PPT 7 -1
Don R. Hansen
Maryanne M. Mowen
COST MANAGEMENT
PPT 7 -2
Joint Product and By-Product
Costing
Chapter Seven
PPT 7 -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.
PPT 7 -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.
PPT 7 -5
Joint Production Process
Raw Material:
HogProcessing
Hides
Pork Meat
Split-Off
Point
PPT 7 -6
Independent Multiple-Product Production
Raw Material:
Steel
Processing Taurus
MustangProcessing
PPT 7 -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.
PPT 7 -8
Joint Costs
Joint Production Costs(Manufacturing perfume)
Processing
$400,000
Processing
$100,000
Processing
$300,000
(Flower Oil)
Charm:
10,000 ounces
@ $40 per ounce
Wild Scent:
20,000 ounces
@ $10 per ounce
Wild Flower:
50,000 ounces
@ $1 per ounce
Separable
Costs
Oil
PPT 7 -9
Characteristics
By-Product Costs
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).
PPT 7 -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.
PPT 7 -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
PPT 7 -12
Methods
Accounting For Joint Product Costs
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
PPT 7 -13
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-OffGrades Feet Factor (per 1,000 ft.)
1 450,000 1.30 $300
2 1,200,000 1.10 200
3 600,000 1.00 121
4 750,000 .50 70
Total 3,000,000=======
Total joint cost is $186,000
Joint Costs Example
PPT 7 -14
Board Joint CostGrades Feet % of Units Allocation
1 450,000 .15 $ 27,900
2 1,200,000 .40 74,400
3 600,000 .20 37,200
4 750,000 .25 46,500
Total 3,000,000 $186,000======= =======
The Physical Units Method
PPT 7 -15
Board Weight Weighted # AllocatedGrades Feet Factor of Board Feet Percent Joint Cost
1 450,000 1.30 585,000 .2031 $ 37,776
2 1,200,000 1.10 1,320,000 .4583 85,244
3 600,000 1.00 600,000 .2083 38,744
4 750,000 .50 375,000 .1302 24,217
Totals 3,000,000 2,880,000 100.00 *$186,000======= ======= ===== =======
* Rounding Error
Grades with higher weights require more cost to obtain the required finish and quality appearance.
Weighted Average Method
PPT 7 -16
Board Price at Sales Value AllocatedGrades Feet Split-Off at Split-off Percent Joint Cost
1 450,000 $300 $135,000 .2699 $ 50.201
2 1,200,000 200 240,000 .4799 89,261
3 600,000 121 72,600 .1452 27,007
4 750,000 70 52,500 .1050 19,530
Totals 3,000,000 $500,100 100.00 *$186,000======= ====== ===== ======
*Rounding Error
Sales-Value-At-Split-off Method
PPT 7 -17
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 $5 $1 $4 1,000 $4,000 $2,300
Beta 4 2 2 3,000 6,000 3,450
$10,000 $5,750
Net Realizable Value Method
PPT 7 -18
Using data from the previous example:
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 profit $ 4,250 25 %Eventual market value $5,000 $12,000
Less: Gross margin @ 25% 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
===== =====
Alpha Beta
Constant Gross MarginPercentage Method
PPT 7 -19
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 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 20 0.7500 14.9504 149,504
100 100 5.0166 *100.000 $1,000,001
=== === ===== ====== ========
*Rounding error
Sales-To-Production-Ratio Method
PPT 7 -20
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
Accounting for By-Product Costs
PPT 7 -21
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) 200 14,950
Gross margin $10,050
======By-product revenue is treated as a reduction of main product manufacturing costs.
Accounting for By-Product Costs(continued)
PPT 7 -22
Sales of main product $25,000
Add net revenue of byproduct (90% x $2,000) 1,800
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) 200 16,300
Gross margin $10,500
======By-product revenue is treated as a separate revenue item.
Accounting for By-Product Costs(continued)
PPT 7 -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
PPT 7 -24
End of Chapter 7