JOINT PRODUCT AND

BY-PRODUCT COSTING

LEARNING OBJECTIVES
Upon completion of this chapter you should be able to
Define joint costs and distinguish them from common costs
a Discuss the appropriate methods for the allocation of joint costs to joint prod-
ts
Define bwproducts and discuss what mav be done with then
The may be sold in the same form as originally produced
They may undergo further processing before sale
Enumerate the methods for costing by-products
Illustrate the journal entries required for by-products under both types of
by-product costing methods

gP AMERICA, Cleveland, Ohio

Description One of the nations largest oil cornpaties
Market Manufacturers, distributors, gas stations, et¢
I89 Revenues: $18 billion
1989 Profits. $2 billion
Controller Ron Boller
Ro Boller used to be with Carborundum, a Fortune 500 rarfactrig copay
/ p977(rheorundam was prchased by kenecott, another Fortune 500 eon@
Then Kennecott was bought by Standard Oil-which was 5% owned by British
Petroleum, In 198 BP bought all of Soio and changed its mane to BP Anerica
Most of pp America's oil is produced in northern Alaska It is then trans-
ported some 800 miles to the Port of Valdez via the Trans-Alaska Pipeline. Tank
ers then move this oil to customers on the West and Gulf Coasts 9PA refines some
700,000 barrels of oil a day through its five refineries. More than half of this
oil is converted into gasoline which is sold through nearly 7000 retail outlets
mainly in Ohio and the southeastern rited States The refinery is the major
business area where you see byproduct cost accounting. says Ron Boller As
controller
At the refinery oil is literally cooked and distilled. 'You make so many differ-
ent products and have such a variety of crudes to select from that you have to
come up with a matrix approach "he says. Anything that weighsr amount that
comes in with a certain chemical structure willeostwas vu rove it through the
svsten That makes proper allocation of costs essential
340 PART 1 PRODUCT COSTING

The biggest problem in oil is the fluctuating cost of the raw material oil
itself "As costs change, you may want to alter the products coming out of the
refinery. says Boller Crude oil, which itself is made up of many different chemi
cal compounds, is used to produce a variety of products. The lighter higher
valued products include gasoline ad heating and diesel oil while the heavier,
lower-valued products include bunker oil and residual oil used in industrial boil
ers and asphalt. "The number of products that come out of a 200.000 barrel a day
refinery is mind-boggling, he says

IN MANY INDUSTRIES a single production process will yield several different

products, For example petroleum industries produce gasoline.heating oils, and
kerosene fro the refining of erude oil, meat-packing industries derive various
cuts of meats,skins, and trimmings from an animal carcase.When more than one
product results from a production process, the products are called joint products
or byproduets. Classification depends primarily upon their relative tales vale
Joint product and byproduct costing involves the allocation of joint costs to
joint products, which is necessary for income and inventory determinations
Costing procedures for joint products and by products do not constitute a ep
rate cost accumulation system but rather are normally part ol a process cost
syten. This chapter will present the techniques involved in accounting for joint
products and byproducts under a process cost system

JoNr PRODUCTS
Joint products are individual products, each with significant sales values, which
are produced simultaneously from the same raw material and/or manufacturing
process. For example, soybean oil and sovbean meal are joint products which
result from the processing of soybeans. Joint products also occur in the meat-
packing industry and in many natural-resource refining industries The basic
characteristics of joint produets are
Joint products have a physical relationship that requires simultaneous con
mosn processing.Processing of one of the joint products results in the process
mg of all the other joint products at the same time When additional quati
ties of one joint product are produced, the quantities of the other joint
products will increase proportionatel
2 Manufacturing of joint products always has a split-off point at which sepa-
rate products emerge. to be sold s is or processed further Costs incurred
after the split-off point do not generally cause allocation problems becae
they can be identified with the specific products
3 None of the joint products is significantly greater in value than other joint
products. This is the characteristic that distinguishes joint products fron
by-products
 CHAPTER 8. JOINT RODUCT AND gY 0DUCT COTING 34f

