Chapter 7: Joint Product and By-Product Costing

CHAPTER 7joint product and by-product costing

questions for writing and discussion

1.A joint cost is a cost incurred in the simultaneous production of two or more products.

2.The joint costing problem is determining how best to allocate joint costs to the various products. The difficulties are that all of the joint costs must be incurred to produce the products, and the allocation is arbitrary.

3.A by-product is a jointly produced product of relatively little sales value relative to the main product(s).

4.Joint costs are allocated to products for financial reporting purposes, to value inventories, and to determine income.

5.The sales-value-at-split-off method is neutral in that joint costs are allocated in accordance with the revenue-producing ability of each product. In this way, products will not show a loss due to joint cost allocation. However, other considerations may take precedence over this type of neutrality. For example, the physical units method may be easier to apply and does not have the disadvantage of changing prices.

6.Joint cost allocation may lead managers to believe that part of a joint cost is avoidable when this is not true. Additionally, allocated joint costs may affect the pricing decisions of the individual products when it is the overall product package which must be evaluated in terms of profitability.

7.Three methods of allocating joint product costs are the physical units method, the market value method, and the net realizable method. The constant gross margin percentage method is also used to allocate joint cost.

8.Joint costs occur only in cases of joint production. A joint cost is a common cost, but a common cost is not necessarily a joint cost. Many overhead costs are common to the products manufactured in a factory but do not signify a joint production process.

9.No. Joint costs are irrelevant. They occur regardless of whether the product is sold at the split-off point or processed further.

10.All sales value methods are based on price. If price is used to determine cost, then that cost cannot be used to turn around and determine price. The decision would be circular.

11.By-products can be accounted for using cost or noncost methods. Cost methods involve assigning some cost to the by-product for inventory purposes. Noncost methods make no attempt to cost the by-product, but instead they make some credit either to income or to the main product.

Exercises

71

UnitsPercent(Joint Cost=Allocated Joint CostPhils1,0000.200$72,000$14,400

Bills1,5000.30072,00021,600

Gills2,5000.50072,000

36,000

Total5,000

$72,000 72

Price atSales Value

JointAllocated

UnitsSplit-offat Split-offPercentCostJoint Cost

Phils1,000$18.75$18,7500.0625$72,000$4,500

Bills1,50075.00112,5000.375072,00027,000

Gills2,50067.50

168,7500.562572,000

40,500

Total5,000

$300,000

$72,000 73

EventualSeparableHypothetical

UnitsPriceMarket Value

Costs

Market ValuePercentUps39,000$2.00$78,000$18,000$60,0000.60

Downs21,0002.1845,7805,780

40,0000.40

Total

$100,000

Ups

Downs

Joint cost$42,000$42,000

( Percent of hypothetical market value(0.60(0.40Allocated joint cost$25,200$16,80074

UnitsPercent(Joint Cost=Allocated Joint CostUps39,0000.65$42,000$27,300

Downs21,0000.3542,000

14,700

Total60,000

$42,000 75

Value of ups at split-off (39,000 ( $1.80)$70,200Value of ups when processed further$78,000

Less: Further processing cost

18,000Incremental value of further processing$60,000Ups should NOT be processed further as there will $10,200 more profit if sold at split-off.

76

1.

Units

Percent(Joint Cost=Allocated Joint CostGrade A3,0000.200$200,000$40,000

Grade B4,5000.300200,00060,000

Grade C

7,5000.500200,000

100,000

Total15,000

$200,0002.

