COST MANAGEMENT
Don R. Hansen
Maryanne M. Mowen
PPT 7 -1
Chapter Seven
Joint Product and
By-Product
Costing
PPT 7 -2
Learning Objectives

Identify the characteristics of the joint production
process.

Allocate joint product costs according to benefitsreceived approaches and the relative market
value approaches.

Describe methods of accounting for by-products.
PPT 7 -3
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 -4
Joint Production Process
Pork Meat
Raw Material:
Hog
Processing
Split-Off
Point
Hides
PPT 7 -5
Independent Multiple-Product
Production
Processing
Mustang
Processing
Taurus
Raw Material:
Steel
PPT 7 -6
Joint Production Process
Joint products are two or more products produced
simultaneously by the same process up to a “splitoff” 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 -7
Joint Production Costs
(Manufacturing perfume)
Joint Costs
Separable
Costs
Processing
$100,000
Oil
Processing
$400,000
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
PPT 7 -8
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 jointproduct types of processes (e.g., fat trimmed from
beef carcasses).

A minor joint product situation (fruit skins and
PPT 7 -9
trimmings used as animal feed).
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 -10
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 -11
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
PPT 7 -12
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
Feet
Weight
Factor
Price at Split-Off
(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
=======
Grades
Total joint cost is $186,000
PPT 7 -13
The Physical Units Method
Board
Feet
% of Units
Joint Cost
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
=======
Grades
$186,000
=======
PPT 7 -14
Weighted Average Method
Grades
1
2
3
4
Totals
* Rounding
Board
Feet
450,000
1,200,000
600,000
750,000
3,000,000
=======
Weight
Factor
1.30
1.10
1.00
.50
Weighted #
of Board Feet
585,000
1,320,000
600,000
375,000
2,880,000
=======
Percent
.2031
.4583
.2083
.1302
100.00
=====
Allocated
Joint Cost
$ 37,776
85,244
38,744
24,217
*$186,000
=======
Error
Grades with higher weights require more cost to obtain the required finish and
quality appearance.
PPT 7 -15
Sales-Value-At-Split-off Method
Grades
1
2
3
4
Totals
Board
Feet
450,000
1,200,000
600,000
750,000
3,000,000
=======
Price at
Split-Off
$300
200
121
70
Sales Value
at Split-off
$135,000
240,000
72,600
52,500
$500,100
======
Percent
.2699
.4799
.1452
.1050
100.00
=====
Allocated
Joint Cost
$ 50.201
89,261
27,007
19,530
*$186,000
======
*Rounding Error
PPT 7 -16
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.
Alpha
Beta
Market
Price
$5
4
Further
Hypothetical
Processing
Cost
$1
2
Market
Price
$4
2
Hypothetical
Number
of Units
1,000
3,000
Market
Value
$4,000
6,000
$10,000
Allocated
Joint Cost
$2,300
3,450
$5,750
PPT 7 -17
Constant Gross Margin
Percentage Method
Using data from the previous example:
Revenue [($5 x 1,000) + ($4 x 3,000)]
Costs[$5,750 + ($1 x 1,000) + ($2 x 3,000)]
Gross profit
$17,000
12,750
$ 4,250
100 %
75
25 %
Alpha
Beta
Eventual market value
Less: Gross margin @ 25%
Cost of goods sold
Less: Separable costs
$5,000
1,250
$3,750
1,000
$12,000
3,000
$ 9,000
6,000
Allocated joint costs
$2,750
=====
$ 3,000
=====
PPT 7 -18
Sales-To-Production-Ratio Method
Assume that $1,000,000 of joint cost was allocated to five products based on the sales-toproduction 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.
Product
A
B
C
D
E
%of
Total Sales
10
20
15
40
15
100
===
% of
Production
10
15
25
30
20
100
===
Sales-to-Production
Ratio
Percent
1.0000
19.9338
1.3333
26.5778
0 .6000
11.9603
1.3333
26.5778
0.7500
14.9504
5.0166
*100.000
=====
======
Cost Assigned
Sales/Prod.
$ 199,338
265,778
119,603
265,778
149,504
$1,000,001
========
*Rounding error
PPT 7 -19
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
PPT 7 -20
Accounting for By-Product Costs
(continued)
Sales of main product
Cost of goods sold:
Total manufacturing costs
Deduct net revenue of byproduct (90% x $2,000)
Net manufacturing costs
Deduct main product inventory (25% x 20,200)
Deduct byproduct inventory (10% x $2,000)
Gross margin
$25,000
$22,000
1,800
$20,200
5,050
200
14,950
$10,050
======
By-product revenue is treated as a reduction of main product manufacturing costs.
PPT 7 -21
Accounting for By-Product Costs
(continued)
Sales of main product
Add net revenue of byproduct (90% x $2,000)
Total Sales
Cost of goods sold:
Total manufacturing costs
Deduct main product inventory (25% x 22,000)
Deduct byproduct inventory (10% x $2,000)
Gross margin
$25,000
1,800
$26,800
$22,000
5,500
200
16,300
$10,500
======
By-product revenue is treated as a separate revenue item.
PPT 7 -22
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 -23
End of Chapter 7
PPT 7 -24