Joint Product
and ByProduct
Costing
Prepared by
Douglas Cloud
Pepperdine University
7-1
Objectives
1. Identify the characteristics
After studying of
thisthe joint
production process.
chapter, you should
2. Allocate joint product
be ablecosts
to: according to the
benefits-received approaches and the relative
market value approaches.
3. Describe methods of accounting for byproducts.
Continued
7-2
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.
7-3
Joint Production Process
Pork Meat
Material:
Hog
Processing
Split-Off
Point
Hides
7-4
Independent MultipleProduct Production
Processing
Mustang
Processing
Taurus
Material:
Steel
7-5
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.
7-6
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.
7-7
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).
7-8
Examples of Joint Products and
By-Products
Industry
Agriculture and Food
Industries:
Flour milling
Extractive Industries:
Copper mining
Chemical Industries:
Soap making
Manufacturing:
Cement
Joint Products and By-Products
Patent flour, clear flour,
bran, and wheat germ
Copper, gold, silver, and
other metals
Soap and glycerine
Concrete pipe and aggregate
7-9
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
7-10
Accounting For Joint Product Costs
Physical Units Method
A sawmill processes logs into four grades of lumber
totaling 3,000,000 board feet as follows:
Grades
First and second
Board Feet
450,000
Percent
of Units
0.15
No. 1 common
No. 2 common
No. 3 common
1,200,000
600,000
750,000
0.40
0.20
0.25
Totals
3,000,000
Joint Cost
Allocation
$ 27,900
74,400
37,200
46,500
$186,000
7-11
Accounting For Joint Product Costs
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:
Number
Grades of Cases
Fancy
100
Choice
120
Standard
303
Pie
70
Totals
Weight Weighted No.
Allocated
Factor of Cases Percent Joint Cost
1.30
130
0.21667
$1,083
1.10
132
0.22000
1,100
1.00
303
0.50500
2,525
0.50
35
600
0.05833
292
$5,000
7-12
Accounting For Joint Product Costs
Sales-Value-at-Split-Off Method
Using the lumber mill example from earlier--
Grades
Quantity
Produced
(board ft.)
First and second 450,000
No. 1 common 1,200,000
No. 2 common
600,000
No. 3 common
750,000
Totals
3,000,000
Price at
Split-Off
(per 1,000
board ft.)
$300
200
121
70
Sales
Value at
Split-Off
$135,000
240,000
72,600
52,500
$500,100
Percent
of Total
Market
Value
0.2699
0.4799
0.1452
0.1050
Allocated
Joint
Cost
$ 50,201
89,261
27,007
19,530
$185,999 *
*Rounding error
7-13
Accounting For Joint Product Costs
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.
Alpha
Beta
Market
Price
Further
Processing
Cost
Hypothetical
Market
Price
$5
4
$1
2
$4
2
Hypothetical Allocated
Number
Market
Joint
of Units
Value
Cost
1,000
3,000
$ 4,000
6,000
$10,000
$2,300
3,450
$5,750
7-14
Accounting For Joint Product Costs
Constant Gross Margin Percentage Method
Revenue ($5 x 1,000) + ($4 x 3,000)
Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)]
Gross margin
Percent
$17,000
100 %
12,750
75 %
$ 4,250
25 %
Alpha
Eventual market value
Less: Gross margin at 25% of market value
Cost of goods sold
Less: Separable costs
Allocated joint costs
Beta
$ 5,000 $12,000
1,250
3,000
$ 3,750 $ 9,000
1,000
6,000
$2,750 $ 3,000
7-15
Accounting For Joint Product Costs
Sales-to-Production Ratio Method
% of
Product Total Sales
A
B
C
D
E
10
20
15
40
15
100
*rounding
% of
Production
Sales-toProduction
Ratio
10
15
25
30
20
100
1.0000
1.3333
0.6000
1.3333
0.7500
5.0166
Percent
Costs Assigned
Sales/Production
19.9338 % $ 199,338
26.5778 %
265,778
11.9603 %
119,603
26.5778 %
265,778
14.9504 %
149,504
100.001*% $1,000,001
error
7-16
Accounting for ByProduct Costs
One possibility is to show
net
By-product
revenue also
sales of by-products in the “Other
can be treated as a
Income” section of the income
deduction from the cost
statement.
of the main product.
7-17
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
7-18
End of
Chapter
7-19
7-20