JOINT COSTS AND THE SPLIT-OFF POINT

Joint costs should not be thought of sa 'mew type of product cost in that the
consist of direct materials, direct labor and factory overhead A major difficult
inherent in joint costs is that they are indivisible ie. joint costs are not speeifi
call identifiable with gay of the products being simultaneously produced.For
example the costs incurred by a refining company to locate, mine and process
ore are joint costs that must be allocated to the iron, zinc or lead which are later
extracted from the ore. Since joint costs cannot be specifically identified with
iron zinc,or lead they ust be allocated to each joint product Joint costs are
sometimes confused with common 00ts. Coro costs are those incurred to
produce products simultaneously but each of the products could have been pro-
duced separate] Therefore. common costs are divisible and can be specificalv
traced to each of the products produced,whereas joint costs ca.not For exam
ple the cost of lumber for a furniture manufacturer is a common cost that can be
directly traced to the various products produced. t is interesting to note that the
cost of trees for a sawmill is a joint cost because the various types of products
that trees yield cannot be varied
Additional processing costs (sometimes called separable costs) are those in
curred by individual products after they have emerged (called the split-off point)
from the common raw material and/or the common paufacturing process. Ad
ditional processing costs simply consist of the additional direct materials, direct
labor and factory overhead incurred for the identifiable products after the spit
oll point in contrast to the joint costs, which are incurred for the benefit of all
products prior to the split-off point
figure8lis an illustration of a joint manufacturing process for a meat pro
Cessor

ACCOUNTING FOR JOINT PRODUCTS

Joint product costs must be allocated to individual products in order to deter
mine the ending workin-process and finished goods inventories, cost ol goods
manufactured and sold and gross profit As discussed previously specific identi
fication is not possible. Therefore an appropriate method roust be used to allo
cate a portion of the joint costs to individual joint produet Thee methods are
commonly used to allocate joint costs. The plrvsical output method is based on
volume; the other two on market value the market vale at split0off method aend
the net realizable value method
The following example will illustrate joint product costing Fillerup Oil Re
finery Company produces gasoline, heating oil and jet fuel feon refining crude
oil. The initial refining of 820,000 gallons is begun in Department I Three par
tially completed products emerge (split-olf point) from Department I Each
product is then sent to the following departments to complete their processing
Al GALON
p4£f pope 8VD
2 Golie 280.000
3 le.ating oil 340,000
• et fuel
Total
200.000
820.000
342 PAT 1 PRODUCT COTING

fie.
0
4-
bot
lo l.rtvlee tho cot
e

Figure 8-2 illustrates the production flow for Fillerup Company. The following
additional statistics relate to Fillerup Company
MA. %4A.4
o of wt Ag
on0 pg$.Ad AT tr
DA7%0 c0rs c0srs gr.0 0KE6NG

•
2
$164,00
50,000 $ 4,000 $.80 $115
3 30.000 1,000 0 100
4 3$.000 .000 95 1.4
Total $279,000 $10,000

The Department l costs of $164,00 are the joint cost because they occur before
the split.off point and therefore relate to all three product 1he production costs
for Department 2 ($50,000), Department 3($30 000, and Department 4 ($35,000
are considered additional processing costs because they occur after the split.off
pot
 CHAPTER$. JOINT PRODUCT AND ¥000CT COSTING 343

I -�-
'
la sis ii
PHYSICAL OUTPUT METHOD
Under this method the quantity of output is the basis or allocating joint costs
The quatit of output is expressed in units, which may be tons, gallons, or an
other appropriate measureret.The quantity ol out put for all the joint products
must be stated in the same scale. In the unlikely event that the measurement
basis (scale) varies from product to product a common denominator has to be
found
Joint cost is allocated to each product by a ratio of output per product over
total joint product output multiplied by total joint cost
foe.la
Joint cost allocation Output per product Jot cost
to each product Total joint products
L/sing the information fro filler Company the following joint cost allocation
is made
280.000
Gasoline g0c $164,000 $ 56,000
Heating 340,000 g464,000 68,000
oil 820,000
Jet 200.000 4164,000 40,000
fuel 820.000
Total joint cost $164 000

The total production costs of a product are computed as follows

Al0AED 440A roA

NT COT 0Ce96 0$% 0Ne9ON
0OCT (04TNT 1) • (044T0NT$.$ AN0 4 • C0rs

6a0hi $ $6,000 $ 50,000 $106,000

eating oil 68,000 30,000 8.000
Jet fuel 40,000 35,000 75.,000
total $164.00 $11.000 $279.000
344 ART 1 ODUCT COSTING

