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Joint Product and By-Product Costing. Prepared by Douglas Cloud Pepperdine University. Objectives. 1. Identify the characteristics of the joint production process. 2. Allocate joint product costs according to the benefits-received approaches and the relative market value approaches.

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Joint Product and By-Product Costing

Prepared by

Douglas Cloud Pepperdine University


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Objectives

1. Identify the characteristics of the joint production process.

2. Allocate joint product costs according to the benefits-received approaches and the relative market value approaches.

3. Describe methods of accounting for by-products.

After studying this chapter, you should be able to:

Continued


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Objectives

4. Explain why joint cost allocations may be misleading in management decision making.

5.Discuss why joint production is seldom found in service industries.


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Joint Production Process

Pork Meat

Material: Hog

Processing

Hides

Split-Off

Point


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Independent Multiple-Product Production

Mustang

Processing

Material: Steel

Taurus

Processing


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Joint Production Process

Joint productsare two or more products produced simultaneously by the same process up to a “split-off” point.

The split-off pointis the point at which the joint products become separate and identifiable.

Separable costsare easily traced to individual products and offer no particular problem.


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The distinction between joint and by-products rests solely on the relative importance of their sales value.

A by-productis a secondary product recovered in the courseof manufacturing a primary product.


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By-products can be characterized by their relationship to the main products in the following manner:

  • By-product resulting from scrap, trimmings, and so forth, of the main products in essentially nonjoint product types of undertakings (e.g., fabric trimmings from clothing pieces).

  • Scrap and other residue from essentially joint product types of processes (e.g., fat trimmed from beef carcasses).

  • A minor joint product situation (fruit skins and trimmings used as animal feed).


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Examples of Joint Products and the main products in the following manner:By-Products

Industry

Joint Products and By-Products

Agriculture and Food

Industries:

Flour milling Patent flour, clear flour, bran, and wheat germ

Extractive Industries:

Copper mining Copper, gold, silver, and other metals

Chemical Industries:

Soap making Soap and glycerine

Manufacturing:

Cement Concrete pipe and aggregate


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Accounting For Joint Product Costs the main products in the following manner:

Benefits-Received Approaches

  • Physical Units Method

  • Weighted Average Method

    Allocation Based on Relative Market Value

  • Sales-Value-at-Split-Off-Method

  • Net Realizable Value Method


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Accounting For Joint Product Costs the main products in the following manner:

Physical Units Method

A sawmill processes logs into four grades of lumber totaling 3,000,000 board feetas follows:

Percent Joint Cost

Grades Board Feet of Units Allocation

First and second 450,000 0.15 $ 27,900

No. 1 common 1,200,000 0.40 74,400

No. 2 common 600,000 0.20 37,200

No. 3 common 750,000 0.25 46,500

Totals 3,000,000 $186,000


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Accounting For Joint Product Costs the main products in the following manner:

Number Weight Weighted No. Allocated

Grades of Cases Factor of Cases Percent Joint Cost

Fancy 100 1.30 130 0.21667 $1,083

Choice 120 1.10 132 0.22000 1,100

Standard 303 1.00 303 0.50500 2,525

Pie 70 0.50 35 0.05833 292

Totals 600 $5,000

Weighed Average Method

A peach canning factory purchases $5,000 of peaches and grades and cans them by quality. The following data pertains to this operation:


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Accounting For Joint Product Costs the main products in the following manner:

Sales-Value-at-Split-Off Method

Using the lumber mill example from earlier--

Price at Percent

Quantity Split-Off Sales of Total Allocated

Produced (per 1,000 Value at Market Joint

Grades (board ft.) board ft.) Split-Off Value Cost

First and second 450,000 $300 $135,000 0.2699 $ 50,201

No. 1 common 1,200,000 200 240,000 0.4799 89,261

No. 2 common 600,000 121 72,600 0.1452 27,007

No. 3 common 750,000 70 52,500 0.1050 19,530

Totals 3,000,000 $500,100 $185,999

*

*Rounding error


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Accounting For Joint Product Costs the main products in the following manner:

Net Realizable Value Method

A company manufactures two products, Alpha and Beta, from a joint process. One production run costs $5,750 and results in 1,000 gallons of Alpha and 3,000 gallons of Beta. Neither product is salable at the split-off point, but must be further processed. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon.

Further Hypothetical Hypothetical Allocated

Market Processing Market Number Market Joint

Price Cost Price of Units Value Cost

Alpha $5 $1 $4 1,000 $ 4,000 $2,300

Beta 4 2 2 3,000 6,000 3,450

$10,000 $5,750


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Accounting For Joint Product Costs the main products in the following manner:

Alpha Beta

Eventual market value $ 5,000 $12,000

Less: Gross margin at 25% of market value 1,250 3,000

Cost of goods sold $ 3,750 $ 9,000

Less: Separable costs 1,000 6,000

Allocated joint costs $2,750 $ 3,000

Constant Gross Margin Percentage Method

Percent

Revenue ($5 x 1,000) + ($4 x 3,000) $17,000 100 %

Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,750 75 % Gross margin $ 4,250 25 %


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Accounting For Joint Product Costs the main products in the following manner:

Sales-to-Production Ratio Method

Sales-to-

% of % of Production Costs Assigned

Product Total Sales Production Ratio Percent Sales/Production

A 10 10 1.0000 19.9338 % $ 199,338

B 20 15 1.3333 26.5778 % 265,778

C 15 25 0.6000 11.9603 % 119,603

D 40 30 1.3333 26.5778 % 265,778

E 15 200.750014.9504 % 149,504

100 100 5.0166 100.001 % $1,000,001

*

*rounding error


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Accounting for By-Product Costs the main products in the following manner:

By-product revenue also can be treated as a deduction from the cost of the main product.

One possibility is to show net sales of by-products in the “Other Income” section of the income statement.


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Effect of Joint Product Costs on Cost Control and Decision Making

  • It is important to understand when the use of allocated joint product costs may be misleading.

  • In making decisions relative to jointly produced articles, it must be remembered that the products are necessarily produced jointly.

  • Some areas that can be affected by joint cost allocationsare:

    • Output decisions

    • Further processing of joint products

    • Pricing jointly produced products


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End of Making

Chapter