1. Don R. Hansen Maryanne M. Mowen
COST MANAGEMENT
Don R. Hansen
Maryanne M. Mowen

2. Joint Product and By-Product Costing
Chapter Seven
Joint Product and By-Product Costing

3. Learning Objectives
Identify the characteristics of the joint production process.
Allocate joint product costs according to benefits-received approaches and the relative market value approaches.
Describe methods of accounting for by-products.

4. Learning Objectives (continued)
Explain why joint cost allocations may be misleading in management decision making.
Discuss why joint production is seldom found in service industries.

5. Joint Production Process
Pork Meat
Raw Material:
Hog
Processing
Hides
Split-Off
Point

6. Independent Multiple-Product Production
Processing
Mustang
Raw Material:
Steel
Processing
Taurus

7. Joint Production Process
Joint products are two or more products produced simultaneously by the same process up to a “split-off” point.
The split-off point is the point at which the joint products become separate and identifiable.
Separable costs are easily traced to individual products and offer no particular problem.

8. Joint Production Costs (Manufacturing perfume)
Separable
Costs
Joint Costs
Processing
$100,000
Charm:
10,000 ounces
@ $40 per ounce
Processing
$400,000
Oil
Wild Scent:
20,000 ounces
@ $10 per ounce
Processing
$300,000
(Flower Oil)
Wild Flower:
50,000 ounces
@ $1 per ounce

9. By-Product Costs Characteristics
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).

10. By-Products
The distinction between joint and by-products rests solely on the relative importance of their sales value.
A by-product is a secondary product recovered in the course of manufacturing a primary product.

11. Examples of Joint Products and By-Products
Industry Joint Products and By-products
Agriculture and Food Industries
Flour milling Patent flour, clear flour, middlings, bran, and wheatgem
Extractive Industries
Copper mining Copper, gold, silver, and other metals
Chemical Industries
Soap making Soap and glycerine
Manufacturing
Cement Concrete pipe and aggregate

12. Accounting For Joint Product Costs
Methods
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

13. Joint Costs Example An Example:
Suppose that a sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows.
Board Weight Price at Split-Off Grades Feet Factor (per 1,000 ft.)
1 450, $300
2 1,200,
3 600, ,
Total 3,000,000
=======
Total joint cost is $186,000

14. The Physical Units Method
Board Joint Cost Grades Feet % of Units Allocation
1 450, $ 27,900
2 1,200, ,400
3 600, ,200
, ,500
Total 3,000,000 $186,000
======= =======

15. Weighted Average Method
Board Weight Weighted # Allocated Grades Feet Factor of Board Feet Percent Joint Cost
1 450, , $ 37,776
2 1,200, ,320, ,244
3 600, , ,744
, , ,217
Totals 3,000,000 2,880, *$186,000
======= ======= ===== =======
* Rounding Error
Grades with higher weights require more cost to obtain the required finish and quality appearance.

16. Sales-Value-At-Split-off Method
Board Price at Sales Value Allocated Grades Feet Split-Off at Split-off Percent Joint Cost
1 450,000 $300 $135, $
2 1,200, , ,261
3 600, , ,007
, , ,530
Totals 3,000,000 $500, *$186,000
======= ====== ===== ======
*Rounding Error

17. Net Realizable Value Method
An Example:
Suppose that 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 split-off, but must be further processed . The separable costs for Alpha is $1 per gallon and for Beta is $2 per gallon. The eventual market price for Alpha is $5 and for Beta $4.
Further Hypothetical Hypothetical
Market Processing Market Number Market Allocated
Price Cost Price of Units Value Joint Cost
Alpha $ $ $ ,000 $4, $2,300
Beta ,000 6, ,450
$10, $5,750

18. Constant Gross Margin Percentage Method
Using data from the previous example:
Revenue [($5 x 1,000) + ($4 x 3,000)] $17, %
Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,
Gross profit $ 4, %
Alpha Beta
Eventual market value $5,000 $12,000
Less: Gross 25% 1, ,000
Cost of goods sold $3,750 $ 9,000
Less: Separable costs 1, ,000
Allocated joint costs $2,750 $ 3,000
===== =====

19. Sales-To-Production-Ratio Method
Assume that $1,000,000 of joint cost was allocated to five products based on the sales-to-production ratio. Note that under this method, less cost is assigned to slower moving goods like Product C, which accounted for 25% of production by only 15% of sales. A good like Product B, which accounted for just 15% of production but 20% of sales, receives relatively more joint cost. The end result is that relatively higher production cost is matched against current revenues, and the company claims lower net income for tax purposes.
%of % of Sales-to-Production Cost Assigned Product Total Sales Production Ratio Percent Sales/Prod.
A $ 199,338
B ,778
C ,603
D ,778
E ,504
* $1,000,001
=== === ===== ====== ========
*Rounding error

20. Accounting for By-Product Costs
Given for a main product and a by-product:
Total manufacturing costs of main product and by-product $22,000
Total sales of main product 25,000
Estimated net realizable value of by-product produced 2,000
Beginning inventories (including ending inventory of by-product) None
Ending inventory of main product is 25% of production volume
Ending inventory of by-product is 10% of production volume

21. Accounting for By-Product Costs (continued)
Sales of main product $25,000
Cost of goods sold:
Total manufacturing costs $22,000
Deduct net revenue of byproduct (90% x $2,000) 1,800
Net manufacturing costs $20,200
Deduct main product inventory (25% x 20,200) 5,050
Deduct byproduct inventory (10% x $2,000) ,950
Gross margin $10,050
======
By-product revenue is treated as a reduction of main product manufacturing costs.

22. Accounting for By-Product Costs (continued)
Sales of main product $25,000
Add net revenue of byproduct (90% x $2,000) ,800
Total Sales $26,800
Cost of goods sold:
Total manufacturing costs $22,000
Deduct main product inventory (25% x 22,000) 5,500
Deduct byproduct inventory (10% x $2,000) ,300
Gross margin $10,500
======
By-product revenue is treated as a separate revenue item.

23. 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 allocations are:
Output decisions
Further processing of joint products
Pricing jointly produced products

24. End of Chapter 7