WeightingWeighted

JointAllocated

Units

Factor

Units

Percent

Cost

Joint CostGrade A3,0004.513,5000.3750$200,000$75,000

Grade B4,5002.511,2500.3125200,00062,500

Grade C

7,5001.5

11,2500.3125200,000

62,500

Total15,000

$36,000

$200,00077

1.Constant gross margin percentage method:

Total revenue ($12 ( 4,000) + ($5 ( 12,000)$108,000100.0%

Less costs: $80,000 + $4,000 + $8,340

92,340

85.5%

Gross margin$15,660

14.5%

High

Low

Eventual market value$48,000$60,000

Less: Gross margin at 14.5% of market value

6,960

8,700

Cost of goods sold$41,040$51,300

Less: Separable costs

4,000

8,340

Allocated joint costs$37,040$42,9602.Net realizable value method:

EventualSeparableHypothetical

UnitsPriceMarket Value

Costs

Market ValuePercent

High4,000$12$48,000$4,000$44,00046%

Low12,000560,0008,340 51,660

54%

Total

$95,660

100%

High

Low

Joint cost$80,000$80,000

( Percent of hypothetical market value(0.46(0.54

Allocated joint cost$36,800$43,200 78

PercentPercent ofSales to

Allocated

of SalesProductionProductionPercentJoint CostHigh0.400.251.600.6667$53,336

Low0.600.750.800.3333

26,664

Total

2.40

$80,00079

NumberPrice atTotal Revenue

of UnitsSplit-Off

at Split-Off

Alpha1,000$2.00$2,000

Beta2,0004.509,000

Gamma2,5003.759,375

Delta6,0008.0048,000

Rho3,0000.501,500

Chi1500.2030

Psi1,0000.0440

Omega1010.00

100

$70,045Chi, Psi, and Omega are, at best, by-products. Arguably, Chi and Psi could be considered scrap. The amount of revenue they produce is not worth a great deal of effort in handling or in accounting. Note that Omega has the highest price per unit of any of the eight. Still, it is a by-product for this company unless and until they can figure out a way to produce more of it.

(Note: A similar situation exists in copper mining. Copper ore may contain gold. While the gold refined from copper ore is very valuable per ounce compared to copper, the gold is accounted for as a by-product since so little of it is produced.)

Beta, Gamma, and Delta are joint or main products due to their considerable revenue.

Alpha and Rho are probably by-products. Together, they account for just under 5 percent of the total revenue. Still, the company may choose to consider them main products based on future revenue estimates or their importance to the overall product line.

710

1.

High-Density

Low-Density

IncomePercentIncomePercent

Sales$5,250100.0%$9,000100.0%

Less: Joint cost

2,000a

38.1%

6,000b

66.7%

Gross margin$3,250

61.9%$3,000

33.3%

a[375/(375 + 1,125)] ( $8,000

b[1,125/(375 + 1,125)] ( $8,000

710Concluded

2.

High-Density

Low-Density

Defective

IncomePercentIncomePercentIncomePercent

Sales$5,250100.0%$9,000100.0%$25100.0%

Less: Joint cost

1,500a

28.6%

4,500b

50.0%

2,000c

Gross margin$3,750

71.4%$4,500

50.0%$(1,975)

a(375/2,000) ( $8,000

b(1,125/2,000) ( $8,000

c(500/2,000) ( $8,000

Previously, defective chips were thrown out and never appeared on the income statement. The entire joint cost was absorbed by the high-density and low-density chips. These product lines maintained gross margins well above the 25 percent limit.

Clearly, the gross margin for the defective chips is negative and doesnt come close to meeting the Ultratech requirements. Yet, this result would imply that LaTonya should throw away the chips instead of selling them for $25. This is a counterintuitive result.

3.A preferred method is to recognize that the defective chips are a by-product. One possibility is to treat the $25 revenue from by-product sales as a reduction in joint cost; then, allocate the remaining joint cost to the main products as follows:

High-Density

Low-Density

IncomePercentIncomePercent

Sales$5,250100.0%$9,000100.0%

Less: Allocated

joint cost

1,994a

38.0%

5,981b

66.5%

Gross profit$3,256

62.0%$3,019

33.5%

a(375/1,500) ( ($8,000 $25)

b(1,125/1,500) ( ($8,000 $25)

An alternative approach is to account for the by-product revenue as Other income or Revenue from sales of the by-product which would leave the gross margins for the main products as calculated in Requirement 1.

