Cost Accounting /
By-Product and Joint Product Costing
Costing of Services
Course for Students of IB@M
Prof. Dr. Wolfgang Seyfert
Lesson 6
September 2000
Prof. Dr. Wolfgang Seyfert
1
Learning Objectives / Literature
After learning this lesson, you should be able to
 Differentiate between by-products and joint
products
 competently use adequate costing procedures
for them
 transfer cost accounting principles from
manufacturing to service industries
 Literature
Schaum 87-97
Oliver 179-199
September 2000
Prof. Dr. Wolfgang Seyfert
2
Joint products / By-products
By Product of a Power
Plant is „Heat“
Comparable volume to
the main product
„electricity“
Much lower value than
the main product
September 2000
Joint Products of an
oil refinery are
Diesel
Gasoline
Comparable Volume
Comparable Value
Prof. Dr. Wolfgang Seyfert
3
Accounting for By-Products recognized
when produced (1)
Net Income " Net realizable value" 
 Total production costs Dep.1 


 - exp. sales val. by - product 
Sales main product - 
 ending inv. main product

 add. proc. costs by - product


  M & A costs by - product) 
- M & A costs main product
Example Schaum p.90
September 2000
Prof. Dr. Wolfgang Seyfert
4
Accounting for By-Products recognized
when produced (2)
Gross profit  Sales - prod. costs - processing costs
Prod. Costs  Sales - processing costs - gross profit
Net Income " Reversal cost" 
Sales main product  Sales by - product
 Total production costs Dep.1   exp. sales val by - product


 

- exp. sales val. by - product   - add. proc. costs by - product 

- 
-


 add. proc. costs by - product
- exp. GP by - product

 

  exp GP by - product)
   add. proc. costs by - product 
 ending inv. main product  ending inv. by - product
- M & A costs main product - M & A costs by - product
Example Schaum p.90
September 2000
Prof. Dr. Wolfgang Seyfert
5
Accounting for By-Products recognized
when produced (3)
 " Net realizable value" - " Reversal cost"
 Exp. sales value by - product - actual Sales by - product
 ending inv. main product (Net realizable)
- ending inv. main product (Reversal cost)
- ending inv. by - product (Reversal Cost)
Example Schaum p.90
September 2000
Prof. Dr. Wolfgang Seyfert
6
Accounting for By-Products recognized
when produced (4)
Net realizable
Value
Calculation
Reversal Cost
Sales main product
Sales By-Product
Expected Sales By-Product
Ending Inventory only main product
Ending Inventory main product
Ending Inventory By-product
Total Production Costs Dep. I
Add. Processing Costs
Mark. and Admin Expenses
300.000
300.000
21.000
150.000
4.500
24.000
16.163
10.350
150.000
4.500
24.000
Net Income
177.938
169.013
42.000
14.438
Example Schaum p.90
September 2000
Prof. Dr. Wolfgang Seyfert
7
Joint Products
Unavoidable physical relationship
Split-off point, where separate emerge
None of the joint products are significantly
greater in value than others
Costing Methods
Market Value at Split-off Point
Net Realizable Value Method
Physical Output
}Very similar
(Schaum, p. 91-93)
September 2000
Prof. Dr. Wolfgang Seyfert
8
Costing of Services
Similarities between Service and Manufacturing
industries
Both provide something valuable to the customer
Both make design and operating decisions concerning products
both allocate scarce ressources
Differences
Products are consumed, services are experienced; services are
not always well defined
Services often do not have clear input-output-relationships
Unused capacity cannot be used for stocking in service industry
Oliver 181-183
September 2000
Prof. Dr. Wolfgang Seyfert
9
Costing of Services /
Cost Categories (for an emergency room)
Service labor: Medical and support staff
Materials and Supplies: Hospital supplies, laboratory
and othre medical tests
Technology Costs: Depreciation and maintenance of
technical equipment
Occupancy Costs: Rent, depreciation, repairs and
maintenance of space used
Other service overhead costs: All the rest
Oliver 185
September 2000
Prof. Dr. Wolfgang Seyfert
10
Costing of Services /
The costing process
Identify the item to be costed (cost object)
Classify costs by cost categories
Determine direct costs
Identify indirect costs
Assign indirect costs
Calculate the Total Service Costs
Oliver 184-187
September 2000
Prof. Dr. Wolfgang Seyfert
11
Costing of Services /
Examples
Discussion of the example in Oliver (P. 187-194)
Work out the differences to example p. 195-196
How would direct costing of the services look
like?
How could we cost „what happens in this room
(F116)“
September 2000
Prof. Dr. Wolfgang Seyfert
12