Cost Accounting Tutorial

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8 Meeting – Joint Cost and Byproducts
Teaching Assistant Team
PROBLEM 1
1. Distinguish between a joint product and a byproduct.
2. What is a joint cost?
3. What is a separable cost?
4. Describe the four methods to allocate joint cost.
5. Describe the two methods to account for byproducts.

PROBLEM 2
The Cocoa Factory manufactures and distributes chocolate products. It purchases cocoa beans and processes them into
two intermediate products: chocolate-powder liquor base and milk-chocolate liquor base. These two intermediate
products become separately identifiable at a single splitoff point.
Every 1,500 pounds of cocoa beans yields 60 gallons of chocolate-powder liquor base and 90 gallons of milk-chocolate
liquor base.
Production and sales data for August 2014 are as follows (assume no beginning inventory):
■ Cocoa beans processed, 15,000 pounds
■ Costs of processing cocoa beans to splitoff point (including purchase of beans), $30,000

The chocolate-powder liquor base is further processed into chocolate powder. The milk-chocolate liquor base is further
processed into milk chocolate. Cocoa Factory fully processes both of its intermediate products into chocolate powder or
milk chocolate.
Production Sales Selling Price Separable
Processing
Costs
Chocolate powder 6,000 pounds 6,000 pounds $ 4 per pound $ 12,750
Milk chocolate 10,200 pounds 10,200 pounds $ 5 per pound $ 26,250

In August 2014, Cocoa Factory could have sold the chocolate-powder liquor base for $21 a gallon and the milk-chocolate
liquor base for $26 a gallon.

Required:
a. Calculate how the joint costs of $30,000 would be allocated between chocolate powder and milk chocolate
under the following methods:
1. Sales value at splitoff
2. Physical-measure (gallons)
3. NRV
4. Constant gross-margin percentage NRV
b. What are the gross-margin percentages of chocolate powder and milk chocolate under each of the methods in
requirement a?
c. Could Cocoa Factory have increased its operating income by a change in its decision to fully process both of its
intermediate products? Show your computations.
PROBLEM 3 Accounting for a byproduct. Hancur Company produces oranges from various organic growers in Florida.
The juice is extracted from the oranges and the pulp and peel remain. Hancur considers the pulp and peel byproducts of
its juice production and can sell them to a local farmer for $2.00 per pound. During the most recent month, Hancur
purchased 4,000 pounds of oranges and produced 1,500 gallons of juice and 900 pounds of pulp and peel at a joint cost
of $7,200. The selling price for a half-gallon of orange juice is $2.50. Sunny Day sold 2,800 half-gallons of juice and 860
pounds of pulp and peel during the most recent month. The company had no beginning inventories.

1. Assuming Hancur accounts for the byproduct using the production method, what is the inventorable cost for
each product and Hancur’s gross margin?

2. Assuming Hancur accounts for the byproduct using the sales method, what is the inventoriable cost for each
product and Hancur’s gross margin?

3. Discuss the difference between the two methods of accounting for byproducts.

PROBLEM 4 Joint-cost allocation with a byproduct. Don Corleone purchases old tires and recycles them to produce
rubber floor mats and car mats. The company washes, shreds, and molds the recycled tires into sheets. The floor and car
mats are cut from these sheets. A small amount of rubber shred remains after the mats are cut. The rubber shreds can
be sold to use as cover for paths and playgrounds. The company can produce 25 floor mats, 75 car mats, and 40 pounds
of rubber shreds from 100 old tires.

In May, Don Corleone, which had no beginning inventory, processed 125,000 tires and had joint production costs of
$600,000. Don Corleone sold 25,000 floor mats, 85,000 car mats, and 43,000 pounds of rubber shreds. The company
sells each floor mat for $12 and each car mat for $6. The company treats the rubber shreds as a byproduct that can be
sold for $0.70 per pound.

1. Assume that Don Corleone allocates the joint costs to floor mats and car mats using the sales value at splitoff
method and accounts for the byproduct using the production method. What is the ending inven- tory cost for
each product and gross margin for Don Corleone?

2. Assume that Don Corleone allocates the joint costs to floor mats and car mats using the sales value at splitoff
method and accounts for the byproduct using the sales method. What is the ending inventory cost for each
product and gross margin for Don Corleone?

3. Discuss the difference between the two methods of accounting for byproducts, focusing on what conditions are
necessary to use each method.

Don Corleone’s accountant needs to record the information about the joint and byproducts in the general journal, but is
not sure what the entries should be. The company has hired you as a consultant to help its accountant.

1. Show journal entries at the time of production and at the time of sale assuming Don Corleone accounts for
the byproduct using the production method.

2. Show journal entries at the time of production and at the time of sale assuming Don Corleone accounts for
the byproduct using the sales method.