700
Less: Selling
& Admin 32,000 2,500 1,000 35,500
Net Income P48,000 P2,000 P1,000 P51,200

SELF-CHECK

Instructions: Answer the question and provide solution for each item.
Fisher Company manufactures one main product and two by-products. A
and B. For April, the following data are available.
Main Product By-Product
A B
Sales P75,000 P6,000 P3,500
Manufacturing cost after
Separation 11,500 1,100 900

Marketing and Adm. Exp 6,000 750 500

Manufacturing cost before
Separation 37,500

Profit allowed for A and B is 20% and 15% respectively.

Required:
1. Calculate the manufacturing cost before separation for by-product A and
B using the market value (reversal cost method)
2. Prepare the income statement showing details for sales and costs for
each product)
ANSWERS:

1.
By-Product A By-Product B
Sales value P6,000 P3,500
Mfg. cost after separation (1,100) (900)
Marketing & adm. Exp. (750) (500)
Desired profit (900) (420)
Share in the JC 3,250 1,680

Total manufacturing cost before separation or joint cost 37,500

Share in by-product A (3,250)
Share of by-product B (1,680)
Share of main product in the mfg. cost before separation 32,570

2.
Main product By-Product A By-Product B
Sales 75,000 6,000 3,500
Less: CGS
Share in JC 32,570 3,250 1,680
Cost after sep.11,500 44,700 1,100 4,350 900 2,580
Gross Profit 30,930 1,650 920
Less: Mktg & admin exp. 6,000 750 500
Net income 24,930 900 420

UNIT SUMMARY

 Joint product - when the production of two or

more products of similar value, are made together with
same input and process
 By-product - a product which is incidentally produced
during the processing operation of another product
 Joint costs - not specifically identifiable with any of the
products being simultaneously produced
 Methods commonly used to allocate joint costs -
physical output method, market value at split‐off method
and the net realizable value method
 Physical output method - based on volume
 Market value at split‐off method and the net
realizable value method - based on market value
 Methods of costing by‐products - fall into two
categories: (a) in which by‐products are recognized
when sold; and (b) in which by‐products are recognized
when produced. By‐products are generally of secondary
importance; therefore, cost allocation procedures differ
from those used for joint products.