711

1.Net realizable value of by-product = $2 ( 60,000 = $120,000

Joint cost to be allocated = $2,520,000 ( $120,000 = $2,400,000

2.

Allocated

Units

Percent(Joint Cost=

Joint CostFirst main product90,0000.375$2,400,000$900,000

Second main product150,0000.6252,400,000

1,500,000

Total240,000

$2,400,000

712

1.

Allocated

Units

Percent(

Joint Cost

=

Joint CostTwo Oil300,0000.4546*$10,000,000$4,546,000

Six Oil240,0000.363610,000,0003,636,000

Distillates120,0000.181810,000,000

1,818,000

Total660,000

$10,000,000

*Rounded up

2.

Price atMarket Value

Allocated

Units

Split-off

at Split-off

Percent

Joint Cost

Joint CostTwo Oil300,000$20$6,000,0000.4000$10,000,000$4,000,000

Six Oil240,000307,200,0000.480010,000,0004,800,000

Distillates120,00015

1,800,0000.120010,000,000

1,200,000

Total660,000

$15,000,000

$10,000,000 problems

713

1.

Liquid SkinSilken Skin

Total

Revenue$432,000$468,000$900,000

Variable expenses

252,000

108,000

360,000

Contribution margin$180,000$360,000$540,000

Joint costs

420,000

Operating income

$120,0002.The special order requires two additional standard production runs (2 ( 120,000 gallons = 240,000 gallons). These two runs will also generate 360,000 gallons of Liquid Skin.

Income from Special Order

Liquid SkinSilken Skin

Total

Revenue$576,000a$876,000$1,452,000

Variable expenses

504,000b

204,000

708,000

Contribution margin$72,000$672,000$744,000

Joint costs

840,000

Operating income (loss)

$(96,000)

aRevenue: (360,000 ( $1.60) and (240,000 ( $3.65)

bVariable expenses: (360,000 ( $1.40) and (240,000 ( $0.85)

No. The special order will result in a $96,000 loss.

714

1.

@ 500 lbs.Process Further

Sell

Difference

Revenuesa$8,750$6,000$2,750

Bagsb0(65)65

Shippingc(250)(300)50

Grindingd(1,575)0(1,575)

Bottlese

(500)

0

(500)

$6,425$5,635$790

a500 ( 5 ( $3.50; $12 ( 500

b$1.30 ( (500/10)

c[(5 ( 500)/25] ( $2.50 = $250; $0.60 ( 500

d$3.15 ( 500

e5 ( 500 ( $0.20

Pharmadon should process the chemical further.

2.$790/500 = $1.58 additional income per pound

$1.58 ( 180,000 = $284,400

715

1.Revenues$141,500

Joint costs

131,000

Gross margin$10,5002.

Sell

Process FurtherDifference

Revenues$40,000$70,000$30,000

Further processing costs

0

11,500

11,500

Gross margin$40,000$58,500$18,500

The company should process Inex further as gross margin would increase by $18,500.

(Note: Joint costs are irrelevant to this decision, as the company will incur them whether or not Inex is processed further.)

716

1.If Altox is processed further:

If Altox is sold at split-off:

Revenue ($5.50 ( 150,000)$825,000Units at split-off170,000

Further processing costs

250,000( Price($3.50

Gross margin$575,000

Gross margin$595,000

Altox should be sold at split-off.

If Lorex is processed further:

If Lorex is sold at split-off:

Revenue ($5 ( 500,000)$2,500,000Units at split-off500,000

Further processing costs

1,400,000( Price($2.25

Gross margin$1,100,000

Gross margin$1,125,000

Lorex should be sold at split-off.

If Hycol is processed further:

If Hycol is sold at split-off:

Revenue ($1.80 ( 412,500)$742,500Units at split-off330,000

Further processing costs

75,000( Price($2.00

Gross margin$667,500

Gross margin$660,000

Hycol should be processed further.

