Chapter 11 Joint and by Products
Chapter 11 Joint and by Products
Chapter 11 Joint and by Products
Introduction:
Almost every company produces and sells more than one type of product.
Although companies may engage in multiple production processes to manufacture a
variety of products, they may also engage in a single process to simultaneously
generate various different outputs. For example, the refining of crude oil may produce
gasoline, motor oil, heating oil, and kerosene. A single process in which one product
cannot be manufactured without producing others is known as a joint process. Such
processes are common in the extractive, agricultural, food, and chemical industries.
The costs incurred for materials, labor, and overhead during a joint process
are referred to as the joint cost of the production process. This chapter discusses
joint processes, their related product outputs, and the accounting treatment of joint
cost. Outputs of a joint process are classified based on their revenue-generating
ability, and joint cost is allocated only to the primary products of a joint process, using
either a physical or monetary measure.
Learning objectives:
A joint process simultaneously produces more than one product line. The
product categories resulting from a joint process that have a sales value are referred
to as (1) joint products, (2) by-products, and (3) scrap.
Joint products are the primary outputs of a joint process; each joint product
individually has substantial revenue-generating ability. Joint products are the
primary reason management undertakes the production process yielding
them. These products are also called primary products, main products, or co-
products. Joint products do not necessarily have to be totally different
products; the definition of joint products has been extended to include similar
products of differing quality that result from the same process.
By-products and scrap are incidental outputs of a joint process. Both are
salable, but their sales values alone would not be sufficient for management
to justify undertaking the joint process. For example, donut hole cutouts are a
by-product of the donut-making process. Scrap may be generated in the
setup stage. By-products are viewed as having a higher sales value than
scrap.
A final output from a joint process is waste, which is a residual output that
has no sales value. A normal amount of waste may create a production cost
that cannot be avoided in some industries. Alternatively, many companies
have learned either to minimize their production waste by changing their
processing techniques or to reclassify waste as a by-product or scrap through
selling it to generate some minimal amount of revenue.
A company may change a product classification over time because of
changes in technology, consumer demand, or ecological factors. Some
products originally classified as by-products are reclassified as joint products,
whereas some joint products are reduced to the by-product category. Even
products originally viewed as scrap or waste may be upgraded to a joint
product status. Classification of joint process output is based on the judgment
of company managers, normally after considering the relative sales values of
the outputs. Classifications are unique to each company engaged in the joint
process.
The point at which joint process outputs are first identifiable as individual
products is called the split-off point. A joint process may have one or more split-
off points, depending on the number and types of output produced. Output may
be sold at the split-off point if a market exists for products in that condition.
Alternatively, some or all of the products may be processed further after exiting
the joint process.
Joint cost includes all costs incurred up to the split-off point for direct material,
direct labor, and overhead. Joint cost is allocated, at the split-off point, to only the
joint products because these products are the reason that management
undertook the production process. Allocation is necessary because of the cost
principle. Joint cost is a necessary and reasonable cost of producing the joint
products and, therefore, should be attached to them. Additional costs incurred
after the split-off point that can be identified directly with individual products are
called additional processing costs or separable costs.
Joint cost is only assigned to joint products. However, before allocation, joint cost
may be reduced by the value of the by-products and scrap. The most commonly
used methods to allocate joint costs to joint products are:
Illustration:
Unit
variable
costs 100 350 500
Budgeted 500 300 200 1000
sales
price in
units
Budgeted
sales
price in
pesos 180,000 200,000 140,000 520,000
Total
fixed
costs P795,000
The allocation of the joint cost based on sales value at split-off is shown
below:
Total
Approximated Appoximated
Joint Net Realizable Net Realizable Decimal Amount Cost per
Products Tons Value per Ton Value Fraction Joint Cost Allocated Ton
The allocation of joint costs using the net realizable value method is as
follows:
Method 1 – The net realizable value from sale of the by-products is deducted
from the cost of the main product.
Method 2 – The net realizable value from sale of the by-product is treated as
other income.
To illustrate, assume that GS Company has a production process that yields product
ABC as the main product and product X as the by-product. Data related to these
products follow:
ABC X
Sales Value 2,000,000 11,000
Processing costs up to split-off point, chargeable
To product ABC 800,000
Additional processing costs of product X 3,000
Method 1 Method 2
Sales revenue from ABC P2,000,000 P2,000,000
Other Income (11,000 – 3,000) 0 8,000
Total revenue 2,000,000 2,008,000
Cost of Sales:
Total production costs 800,000 800,000
Less by-product:
Net Realizable Value of X 8,000 0
Adjusted cost of sales 792,000 800,000
Gross margin P1,208,000 P1,208,000
Method 1 – The net realizable value of the by-product is deducted from the cost of
the main product.
2,000,00
Accounts Receivable 0
2,000,00
Sales revenue (Main Product) 0
*Debit assumed
CHAPTER EXRCISES
I – Review Questions:
II – Problems
2. BL Company produces only two products and incurs joint processing costs
that total $3,750. Products Aba and Ibi are produced in the following
quantities during each month: 4,500 and 6,000 gallons, respectively. BL also
runs one ad each month that advertises both products at a cost of $1,500.
The selling price per gallon for the two products are $20 and $17.50,
respectively.
Required:
a. What amount of joint processing costs is allocated to each product
based on gallons produced?
b. What amount of advertising cost is allocated to each product based on
sales value?
3. GAB Company produces three products from the same process and incurs
joint processing costs of $3,000.
Disposal
Sales price cost per Further Final sales
per gallon gallon at processing price per
Gallons at split-off split-off costs gallon
Mat 2,300 $ 4.50 $1.25 $1.00 $ 7.00
Nat 1,100 6.00 3.00 2.00 10.00
Qat 500 10.00 8.00 2.00 15.00
Disposal costs for the products if they are processed further are:
Required:
1) Prepare a statement showing, in parallel columns, the sales revenue,
other income, costs of goods sold, separate costs to process by-
products, and gross margin that would be reported for each of the two
methods.
2) Prepare journal entries under the two methods of accounting for by-
products.