The primary assumption of this method is that all products produced by a com
mon process should be charged a proportionate share of the total joint cost based
on the number of units produced.It is assumed that the products are homoge
eours and one product does not require more or less effort (cost) than any other
product in the group. The most appealing characteristic of this method is its
simplicity not its accurac
The major drawback of allocating joint costs on the basis of quantity pro
duced is that the revenue-producing abilit of the produet is not considered Fe
example,if the parts of a steer were allocated joint cost solely on the basis of
weight the parts that are sold as steak would have the sare unit cost as the parts
that are sold for chopped meat

MARKET VALUES AT SPLIT-OFF METHOD

Advocates of this method argue that a direct relationship exists between cost and
selling priee. They contend that selling prices ol products are determined primar
ily by the costs involved in producing the products. Therefore. joint product costs
should be allocated on the basis of the market value of the individual products
This is the most popular allocation method
When the market value is known at the split.off point the total joint cost is
allocated among the joint products by dividing the total market value of each
joint product bw the total market value of all joint products to arrive at a ratio of
individual market values to total market values. This ratio is then multiplied by
the total joint costs to arrive at the joint cost allocation to each product

owed

Joint cost allocation Total market_value of each product Joint

to each product ---•
Total market value of all products.t costs
Total market value ol each product /nits produced of each produet e Lit
market value of each product
t Total market value of all pooducts=Sum of all the individual products male
value

On the basis of the information from Fillerup Company the following joint
costs can be allocated.First the total market value of each joint product at the
split0ff point is computed

04 KT VAMU€
Of SA MOO
• A $0f
Gasoline 280,000 $224,000
teatig oil 340,00 238,000
Jetfuel 200,000 190,000
tot.l meet value ofal products $652.000

Second, the formula is applied to determine the amount ol joint cost to be

allocated to each joint product
 CAPTER 8. JOINT PRODUCT AND Y-0DUCT COSTING 34

AM0GATON Of
8AnO ONT CO0Sr
$224,000
$652.06 $164,000
$238,000
Heating oil $652,6@ $164,000

$190,000
Jet fuel Kl64000a 4779
$652,000
Total $164,000

Third and last, the total cost of producing the joint products is arrived at b
adding only the additional processing costs to the allocated joint costs. (Disposal
costs are selling expenses, pot production costs.

At0CAT£0 A00ON rot

• on
NT 0 0CE6 0
oouCT (047 (0047.007$ 23. AN4 0srs
Gasoline $$6.344 $ 50,000 $106 34
ting oil 9,865 30,000 89.865
let fuel 4779 3$.000 82791
total $164.000 $11$.00 $279.000

NET REALIZABLE VALUE METHOD

When the market value is known gt the split.of point it should be used to allo
cate the joint costs, as illustrated in the previous example However the market
value or replacement cost of a joint product may not be readily determinable at
the split.off point,especially if additional processing is required in order to nan
ufacure the product. When this situation exists, the next best approach is to
allocate joint costs using the net realizable value method. Under this method
any estimated additional processing and disposal costs are deducted from the
final sales value in an attempt to approximate a hypothetical mgkeet value at the
split-off point The joint cost allocation to each product is computed ae follows
The total hypothetical market value of each joint product is divided by the total
hypothetical market value of all joint products to determine the ratio ol individ
ual market value to total market value This ratio is then multiplied by the joint
cost applicable to the fully completed units (from a cost of production report) to
allocate the joint cost to the individual joint products
fewer.d

Jot cost
allocation Total hypothetical market value of each product Joint
to each Total hypothetical market value of all productst cost
product
Total hypothetical market value of each product (units produced of each
product final market value of each product) additional processing costs and
/posal costs of each product
t Total hypothetical value of al prod.ts sun of all the individual products
hypothetical market values
346 PART PRODUCT COSING

Using the information from Fillerup Company, the following joint cost allocation
is made
Al0GATON OF
00CT A • ONT 0 • NT CO$f
$268.000 $164.000 $ 53797
Garo4
$817,00
$309,000
eating oil $164,000 62.027
$81,000
$240,000 48,176
et fuel $164,00
$817,000
Total $164.000