2.a.Annual production of Dorzine50,000

( Price offered by Dietriech($0.75

Revenue$37,500

Savings on waste disposal1,750

Less: Processing costs

(43,000)

Loss on sale of Dorzine$(3,750)

Refining the waste product appears to be a poor decision, since it will cost Goodson an additional $3,750. However, there are other considerations. By converting the chemical waste to a solvent, Goodson will avoid having to locate hazardous waste disposal sites and may avoid any future litigation regarding its waste disposal.

b.Treating Dorzine as a by-product will have no effect on the decisions to process Altox, Lorex, and Hycol further, since joint costs were not considered in those decisions.

717

Goodson could account for the by-product in the following ways:

1.Show the $13,000 annual net revenue as Revenue from sale of by-product on the income statement.

2.Reduce the joint costs to be allocated to the main products by $13,000.

3.Reduce the cost of goods sold of the main products by $13,000.

718

At first, the director would probably not view the use of the museum for weddings as a joint costing problem. The first few rentals would add income to the museum and would be accounted for as Other income or Miscellaneous revenue on the income statement. Later, if the use of the museum for social affairs became more popular, some of the cost of the grounds and restaurant would no doubt be allocated to this use of the facilities. In effect, a by-product would turn into a main product.

719

1.Physical units method:

UnitsPercent(Joint Cost=Allocated Joint CostRed1500.30$5,000$1,500

Drab3500.705,000

3,500

Total500

$5,0002.Market value method:

NumberPrice atSales Value

JointAllocated

of TreesSplit-Offat Split-OffPercentCostJoint Cost

Red150$35$5,25060.00%$5,000$3,000

Drab35010

3,500 40.00%5,000

2,000

Total

$8,750100.00%

$5,000719Concluded

3.Revenue (0.7 ( 500 ( $35)

$12,250

Less:

Cost of checking seedlings ($5 ( 500)

$2,500

Cost of additional labor

275

Joint costs

5,000

7,775

Operating income

$4,475

If Vicki undertakes the genetic testing, she will make $4,475 versus the $3,750 ($8,750 $5,000) she would make selling both red and drab trees. She should have the trees tested.

720

1.a.

TotalPoundsNet

Product

Input

ProportionPounds

Lost

Pounds

Slices270,0000.3389,10089,100

Sauce270,0000.3081,00081,000

Juice270,0000.2772,9005,40067,500*

Feed270,0000.1027,000 27,000

264,600

*Net pounds = 72,900 (0.08 ( Net pounds)

1.08Net pounds = 72,900

Net pounds = 67,500

b.The net realizable value for each of the three main products is calculated as follows:

Net

Net

SellingSeparableRealizable

ProductPoundsPrice

Revenue

Costs

Value

Slices89,100$0.80$71,280$11,280$60,000

Sauce81,0000.5544,5508,55036,000

Juice67,5000.40

27,000

3,000

24,000

$142,830$22,830$120,000720Concluded

c.The net realizable value of the by-product is deducted from the production costs prior to allocation to the main products as follows:

NRV of by-product= By-product revenue Separable costs

= $0.10(270,000 ( 0.10) $700

= $2,000

Costs to be allocated= Joint cost NRV of by-product

= $60,000 $2,000

= $58,000

d.Gross margin for November:

Net Realizable

JointGross

Product

Value

Percent

Costs

Margin

Slices$60,00050%$29,000$31,000

Sauce36,00030%17,40018,600

Juice

24,000 20%

11,600

12,400

Total$120,000100%$58,000$62,000

The by-product is not allocated any joint costs.

2.Because the gross margin by main product is determined by the arbitrary allocation of joint product costs, these cost figures and the resulting gross margin information are of little use for planning and control. The allocation is made only for purposes of inventory valuation and income determination.

721

1.a

2.a

3.c

722

1.Because Product N was allocated $24,000 of the joint costs, it must account for 40 percent of the relative sales value at split-off ($24,000/$60,000 = 0.40). Therefore, Product N has a $40,000 sales value at split-off ($100,000 ( 0.40 = $40,000).

