Cost Accounting:
Foundations and Evolutions, 9e
Kinney ● Raiborn
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 How are the outputs of a joint process classified?
 What management decisions must be made before beginning a joint process?
 How is the joint cost of production allocated to joint products?
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How are by-product and scrap accounted for?
How should retail and not-for-profit organizations account for the cost of a joint activity?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

 Joint process —single process in which one product cannot be manufactured without producing others
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Extractive industries
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Agriculture industries
Food industries
Chemical industries
Industries that produce both first-quality and factory seconds merchandise in a single operation
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When the process is unstable and is unable to maintain output at a uniform quality level or
The output quality varies
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

 Joint costs —material, labor, and overhead incurred during a joint process
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Allocate to primary products of a joint process using
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Physical measures
Monetary measures
 Interpret costs allocated to joint products carefully
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Product profitability is determined largely by the allocation method
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 A joint process produces
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Joint products —primary outputs of a joint process; substantial revenue-generating ability
By-products —incidental output of a joint process with a higher sales value than scrap but less than joint products
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Scrap —incidental output of a joint process with a low sales value
Waste —residual output with no sales value
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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Separate cost —incurred in later states of production; assignable to specific primary products
Split-off point —when joint products are first identifiable as individual products
At split-off, joint costs are allocated to joint products
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Joint costs are sunk costs once the split-off point is reached
Joint costs may be reduced by the sales value of byproducts and/or scrap
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D’s Chicken Soup Company
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Chicken Noodle
Chicken & Dumplings
Chicken Rice
Chicken
Water
Spices
Prepare vegetables, discard waste
Cook vegetables and chicken in water
 Chicken, water, spices and vegetables are joint inputs
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split off point add
Cooked, canned, and into FG inventory
Chicken
Noodle Noodles
Basic chicken soup Rice
Chicken
Rice
Dumplings
Chicken
&
Dumplings
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Decide before the joint-process is started
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Will revenues exceed total costs?
Revenue from sale of joint process outputs
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Costs
Joint costs
Processing costs after split-off
Selling costs
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What is the opportunity cost?
Is income from the joint process greater than income from other uses?
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Is the joint production process the best use of capacity?
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Decide at the split-off point
 How to classify outputs
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Primary
By-product
Scrap
Waste
Joint costs, reduced by the value of by-products and scrap, are assigned to primary products only
 Sell at split-off or process further?
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If primary products are marketable at split-off, process further only if value added to the product (incremental revenue exceeds incremental cost)
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
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Physical measure
 Common physical characteristic
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Monetary measure
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 Physical Measures
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Treats each unit as equally desirable
Assigns same cost to each unit
Provides an unchanging yardstick of output over time
Use for products with unstable selling prices
Use in rate-regulated industries
Ignores revenue-generating ability of joint product
Joint Cost
Pounds =
$150
300 lbs
 Examples of Physical
Measures
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Tons of meat, bone, and hide in meat packing and chicken processing
Tons of ore in mining
Linear board feet in lumber milling
Barrels of oil in petroleum refining
Number of computer chips in semiconductors
= $0.50 per lb
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 Monetary Measure
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Recognizes the revenue —generating ability of joint products
The base is not constant — unchanging
 Choices
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Sales value at split-off
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Net realizable value (NRV) at split-off
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Approximated NRV at split-off
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Choose a monetary allocation base
List values that comprise the base for each joint product
Sum the values
Divide each individual value by the total value; this is the numerical proportion for each value
Multiply joint costs by each proportion; this is the amount to allocate to each product
Divide allocated joint cost for each product by the number of equivalent units to obtain a cost per equivalent unit
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

(slide 1 of 3)
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Choose a monetary allocation base
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Sales value at split-off
List values that comprise the base for each joint product
Product Revenue (at split-off)
A
B
C
$ 1,000
$ 4,000
$ 5,000
Sum the values
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$1,000 + $4,000 + $5,000 = $10,000
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(slide 2 of 3)
Divide each individual value by the total value; this is the numerical proportion for each value
Product Revenue
A
B
C
$ 1,000 1,000/10,000 = 10%
$ 4,000 4,000/10,000 = 40%
$ 5,000 5,000/10,000 = 50%
$10,000 100%
Multiply joint costs ($3,000) by each proportion; this is the amount to allocate to each product
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Joint Cost
Product Joint Costs Proportion Per Product
A
B
C
$3,000 *
$3,000 *
$3,000 *
10%
40%
50%
$ 300
$1,200
$1,500
$3,000
$3,000 of joint costs are allocated to Products A, B and C
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