The following supporting computations are necessary

0n
(o 0A
( to totA oeOA
4%A 0A # A.00/ONA. AT AU
8 A.gt A 0CG Of £ACM JOINT
0 0T% op yA 4. 004Al oboe
OD ODUKED t. 08 (0 004% to - (
Gasoline 280,000 $11$ $322,000 54,000 $268,000
teting oil 340,000 1.00 340.,000 31,000° 309,000
let fed 200.000 140 280.000 40,000° 240,00
Total $817,000
150.000+ 4.000
$30.000+ $1.000
$35,000 + $5.000
To arrive at the total cost of producing the products, only the additional process
ng cots are added to the joint costs, as follows
Al0AT40 A0040.A rot
ONT CO4 0Ke$ 00$% 0bu4ON
0DUCT OMA.TNT 1 (0eA8.007$. AND4 • c06rs
Golie $ 53.797 $ 50,000 $103.79
leating oil 62,02 30,000 92.027
let fuel 48176 3$.000 83176
Total $164.000 $115.000 $29.000

The major advantage of the market value method and the net realizable
value method of allocating joint cost to joint products is that they are based on
the revenue-producing ability of the individual products. Thus, when a common
raw material is split off the emerging joint products that yield the highest reve-
ue will be allocated the largest portin of the joint costs. Under these methods, a
change in market value of any of the products will cause a change in joint costs
assigned to all joint products even though no change in production has taken
place. This fluctuation of cost allocation ratios as a result of changes in market
values, along with the faet that it inherently assures that no profit is generated
by processing further are seen as the major criticisms of this method
Note that in all the methods the total joint cost (Io4.00) and the total
production cost ($279,000) are the same. The difference between the methods is
how these costs are allocated to the individual products
 CTR 8 JOINT PRODUCT AND BY PR0DUCT 05TING 347

An analysis of whether a company should sell its product at the split-off point
or process it further is presented in Chapter 14 (Relevant Costs and Revenue in
Short. Term Decision Making)

JOURNAL ENTRIES FOR JOINT PRODUCTS

The journal entries to account for joint products follow the sane format ass those
illustrated in Chapter 6 (Process Cost I Nature and Characteristics)

By.pRoDucrs
[.products are those products of limited sales value produced simultaneously
with products of greater sales value.known as rain or joint products. Main
products are generally produced in much greater quantity than by-products.B
products are an ineidental result ol producing main products. vproduets nay
result from the cleansing of main products or the preparing ol raw materials
before they are used to manufacture main products, or the rna be the leftovers
after main products are processed
After they have emerged along with joint products at the split-oll point, by-
products either may be sold in the same form as originally produced or they ma
undergo further processing before sale
Occasionally there is a problem of whether to classify a product as b
product or as scrap The basic difference between the two is that by.roduets
have agreater sales value than scrap. Also, scrap is generally sold immediately
whereas by.products quite often must undergo further processing after the split
olf point in order to be salable
The classification of products as joint products, by-products, or scrap ma
change as new uses of the products are discovered or old ones abandoned Be
cause of technological discoveries, a product mav change from a byproduet to a
joint product.For example, in the petroleum industry.gasoline was originallg
byproduct of the main product,kerosene. After the invention of the utorobile
however,gasoline became the man product and kerosene the byproduct.ln
may cases,uses have even been found for products formerly considered waste
for example, many sewage plats have found ways to convert their waste into
fertilizer
Product markets change frequently thus a product that may have a rela
tively small sales value today fa have a significant sales value tomorro
Therefore management should frequently examine product classifications ad
rake reclassifications when necessary

ACCOUNTING FOR BY-PRODUCTS

As already stated b.products, like joint products, are produced from a common
raw material aso/or a common nanuacuring process. Joint 0ots are no di-
rectlv traceable to either main products or byproducts. Since by products are
generally of secondary importance in production, cost allocation methods differ
from those used for joint products. The methods of costing by-products fall into
two categories category I,in which by-products are recognized when sold, and
category 2, in which by-products are recognized when produced
348 PART PRODUCT COSING
e

CATEGORY 1 products are considered of minor importance and therefore no income is re

corded from them until they are sold Net byproduct income equals actual sales
revenue less any actual additional processing costs and marketing and admiris
tratie expenses. Net bwpoduet come may be shown on the income statement
as
An addition to income, as either part of Other Sales (at the top o4 the
income statement) or Other Income(at the bottom of the income state--
rent)
2Adeduction from cost ol goods sold of the main product