2.If the units produced approach is used, Product N will receive $30,000 in joint costs since it accounts for half of the total units produced.

723

1.a.Relative sales value method at split-off:

MonthlySalesRelative

Allocated

UnitPriceSales ValuePercent ofJoint

Outputper Unitat Split-Off

Sales

Costs

Studs75,000$8$600,00046.15%$ 461,500

Decorative pieces5,00060300,00023.08%230,800

Posts20,00020

400,000 30.77% 307,700

Total

$1,300,000100.00%$1,000,000

b.Physical units method at split-off:

Allocated

Units

Percent(

Joint Cost=Joint Costs

Studs75,0000.750$1,000,000$ 750,000

Decorative pieces5,0000.0501,000,00050,000

Posts 20,0000.2001,000,000 200,000

Total100,000

$1,000,000

c.Estimated net realizable value method:

Fully

ProcessedEstimated

MonthlySalesNet

Allocated

UnitPriceRealizablePercentJoint

Outputper Unit

Value

of Value

Costs

Studs75,000$8$600,00044.44%$ 444,400

Decorative pieces4,500*100350,000**25.93%259,300

Posts20,00020

400,000 29.63% 296,300

Total

$1,350,000100.00%$1,000,000

*5,000 monthly units of output 10% Normal spoilage = 4,500 good units

**4,500 good units ( $100 = $450,000 Further processing cost of $100,000 = $350,000

723Concluded

2.

Units

Dollars

Monthly unit output

5,000

Less: Normal further processing shrinkage

500

Units available for sale

4,500

Final sales value (4,500 units @ $100 per unit)

$450,000

Less: Sales value at split-off

300,000

Differential revenue

$150,000

Less: Further processing costs

100,000

Additional contribution from further processing

$50,0003.Assuming Sonimad Sawmill, Inc., announces that in six months it will sell the rough-cut product at split-off due to increasing competitive pressure, at least three types of likely behavior will be demonstrated by the skilled labor in the planing and sizing process, including the following:

a.Poorer quality

b.Reduced motivation and morale

c.Job insecurity, leading to nonproductive employee time looking for jobs elsewhere

Management actions that could improve this behavior include the following:

a.Improve communication by giving the workers a more comprehensive explanation as to the reason for the change in order to help them better understand the situation and bring about a plan for future operation of the rest of the plant.

b.Offer incentive bonuses to maintain quality and production and align rewards with goals.

c.Provide job relocation and internal job transfers.

collaborative learning exercise

724

1.Units produced method:

UnitsPercent(Joint Cost=Allocated Joint Cost

Coming1,00020%$6,000$1,200

Going4,000806,000

4,800

Total

$6,000

2.Net realizable value method:

EventualSeparableHypotheticalNumberHypothetical

Price

Costs

=

Price

(of Units=

Revenue

Coming$12$3$91,000$9,000

Going142124,000

48,000

Total

$57,000

HypotheticalAllocated

Revenue

Percent(Joint Cost=Joint Costs

Coming$9,00015.789%$6,000$947

Going48,00084.2116,000

5,053

Total

$6,0003.Constant gross margin percentage method:

Percent

Revenue [($12 ( 1,000) + ($14 ( 4,000)]$68,000100%

Costs [$6,000 + ($3 ( 1,000) + ($2 ( 4,000)]

17,000

25

Gross margin$51,000

75%

Coming

Going

Eventual market value$12,000$56,000

Less: Gross margin

9,000

42,000

Cost of goods sold$3,000$14,000

Less: Separable costs

3,000

8,000

Allocated joint costs$0$6,0004.The revenue provided by Going is so much higher than that provided by Coming that any allocation method relying on revenue will allocate much more of the joint cost to Going. At the extreme is the constant gross margin percentage method which allocates all of the joint costs to Going. Given this information, it would be preferable to treat Coming as a by-product and allocate all joint costs to Going. Therefore, the least desirable method is the units produced method.

cyber research case

725

Answers will vary.

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209