CHAPTER : Process Costing
with Joint and
By-products
•.
Learning Outcomes
• Identify joint and by-products
• Distinguish between joint and by-products
• Explain and identify the split-off point
• Explain the alternative methods of allocating joint costs to joint
•
products
Discuss the advantages and disadvantages of the alternative
methods of allocating joint costs to joint products
Learning Outcomes (cont.)
• Explain how joint costs are treated for short-term decision•
•
•
making
Make decisions on further processing joint products or selling
them at the split-off point
Describe the accounting treatment of by-products
Explain the hybrid costing system
PROCESS COSTING –JOINT
PRODUCT
CONT’
•
•
•
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From Figure 8.1, the raw material, cocoa beans, is processed in a joint
production process.
At the end of the joint process two main or joint products, cocoa butter and
cocoa powder are produced. The point at which the joint products emerge
is known as the split-off point.
The cost incurred up to the split-off point is common to both joint products,
hence known as the joint cost or common cost.
Figure 8.1 shows that the joint cost or common cost is $1,100 per 1-ton
batch.
• This joint or common cost will have to be apportioned to the
•
joint products as these costs are incurred in the production of
the two joint products.
The joint products can be sold at the split-off point or can be
further processed before it is sold. The cocoa butter can be
further processed in a separate process to yield tanning
cream. Likewise, the cocoa powder can be further processed
to yield instant cocoa mix.
• The costs incurred in these separate further processes are
specific to the individual joint products.
• Referring to Figure 8.1, the further processing costs for
cocoa butter is $1,560 and for cocoa powder is $800.
• Subsequently, the cocoa husk which can be used as animal
feed will also emerge at the split-off point as a byproduct, but will have a less significant sales value
compared to the joint products.
• The joint cost will not be apportioned to the by-product
as it not considered as a main product (it is considered
incidental).
• Examples of industries that produce joint and byproducts include timber processing, crude oil refining,
mining, petroleum refining, paper manufacturing, meat
processing and gas manufacturing.
JOINT AND BY-PRODUCTS
 Joint and by-products are two or more products produced from the same
processing operation. These products are not distinguishable up to the point
of separation (the split-off point).
 Joint products are the main products having significant sales value. Byproducts are incidental in the production process and have insignificant
sales value.
 The net realizable value or the sales value of the by-product at the splitoff point is deducted from the joint cost of production. The joint cost less the
by-product revenue is then apportioned to the main joint products.
JOINT COSTS
• Costs incurred up to the split-off point are known as joint costs/common costs.
• Joint costs are apportioned to joint products.
• The reasons for sharing the costs are:
• To value closing inventories
• To compute costs and assess profitability
• To aid pricing decisions
•
Two main methods of apportionment:
• Physical measures
• Sales value measures
PHYSICAL MEASURES
• On the basis of physical output (weight or volume).
• Joint products are charged with a proportionate share of joint costs.
• Cost per unit is the same for each joint product.
SALES VALUE MEASURES
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Sales value at split-off point
Net realizable value
Assumes that sales revenue of joint products determines the costs to be allocated
Will result in a similar profit/sales ratio
JOINT COSTS AND
DECISION-MAKING
• Joint costs are irrelevant for further processing decision-making.
• The relevant information is the sales revenue after further
processing and the further processing costs.
• Joint products should be further processed only when the sales value
after further processing less the further processing cost is higher
than the sales value at the split-off point
JOINT COSTS AND
DECISION-MAKING
Example 8.3
ABC Company produces two joint products, Alpha and Beta. The joint
costs incurred up to the split-off point is RM500,000. At the split-off
point, 20,000 units of Alpha and 40,000 units of Beta emerge. ABC
Company can sell Alpha for RM5 per unit and Beta for RM4 per unit at
the split-off point.
ABC Company has the option to further process Alpha into
15,000 units of Superalpha is RM60,000 and Beta into 35,000 units of
Maxbeta. The further processing costs for Superalpha is RM60,000 and
for Maxbeta is RM70,000.
BY-PRODUCTS
• Incidental products that emerge in the production process.
Joint costs are not apportioned to by-products.
• It is treated in a similar manner to normal loss.
• Treatment of by-products:
• Income from by-product added to sales of the main product.
• Income from by-product treated as a separate source of income.
• Net realizable value of by-product deducted from the cost of
production.
HYBRID COSTING
• Job costing and process costing are the two main costing
methods used to measure product costs.
• Job order costing is used when small numbers of products in
distinct batches or job orders. These products differ
significantly from each other.
• Process costing is used when large numbers of relatively
homogeneous or similar products are produced in a series
of sequential processes.
HYBRID COSTING (CONT.)
• Generally, all product manufacturing will fall into one of these
•
two product costing systems. However, certain production
methods may exhibit a mix of both job costing and process
costing systems. This production method is called the hybrid
costing system.
Batch production operations have the features of both job and
process costing and hence uses a hybrid costing system. Under
such a system, conversion activities are similar across product
lines, but the direct materials used may vary considerably.
HYBRID COSTING (CONT.)
• Thus, conversion costs are assigned to products using the process
costing system, whilst direct materials are accumulated by job or
batch orders and assigned to products using the job order
costing system.
DIFFERENCE BETWEEN THE THREE PRODUCT
COSTING SYSTEMS
Job costing system
Hybrid costing system
Unique and custommade products in low
volumes
Both features of mass
production and customer
order manufacturing
Examples: house
Examples: manufacturing
construction, automotive of clothing, shoes and
repair, ship building
cars*
Process costing system
Mass production of
homogeneous products
Examples: postal delivery
service, oil refining,
paper manufacturing
* While clothes, shoes or cars can be mass produced, these products can also be
customized. The manufacturing process can be identical up to a certain point,
after which each product can be individually modified to suit customer orders.
END OF SLIDE