7-1 Joint Product and By- Product Costing Prepared by Douglas Cloud Pepperdine University Prepared by Douglas Cloud Pepperdine University

7-2 1.Identify the characteristics of the joint production process. 2.Allocate joint product costs according to the benefits-received approaches and the relative market value approaches. 3.Describe methods of accounting for by- products. ObjectivesObjectives After studying this chapter, you should be able to: ContinuedContinued

7-3 4.Explain why joint cost allocations may be misleading in management decision making. 5.Discuss why joint production is seldom found in service industries. ObjectivesObjectives

7-4 Joint Production Process Material: Hog Processing Split-Off Point Pork Meat Hides

7-5 Independent Multiple- Product Production Processing Processing Mustang Taurus Material: Steel

7-6 Joint Production Process Joint products are two or more products produced simultaneously by the same process up to a “split-off” 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.

7-7 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.

7-8 By-products can be characterized by their relationship to the main products in the following manner:  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 joint product types of processes (e.g., fat trimmed from beef carcasses).  A minor joint product situation (fruit skins and trimmings used as animal feed).

7-9 Examples of Joint Products and By-Products Agriculture and Food Industries: Flour millingPatent flour, clear flour, bran, and wheat germ Extractive Industries: Copper miningCopper, gold, silver, and other metals Chemical Industries: Soap makingSoap and glycerine Manufacturing: CementConcrete pipe and aggregate Industry Joint Products and By-Products

7-10 Accounting For Joint Product Costs 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

7-11 A sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows: Accounting For Joint Product Costs Physical Units Method Percent Joint Cost Grades Board Feet of Units Allocation First and second450, $ 27,900 No. 1 common1,200, ,400 No. 2 common600, ,200 No. 3 common 750, ,500 Totals3,000,000$186,000

7-12 Accounting For Joint Product Costs Weighed Average Method A peach canning factory purchases $5,000 of peaches and grades and cans them by quality. The following data pertains to this operation: Number Weight Weighted No. Allocated Grades of Cases Factor of Cases Percent Joint Cost Fancy $1,083 Choice ,100 Standard ,525 Pie Totals600$5,000

7-13 Accounting For Joint Product Costs Sales-Value-at-Split-Off Method Using the lumber mill example from earlier-- Price at Percent Quantity Split-Off Sales of Total Allocated Produced (per 1,000 Value at Market Joint Grades (board ft.) board ft.) Split-Off Value Cost First and second450,000$300$135, $ 50,201 No. 1 common1,200, , ,261 No. 2 common600, , ,007 No. 3 common 750, , ,530 Totals3,000,000$500,100$185,999 * *Rounding error

7-14 Accounting For Joint Product Costs Net Realizable Value Method 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 the split-off point, but must be further processed. The separable cost for Alpha is $1 per gallon and for Beta is $2 per gallon. Further Hypothetical Hypothetical Allocated Market Processing Market Number Market Joint Price Cost Price of Units Value Cost Alpha$5$1$41,000$ 4,000$2,300 Beta4223,000 6,000 3,450 $10,000$5,750

7-15 Accounting For Joint Product Costs Constant Gross Margin Percentage Method Percent Revenue ($5 x 1,000) + ($4 x 3,000)$17,000100% Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,750 75% Gross margin$ 4,25025% Alpha Beta Eventual market value$ 5,000$12,000 Less: Gross margin at 25% of market value 1,250 3,000 Cost of goods sold$ 3,750$ 9,000 Less: Separable costs 1,000 6,000 Allocated joint costs$2,750$ 3,000

7-16 Accounting For Joint Product Costs Sales-to-Production Ratio Method Sales-to- % of % of Production Costs Assigned Product Total Sales Production Ratio Percent Sales/Production A %$ 199,338 B %265,778 C %119,603 D %265,778 E % 149, %$1,000,001 * * rounding error

7-17 Accounting for By- Product Costs One possibility is to show net sales of by-products in the “Other Income” section of the income statement. By-product revenue also can be treated as a deduction from the cost of the main product.

7-18 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

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