(slide 2 of 3)
 Divide allocated joint cost for each product by the number of equivalent units to obtain a cost per EUP
Joint Cost
Product Per Product
A $ 300 /
B
C
$1,200
$1,500 /
$3,000
/
Equivalent
Units
100
600
300
Cost
Per EU
$3.00
$2.00
$5.00
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
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Uses relative sales value at split-off point
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All joint products must be marketable at splitoff
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Uses a weighting technique based on both
 Quantity produced
 Selling price of production
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Sales revenue at split-off less product disposal costs equals NRV
NRV at split-off
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Assigns joint costs based on the proportional NRVs of the joint products at the split-off point
All joint products must be marketable at split-off
Approximated NRV at split-off
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Some or all joint products are not marketable at split-off
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Uses simulated NRV at split-off in place of actual NRV at split-off
 Incremental separate cost equals all processing and disposal costs incurred between split-of point and point of sale
Assumes that incremental revenue from further processing is equal to or greater than the incremental costs of further processing and selling
Final sales price less incremental separate costs equals simulated NRV at split-off
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

 Which monetary measure method to use?
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Sales value at split-off
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NRV at split-off
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Approximated NRV at split-off
 Superior method of measuring benefits
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Matches costs of joint processing with its benefits
Provides expected contribution of each product line to the coverage of joint costs
More complex due to required estimates
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(slide 1 of 3)
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By-products, scrap, and waste may provide substantial revenue
Companies are devoting time, attention, and creativity to developing innovative revenue sources from by-products, scrap, and waste
Sales value of by-products/scrap is recorded using
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NRV Method or
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Choose method based on
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Realized Value Method
Magnitude of NRV
Need for additional processing after split-off
Decide before joint costs are allocated to the joint products
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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(slide 2 of 3)
Selling Price
Less Process, Storage, Disposal Costs equals NRV of By-Product/Scrap NRV
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Use this method when NRV is significant
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Scrap or by-product recorded at NRV
NRV reduces joint cost of main products
Any loss is added to cost of the main products
Indirect method
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NRV reduces cost of goods sold for joint products
 Conservative; joint cost is reduced when the product/scrap is sold
Direct method
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NRV reduces work in process for joint products
 Joint cost is reduced when by-product/scrap is produced
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(slide 3 of 3)
 NRV is the traditional method, not necessarily best method
 By-products have either no assignable costs or costs equal to their net sales value
 Difficult for management to
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Monitor production and further processing of byproducts
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Make effective decisions for by-products
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(slide 1 of 2)
 First option
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Proceeds recorded as
Other Revenue
Costs of additional processing or disposal added to costs of primary products
Provides little information to management as it does not match revenues and expenses
By-product/scrap value is recognized when items sold
 Second option
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Proceeds less related costs shown as Other Income
Matches revenues and related expenses for storage, further processing, transportation, and disposal costs
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Highlights the revenue enhancement provided by managing the costs and revenues related to byproducts/scrap
Allows for better control and improved performance
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(slide 2 of 2)
 Other clerically efficient options
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Proceeds added to gross margin
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Proceeds reduce cost of goods manufactured
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Proceeds reduce cost of goods sold
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 If most jobs create byproducts or scrap
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Proceeds reduce the manufacturing overhead account
The journal entry using the realized value approach is:
 If only specific jobs create by-products or scrap
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Proceeds reduce work in process for the specific job
The journal entries using the NRV approach are:
Cash
Manufacturing Overhead
Scrap Inventory
Work in Process
Cash
Scrap Inventory
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 Joint costs include
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Advertising for multiple products
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Printing for multipurpose documents
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Events held for multiple purposes
 Not required to allocate joint costs
 Allocation base
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Physical (number of locations)
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Monetary (sales volume)
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Joint costs related to
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Fund-raising
Organizational programs (program activities)
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Conducting an administrative function
Joint costs must be allocated for NPFs and state and local government entities
Method must be rational and systematic
Clearly show the amount spent for various activities
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Three tests for allocation — purpose , audience , and content
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If tests not met, the costs are fund-raising
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Compensation tied to contributions is automatically fund-raising
Purpose is to ensure that users of financial statements can identify fund-raising costs
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 What is a joint product?
 How are costs allocated to joint products?
 What accounting methods are used to record the proceeds from the sale of by-products?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.

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 Product decisions based on sum of joint and separate processing costs
Misclassifying a joint product as by-product or scrap
Misclassifying products as waste and selling “off the books”
Manipulating joint costs in ending inventory
Using sales values of by-products and scrap to manipulate overhead allocation rates
Disposing of hazardous waste in a harmful way
Misallocating costs to programs or management activities to reduce fund-raising costs reported by a not-for-profit organization
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.