Chapter 7 – Accounting for Joint and By-Products

LEARNING OBJECTIVES
After completing this module, you should be able to
know the following:
1. What are joint costs, joint products, joint process
and byproducts?
2. What are the methods of allocation of joint costs to
joint products?
3. How by-products and scraps accounted for?
4. How by-products are being presented in the income statement?

Most companies undergo either single or multiple production processes but produce
a wide variety of products. Like for an instance, for a shampoo manufacturer, it
produces a range of products depending on target consumer. They produce shampoo
intended for helping hair to shine even brighter, others are for anti-dandruff, some are
for anti-hair fall and damage repair. Nonetheless, even with this group of selection,
they still undergo common process and incur common costs.
These common processes where products of wide varieties go through are called joint
process, whereas the common costs that were incurred during the production but prior
to splitting off to its intended group of variety are called joints costs. Collectively, these
products which undergo common process and incur common costs are called joint
products. Joint products are the main products of a manufacturing company, hence,
these are the products that generate the significant amount of revenue.
On the other hand, by-products are the incidental to the production of joint products
like the end product generated from the hole of a doughnut.

Moreover, it is to further elaborate that joint costs are not another type of product cost since it
is also comprise of direct material, direct labor and overhead. Split-off point is the point
where jointly manufactured products are being separated either for further processing or
transferring as completed and saleable goods.
 I. Accounting for Joint Products

• Methods of Allocation of Joint Costs to Joint Products

Joint cost allocation is necessary in order to meet the requirements of
financial reporting since under the Generally Accepted Accounting
Principles (GAAP), inventories must be valued and income must be
recognized. Presented below are the ways to allocate such joint costs:
1. Physical Measure
Allocation a. Physical
Units Method
- Also known as "Physical Output Method" ; "Average Unit
Cost Method"; "Weighted Average Method”
Under this method, the number of physical outputs
produced is the basis of allocating the joint costs.
Common physical measurement are tons, gallons,
barrels, kilograms and other measurement of volume.
Moreover, in the weighted average, a weight factor such
as "points" is being assigned. Thus, physical units
allocation is expressed as:

Weighted physical units = Number of units * Weight

factor
Illustration:
ABC Company produces three joint products which have a
joint manufacturing of cost of P180,000 at split-off point.
Data pertaining to these products are as follows:

Allocate the joint production cost using:

I. Physical Units Method
a. Average Unit Cost Method
b. Weighted Average Method
2. Monetary Measure Allocation
Steps in allocating joint costs under monetary measure basis of allocation:
Step 1: Determine the allocation base
a. Sales Value (Market Value) at Split-off Allocation
Under this allocation base, joints costs are being assigned on the
related sales value at split-off point.
b. Net Realizable Value (NRV) at Split-off Allocation
In this allocation base, joint costs are being assigned based on the
inventory valuation of the joint products at split-off point. NRV
is computed as sales value less disposal costs
c. Approximated Net Realizable Value at Split-off Allocation
Like the NRV allocation, approximated NRV also assigns joint costs
based on the inventory valuation of the joint products at split-off point.
However, some of the joint products are not saleable yet at split-off
point. With this, further processing is needed and it entails additional
processing costs.
Accordingly, if the joint products needs further processing, the
approximated NRV is computed as: Final Sales Value less disposal
cost less additional processing costs
If there is no further processing needed to other joint products, the
actual NRV (allocation base letter b) computed shall be used.

Step 2: Calculate the proportional relationship

Step 3: Multiply joint cost by the percentage computed to
 obtain the total joint cost allocated Step 4: Divide the
total joint cost allocated by the number of output
produced to determine the joint cost per unit
Illustration:
ABC Company produces three joint products which have a joint manufacturing of cost of
P180,000 at split-off point. Data pertaining to these products are as follows:
 II. Accounting for By-products
The method of costing to be used in accounting for by-products depends on how it is
recognized.
By-products are to be carried at its net realizable value, calculated as Selling Price
less disposal cost less further processing costs and can either be recognized
when sold or when produced.
In practice, companies producing by-products accounts those items when sold if
proceeds from such sale are not significant to the company.
However, if proceeds from sale of a by-product generates a substantial amount of
revenue to the company, it is appropriate and just to recognize by-product at the
time it is produced.
If the company recognizes by-product at the time it is sold, the company can present
the proceeds in the following manner:
(1) As part of other income
(2) As an additional sales revenue
(3) As deduction from cost of goods sold of main product
On the other hand, if a by-product is recognized at the time it is produced, it is
presented on the income statement as a reduction to the product cost of the main
product produced.
Illustrative Problem:
ABC Company produces product AB from a process that also yields a by-product, C.
By-product C has been processed further and a cost amounting to P10, 000 has been
incurred. Also, the by-product will require ABC Company to spend selling and
administrative expenses of PI, 500.
Joint costs amounting to P600, 000, breakdown as shown below, will be fully charged
to the main product AB: