Joint Product & By-Product Costing

Joint Product & By-Product

In many manufacturing operations, specifically in biotechnology
operations, management has no choice but to produce several
products simultaneously.
They have a single process that simultaneously generates
different outputs

For example,
making ethanol from corn, produce two or more products. While distilling corn
into ethanol, cell mass from the processsuch as antibiotic and yeast
fermentationsseparates from the liquid and becomes a separate product,
which is often sold as animal feed

The separation point, where outputs become distinctly identifiable
as individual product, is called the split-off point
A Joint Process
A joint process: is one during which one product
cannot be manufactured without producing others.

Such processes are common in the food, extractive,
agricultural, and chemical industries. Additionally, the
process of producing first-quality merchandise and
factory seconds in a single operation can be viewed as
a joint process
Outputs of Joint Process
A joint process inevitably produces more than one
product line.
A product that results from a joint process and that
has a sales value is classified as:

1. A joint product (also called a primary product,
main product, or co-product)
2. A by-product or
3. Scrap
Joint Product & By-Product
J oint product (main product) is the primary output of a joint
process

Joint product has substantial revenue-generating ability
and, as such, provides the financial motive for entering
into the production process

By-product and Scrap are incidental outputs of a joint
process

Both are salable, with by-products having a higher sales
value than scrap

The final residual output from a joint process is Waste
which has no sales value


Joint Product & By-Product
The classification of products as main, joint,
or by-product depends on its sales value

Products can change from by-products to
joint products when their relative sales values
increases and changes from joint products to
by-products when their relative sales value
decreases

Because of technology advances, consumer
demands and ecological factors

Joint Cost

J oint cost includes all direct material,
direct labor, and overhead costs incurred up
to the split-off point


Financial reporting requires that all
necessary and reasonable costs of
production be attached to products

The Purpose of Allocating Joint Cost to Products
I nventory Costing: Important for financial accounting
purposes, reports to income tax authorities, and internal
reporting purposes
Cost Reimbursement Contracts: Cost allocation is
required for cost reimbursement purposes under contracts when
only a proportion of a business products or services is sold to a
single customer (Government Agency)
I nsurance Settlements: Requires cost allocation when
damage claims made by business with join products, main
products, or by-products are based on cost information
Rate Regulation: The allocation of joint cost is required if
one or more of the jointly produced products or services are
subject to price regulation
Litigation: Joint cost allocation is important in litigation
involving one or more joint products
Model of a Joint Process
Approaches to Allocating Joint Costs
Two (2) basic ways to allocate
joint costs to products are:
Approach 1:
Market based
Or Monetary Measures
Allocation
Approach 2:
Physical Measure
Allocation
Approaches to Allocating Joint Costs
Approach 1 Approach 2
The Sales Value at Split-Off
Point

The Estimated Net
Realizable Value (NRV)
Method

The Constant Gross Margin
Percentage Method
Allocates Joint Cost to
Joint Products on the
basis of Relative
Physical Characteristics
of the Joint Products
Allocating Joint Cost
Harkins Poultry incurred $5,400,000 of joint cost to
produce the following:

I tem Quantity Selling Price
Breast 3800 tons $2800 per ton
Ground 2400 tons $1800 per ton
Whole 2800 tons $1200 per ton

Required: Allocate the joint costs to joint products on
the basis of relative sales value at split-off point.
Allocating Joint Cost
Joint
Product
Tons
Produced
Selling
Price
Total Revenue Proportion Joint Cost Amount
Allocated
Cost per
Ton
Breast
3800 $2,800 $10,640,000 0.5808





$5,400,000
$3,136,245 $825.33
Ground
2400 $1,800 $4,320,000 0.2358 $1,273,362 $530.57
Whole
2800 $1,200 $3,360,000 0.1834 $990,393 $353.71
Total
9000 $18,320,000
Journal Entry

Work-In-Process Inventory (Turkey Processing) Dr. 5,400,000
Various accounts* Cr. 5,400,000
[To record joint processing costs]

* Various accounts includes: Material I nventory Control Account;
Payroll Control Account; Factory O/H Control Account /
Factory O/H Applied Account

Work-In-Process Breast Dr. 3,136,245
Work-In-Process Ground Dr. 1,273,362
Work-In-Process Whole Dr. 990,393
Work-In-Process Turkey Processing Cr. 5,400,000
[To allocate joint processing costs]
Allocating Joint Cost
Now assume that all tons produced of Breast and
Ground were sold out at split-off point without no
further processing, however, 50% of Whole
remain in inventory.

What is the gross margin percentage of each
product?
Tips
The sales value at split-off method produces an
identical gross margin for each joint product
Allocating Joint Cost
Product Whole:
Revenues: 2800*0.5*1200 $1,680,000
Less: Cost of goods sold:
J oint product cost $990,393
Less: Ending I nventory $495,197
$495,196
Gross Margin $1,184,804


Allocating Joint Cost
Product $Sales Joint Cost
Allocated
Gross Margin Gross Margin
Percentage
Breast


$10,640,000
$3,136,245 $7,503,755 70.52%
Ground


$4,320,000
$1,273,362 $3,046,638 70.52%
Whole


$1,680,000
$495,196 $1,184,804 70.52%
Estimated Net Realizable Value Method
Products may processed further beyond the
split-off point to make them marketable or
increase their value
The estimated NRV Method allocate joint
costs to joint products on the basis of the
relative estimated NRV

NRV = (Expected Final Sales Value in the
Ordinary Course of Business) (Expected
Separable Costs of the Total Production of
These Products)
Estimated Net Realizable Value Method
Assume that Harkins Poultry can process products
Breast, Ground, and Whole into QBreast, BGround,
and HQWhole. The new sales price per ton after the
processing are $3200, $2100, and $1500 respectively.
Additional processing costs (separable costs) are
$300, $200, and $110 per ton respectively.

Required:
1. What is the estimated NRV of each product at the
split-off point?
2. How much of the joint cost is allocated to each
product?
Estimated Net Realizable Value Method
Product Quantity
New Sales
Price
Additional
Processing
Cost NRV Proportion
Allocated
Cost
Cost Per
Ton
QBreast 3800 3200 300 11020000 0.566 3056081 804.23
BGround 2400 2100 200 4560000 0.234 1264585 526.91
HQWhole 2800 1500 110 3892000 0.200 1079334 385.48
TOTAL 19472000
Journal Entry
Work-In-Process Inventory (Turkey Processing) Dr. 5,400,000
Various accounts* Cr. 5,400,000
[To record joint processing costs]
Work-In-Process QBreast Dr. 3,056,081
Work-In-Process BGround Dr. 1,264,585
Work-In-Process HQWhole Dr. 1,079,334
Work-In-Process Turkey Processing Cr. 5,400,000
[To allocate joint processing costs]
Work-In-Process QBreast Dr. 300
Work-In- Process BGround Dr. 200
Work-In-Process HQWhole Dr. 110
Various Account Cr. 610
[To record separable costs]
Physical Measure Method
Product Quantity Proportion Joint Cost Allocated
Cost
Cost Per
Ton
Breast
3800 0.422 2280000 600
Ground
2400 0.267 5400000 1440000 600
Whole
2800 0.311 1680000 600
Total
9000
Problem for self-study
Problem for self-study
Requirement (a)
Requirement (b)
Work In Process Inventory (Processing) 520000
Various Accounts 520000
To record joint processing costs

Work In Process Inventory (Division 1) 312000
Work In Process Inventory (Division 1) 208000
Work In Process Inventory (Processing) 520000
To record joint costs to joint products

Work In Process Inventory (Division 1) 649026
Work In Process Inventory (Division 1) 387600
Various Accounts 1036626
To record separate processing costs




Requirement (b)
Work In Process Inventory (Division 1) 122094
Various Accounts 122094

To record processing costs for J P#89-43A

Finished goods Inventory JP#89-43A 1083120
Finished Goods Inventory JP#89-43B 595600
Work In Process Inventory (Division A) 1083120
Work In Process Inventory (Division B) 595600

To Transfer completed production to finished goods
Requirement (c)
Product Quantity
Produced
NRV Total
NRV
Weight Joint
Cost
Allocated
Joint
Cost
JP#89-43A 214200* 3.60 771120 0.70
520000
364000
JP#89-43B 204000** 2.65 336600 0.30 156000
WORKI NGS
* Final Output of Division A =(600000-90000)*0.6*0.7 = 214200
NRV (JP#89-43A): (8.00 - 3.03 - 0.57 0.80) = 3.60
Separable cost per unit (Division A) = 649026/214200
Packaging cost per unit (Division A) = 122094/214200
Selling cost per unit (Division A) = 0.80
**Final Output of Division B = (600000-90000)*.4 =204000
NRV (JP#89-43B): (3.70 1.90 0.15) = 1.65
Separable cost of (Division B) = 387600/204000 = 1.90
Selling cost per unit (Division B) = 0.15
Requirement (d)