For example, assume the following facts for Splinter Sawmill Company
Splinters main product is 8-foot long, by 4inch wide strips of wood
which are cut in Department l and require no additional processing. The saw
dust accumulated from the cutting process in Department l is transferred to
Department where it is packaged for sale as a bproduet Cost and revenue
data are presented belo
et production costs
Department $3ts0
Department 2460 direct materials, 0direct labor, and10factory overhead I00
Lits of the nain out
roduded
old
Ending inventory
tits cf he byproduct
Produced
$old
teeing iwent
stated marketing adadinigttie4xe
Main product
y-product
ctu.al$.al$4@vu
Min product (1$,000 units@@ $25pr tit
By-product (250 units ($.90 er unit)
pectedgross profit for by-products
gore ion tees

Net bypooch ooe treated as other too¢

ales (rain product $37,500

Cost of main product sold
total production costs $3150
less. £ndi0g inventory (3,000$1.7$ 5.250
total cost of main product go
Gross frofit
letting aadministrative expense of mean poet
none fro operatic
thee income
Net byproduct income [2250 ($100 + $500)]
et ice
$31500+ 18,000$175
 CHAPTER 8 JOINT PRODUCT AND 8Y-PR0DUCT C0$NG 349

ales (main product)

Cost of main product sold
otal production cost
less£ndig inventory(ea.bow)
lot4 cost of main product sold
less Net b product inon (e abowe
Gross profit
Marketing adadrnnistative epn¢ cf e.an poet
et ioe

CATEGORY 2 Management would consider using one of the methods in category when the net
byproduet income is significant and therefore bproducts are considered j
portat Th expected value of the by.products produced is shown on the income
statement as a deduction from the total production costs of the main product
produced. The unit cost of the rain product is therefore reduced by the expected
value of the by-product produced.The following two methods mav be used to
compute the dollar amount of the by-product to be deducted from total produce
on costs
Net realizable value method. Under the net realizable value method the
expected sales value of the by-product produced is reduced by the expected
additional processing costs and marketing and administrative expenses. The
resulting net realizable value of the by product is deducted from total prode
tion costs of the main product
The following example of the net realizable value method is based on the
information given for Splinter Sawmill Canepa
vet readable vale method
le4 (ran pr0fut%)
Cost of main products sold
Total production cost
Value of by-product produced [$2520 ($100 $500)]
Net production 0ots
es.Ending inventory (3000 $1.643t)
Gross profit
aeti0gad a07000ta0/w40p0900.a p00.f
it4o
2800 uit proceed90per urt 2520(expected $.a w.a)
+$29580 18,000 unit $1643 per unit
2 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 be the marketing ad administrative expenses and net
incore). This method is called the reversal eost method because one must
work backward from gross revenue to arrive at the estimated joint cost of the
bw.product at the split-of point When additional processing costs and or
al gross profit of the by-product are deducted from gross revenue. the re.
maiming portion is the estimated cost ol producing the byproduct up to the
split-olf point
The joint cost allocated to the production of the by-product is deducted
from the total production cost of the main product and charged to a Dy
30 PART PRODUCT COSTING

Poluct Inventory account. Any additional processing costs related to the

by-product after separation (split--off) are also charged to the By-Product In
ventorv account Proceeds from the sale of the byproduct are treated the
same way as sales of the main product
Those companies that favor the reversal cost method feel that the b
product should be given separate line item recognition, if significant, on the
income statement.The reversal cost method also gives the b.product an
allocated share of joint cost
The following example of the reversal cost method is based on the same
information for Splinter Sawmill Company
eers.al cos method
ales
Main product $37,500
y-product 2.250 $39750
Cost of me.i product adb-product gel
Production costs
e pout (ee schedule AN
y-product(see schedule Bl $31,600
less ending inventory
Mn product [($30,088 18,000 3,000] $ 5015
yproduct [($1,512 2.800 300 6.2 51 26,423
Gross profit $13,327
Altig3einitnative eenes
a product 3.150
yproduct 500 3.750
Ne4 $957

Schedule A Production
Costs of Main Product Total production costs o Depart.et $31,500
lei.it4o4ts a-icable to bproducts produced
Estimated revenue free byproduct. (280git
produced$90per unit) $2.520
less. Expected additional po0469 00
[Department 00
pected gos profit for by-products
(40% $2,520 1,0O8 ,108 1.412
Production got of main product $30,08

Schedule8 Production
Costs of y-Product Joint costs applicable to by products (wee Schedule A) $1,412
A4.4ice.al pr00es900st%ft $.pl0ff eatent 100
Production costs fb-product $1,512

JOURNAL ENTRIES FOR BYPRODUCTS

The journal entries to account for by-products will depend on whether or not
production costs are allocated to the b-product
Category t$Products Are #cognied whe Sol When a cornpanv follows the
methods in this category a Product Inventory account is not set up. Addi
 CHAPTER 8 JOINT PRODUCT AND BY-PR0DUCT CO$NG 3Sf

tional processing costs are expensed when incurred and disposal costs are ex
pensed at the time of sale For example, the journal entries in category I fror
the illustration given in this section, follow
A.itie.al expense of process b-product
2
(Department 00
a0%.ai00010/ 6
Payroll payable 30
atoy overhead apoled 10
le rec0radon.al pro.es.gos of the bprode
Makegaaireii.teepee 0lb pro
Ve0u 0eh8
le record marketing adadraistteerpenoes relate4t the b-rode
Cash0ea&count nee.al
Byproduct «core
tee&coed the sale 0lb-products
The accounting for by products by the methods presented in category l is only
appropriate when management believes that the net by.produet income is ins.ig
mificant and not worth the additional costs involved in setting upa by-product
inventory

atgory2#Products Are Recognized When Produce The journal entries in this

category will depend on whether the net realizable value or the reversal cost
method is used to value byproducts The journal entries relating to the account-
ng for by products under the net realizable value method, on the basis of the
illustration in this section follow
leek.process «nee0toe. Deeg.tenet 1920
weir-process ire.ory-Lee.pet 1920
locoed the net teal.be val et byproduct
2 leek.pro0es ieet0 Department 0o
Matera sweet0 60
ayroll parable 30
f%toe [email protected] 10
lonecoe4ace. proceig cost tor the brout i Detest
8product reentory 2.020
wigeoeess entoryDepate 2.020
orecord costs of completed by-products (1920+100
4 leparalegal%eegttieeeen 4
Cash0rt0 fee.bl 2.20
yprose ientyt .804
Various (to en.etiaearnest
expenses $00
lo record the sale ot by-products
Debit t0peep.re.aleetigaa.eeteen..($6/el et.efee.ietigadainst
tiexpense fee th 800unit pr0def e$6 nits on ha4the4of the period wee 30
deal ta2800 produced le2500 sole he pet0.%id portion equal $500 03002800 54
the peep.an.alet.e4inane,teexpense e. beg.hon o the balee sheet8rue
at The$4we beexpensed nett ei teen the en.are309qt$old
Credit to bw pro&duet ireetory(ft,804. $202000st0f by-pr duct proceed2800unit produced
$7214per unit 500us sold$1,804, l
2500
42.020 5%6.
the balaoe in the by product awe0tony at, .l6equal t$202000st of byproducts pro-
duce le$1804credit ob-poet rent.oryi%lg.ho% the bale getaacure0tart
 The journal entries relating to the acounting for by-products under the re-
versa cost method, on the basis of the illustration in this section, folo
Mori-iproes eeetoe Depart-et 1412
er--process ireenter Department
lo al0ate joint costs to the b product
Wee-ipo0ee irweetoeyDDepate«et 10
.ate0.a4et04 60
Payroll payable 0
factory oerteda.pee
lone0oda.oral pr00es.409ts incur% Deep?lo
the b product
3 Byproduct teeter
eek.n-pr0Kee «enter. Deparoeet2
lo transfer cost of the completed bw products toe prod.
rwentry (11,412$100
4Cash0raccout «gee..bl
B-product ice
lo record the sale of by pro.t
Cost of by poducts sold
product vent.or
locoed th cos of b products sold, computed4el0%

$1512
16
$1350
Note that the b-product endngentor of16200unit% l
woe $.0p% 0 the bale sheet
$is1+2800unit $.54per ant
6 Malet@ad ariestate ex.pee 0geode
Vi0us credit
lo eoednketgadadnestate expenses rel4tt b00
(le ice the bproduct is treated.epate pout le o4
th icorn geest the tot4$500iedeed in the ear incurred

Under the reversal cost method of valuing the by-products, the journal
entries follow the sare format as those used to account for the main product
because the by-product is given a status comparable to the status of a ran
product

Sp@OILED UNITS, DEFECTIVE UNITS, SCRAP, AND WASTE MATERIAL

Costing for joint products and byproducts does not constitute a new cost accu-
mulation system, rather it is a modification of a process cost accumulation sys-
ten. Therefore_ when spoiled units, defective units, scrap, or waste result from
the production of joint produets and b products, the accounting treatment of
these items will depend on the system employed For a detailed discussion, see
Chapters Sand 7
ErrECrs OF JOINT COST ALLOCATION UPON DECISION MAKING
The allocation techniques discussed in this chapter should not be used by man
agerent for decision-making purposes. Decision raking generally involves out
put decisions, further processing decisions, and pricing decisions. In each of
these, Joint cost alloeanion is not relevant intormatot and may prove to be coon
terproductive The allocation ol joint costs is performed solely for purposes of
product costing and should not influence management in its planning and con-
trol of joint costs
The very nature of joint products and by-products limits the flexibility of
decisions. The physical characteristics of main products require that all the
products in the group be produced 4When the products manufactured ae propor
ionatel fixed in quantities relative to each other,a decision to produce more or
less of one product will result in proportional pore or less of the other prod-
uet«• Therefore more useful information is obtained b oparing total input
costs with the potential revenue generated from total output. Individual profit
for each produet is of little significance in production decisions regarding join
product and byproduct production
When the products can be produced in alternative ratios or 'mixes, the
decision is based on which mix obtains the most profit In this situation, incore
increments are an.alvzed fetal cost variation under each alternative ea be cal
culated and compared with the resultant total revenue. Although individual
product cost cannot be speeifieall measured, total costs and total revenue can
.All products
Neither are joint cost allocations useful in price determinations
are expected to be sold; thus individual product pricing is aimed at selling all the
joint products in the same proportion as that in which they are manufactured
This circular reasoning occurs because in certain methods selling price deter
mines joint cost allocation This, selling prices are used to determine costs and
costs are then used to determine selling prices
Total joint cost allocation has no influence on the decision whether to sell at
the spit.off point or manufacture a product further A decision to process further
depends on whether the incremental revenue is greater than the incremental
cost. Management decisions should therefore be based on opportunity costs
rather than on the allocation ol past or sunk joint costs
The decision whether to sell a joint product or a by-product at the split-off
point or process them further will be illustrated in Chapter I

COMPUTER USE IN JOINT AND BY-PRODUCT COSTING

Computer systems track, accumulate, and cost the numerous joint products and

E by.products produced by companies having joint manufacturing processes

Quantities of common raw materials, joint products, and by-products processed
are often recorded autornaieall fo example sensors record the amount of
crude oil, gasoline, or heating oil flowing through pipes of petroleum processors
Meat packers use scales with automatic data transfer into computer svstems to
record the weights of sides of beef and the after split-off products, such as steaks
roasts, and hamburgers
34 PART PRODUCT COSTING

The sales value of all products sold are entered into computers for sales pro-
cessing and invoicing. This also provides the market value per unit for product
cos tog
With quantities and sales values accumulated in computers it is easy and
fast for firs to calculate and allocate joint production costs to their products
Following allocation, computer systems automatically make journal entries to
the appropriate accounts
A firm first selects the method of allocating joint costs that best fits its pro
due tion process and management s needs. Next it implements computer systems
to cost their products automatically Generally data on sales and inventory used
for product costing are also analyzed by computer software to assist with deci
$ions such as the optimum product mix and most profitable selling prices Petro-
leum companies use computer models based upon demand and competitive
prices to choose the best product mix of gasoline heating oil kerosene, ad their
many other products. Similarly, lumber companies evaluate sales at the split.off
point ol rough-cut lumber versus sales after further processing

(OUTER PRO8LAA What are the benefits of a computer system for joint cost
allocation to products for a manufacturer of joint products and by.produetg.

CAPTER REVIEW
4y fnafacturing processes produce di4feet oiotcost the are fade upo4dieen.arterials,dee
products fro initial raw materials and'or onon labor edftory overhead. Noallocation ofseep
onanalac taring process. Depending on their relative be cot$is feces$.av$lee thee ca be dueet traced
sales value.the products are either joint products or to individual joint products and by-product. The
bw-products. Joit products and by-products by their final product cost ol joint product in hoes sotoe al
inherent nature contain anelerent eled joint costs located portion ol joint costs anday necessary.di
hon cots are made up of direct materials, direct tioral processing Gos.ts. The final product cost of the
labor and faeorv overhead by-product ray be allocated a portion of join4 costs
Joint costs are the costs incurred uptothe pon (depending on the technique used plus additional
n agiven prooes where individual products can be processing costsifs
identified. The point of production at which separate lace of each jot product,
ecase of the import
products are identifiable is known ars the split-olf indovdoal product costs for both income deterrina
point. Joint costs incurred up40split.4fence4 be tio and inventory valuation ae feces.a on.
identified with specific products product0ots should be allocated toeach individual
A major difficulty inherent in joint cots is that joint product
they are indivisible; ie. joint costs are pot specif The following methods for the allocation of joint
cally identifiable with any of the products beings 004 are00000./4.d
oultaneously produced
Joit products are individual product, each of Physical output. Units ol measure.rent such as
lgmificant sales value The aonuhac tare of joint gallons and poodsareusedasthe basis for alo
products oooin the meatpacking industry in at ca pot cos.ts
ura-resource refining industries, adin those indu Market value at split-of Joint costs are aloe
tries where raw materials post begraded before pro carted according tothe sales values of the indivd
cessong u.ad joint products at the split-off point
Additional processing 00ts are those ifurred Net nealiable value. f the product does not he
by identifiable products alter the sphitoll point.Lie a market value at the spit-off point and rust be
 CHAPTER 8 JOINT PRODUCT AND 8¥PR0DUCT COTING 3$

processed further to be salable, a hypothetic.ad those used tor join products. Methods or costing by
aet value at the split-olf point is used products fall io two categories. lo category I,by
products are feco@tied when sold; in category
v.products are products of limited sales value they are recognied when produced
produced simultaneous.hy with a product of greater Current classifications ol products as joint prod
value knownasthe nai poet..products are an gt,b-products, or scrap are n0 pen-e-4 De
incidental result of producing the main product. I pending pon mo.aet value.s ad technological
products may be sold in the sate form as origin.a changes, products can shift very readily ron oe
produced, or they may undengo further processing classification to$other
before sale Allocation of joint costs is used primarily for
Because by-products are generally ol secondary product costing for financial repot ting purposes acod
importance, cost allocation procedures differ fron should not be used in a.agerial decision mo.a.king

GLossARY
y-product A product of limited sales vale pro Joint products lndvidua products of significant
dused simultaneously with a product olgreater sales value which are produced simultaneously aed
value,known as a main product which aeares4to4a coronawroaera aor a
terror cot Thee costs incurred to pole coon on.aon.ufacturig process
products simultaneously but each of the pro Mahn product A term used interchangeably wt
could have been produced separated ont product The product olgreater value which is
Joint cots Costs iourred up to the point iagiven produced simultaneously with by-products
process where individual products can be identified Split-of point The point in the production process
Jolt product costs Common cost factors shared by wherein separate products, either joint products or
joint products which are incurred prior to separation byproducts, emerge
into individual joint products

SUMMARY PROBLEMS
PR0gLM 8- The B&OCorpay has oe production process which velds three different products.F
andTA process cost system ired Specific allocation of cost is impossible for these
products until the end of Department l where sphitotf occurs. Joint products.PR.and
are further processed in Departments 2, and4respectively.At the split-olf point the
company could sell%$4$0,#at$2.7$,dfat$320. Department l completed ad
transferred to the other departmentsa total o47600 nits at a total cost o$22000.The
ratio of units produced in Department l for PR. and Tis25l ±espoctwel
keg#red Allocate the joint cots among the thee jot products based on the
a Market wahue art plitoll method
physical output method
Round all answers to two decoal place

PR0gt£M 8-2 f flee Stooge leechucie Cony es a pro0e cot s04et 40a004fee e
production of thee different products M, L,and€The products are considered join
products in the first department (Department I. The products are split off at the end of
processing ma Departmoeml Proue Meeds no further processing after the split0of point
while prods Land€are sent to Departments 2A and2B,respectively for further pro
0es$10