joint product by product
DESCRIPTION
Joint Product by ProductTRANSCRIPT
Joint Product & By-Product Costing
Joint Product & By-Product
In many manufacturing operations, specifically in biotechnology
operations, management has no choice but to produce several
products simultaneously.
They have a single process that simultaneously generates different
outputs
For example,
making ethanol from corn, produce two or more products. While distilling corn into
ethanol, cell mass from the process—such as antibiotic and yeast fermentations
—separates from the liquid and becomes a separate product, which is often sold
as animal feed
The separation point, where outputs become distinctly identifiable as
individual product, is called the split-off point
A Joint Process
A joint process: is one during which one product
cannot be manufactured without producing others.
Such processes are common in the food, extractive,
agricultural, and chemical industries. Additionally, the
process of producing first-quality merchandise and
factory seconds in a single operation can be viewed as
a joint process
Outputs of Joint Process
A joint process inevitably produces more than one product line.
A product that results from a joint process and that has a sales value is classified as:
1. A joint product (also called a primary product, main product, or co-product)
2. A by-product or
3. Scrap
Joint Product & By-ProductJoint product (main product) is the primary output of a joint
process
Joint product has substantial revenue-generating ability and, as such, provides the financial motive for entering into the production process
By-product and Scrap are incidental outputs of a joint process
Both are salable, with by-products having a higher sales value than scrap
The final residual output from a joint process is Waste which has no sales value
Joint Product & By-Product
The classification of products as main, joint, or by-product depends on its sales value
Products can change from by-products to joint products when their relative sales values increases and changes from joint products to by-products when their relative sales value decreases
Because of technology advances, consumer demands and ecological factors
Joint Cost
Joint cost includes all direct material, direct labor, and overhead costs incurred up to the split-off point
Financial reporting requires that all necessary and reasonable costs of production be attached to products
The Purpose of Allocating Joint Cost to Products Inventory Costing: Important for financial accounting
purposes, reports to income tax authorities, and internal reporting purposes
Cost Reimbursement Contracts: Cost allocation is required for cost reimbursement purposes under contracts when only a proportion of a business products or services is sold to a single customer (Government Agency)
Insurance Settlements: Requires cost allocation when damage claims made by business with join products, main products, or by-products are based on cost information
Rate Regulation: The allocation of joint cost is required if one or more of the jointly produced products or services are subject to price regulation
Litigation: Joint cost allocation is important in litigation involving one or more joint products
Model of a Joint Process
Approaches to Allocating Joint Costs
Two (2) basic ways to allocate
joint costs to products are:
Approach 1:Market based
Or Monetary Measures Allocation
Approach 2:Physical Measure
Allocation
Approaches to Allocating Joint Costs
Approach 1 Approach 2
The Sales Value at Split-Off Point
The Estimated Net Realizable Value (NRV) Method
The Constant Gross Margin Percentage Method
Allocates Joint Cost to
Joint Products on the
basis of Relative
Physical Characteristics
of the Joint Products
Allocating Joint Cost Harkins Poultry incurred $5,400,000 of joint cost
to produce the following:
Item Quantity Selling Price Breast 3800 tons $2800 per ton Ground 2400 tons $1800 per ton Whole 2800 tons $1200 per ton
Required: Allocate the joint costs to joint products on the basis of relative sales value at split-off point.
Allocating Joint Cost
Joint Product
Tons Produced
Selling Price
Total Revenue Proportion Joint Cost Amount Allocated
Cost per Ton
Breast 3800 $2,800 $10,640,000 0.5808
$5,400,000
$3,136,245 $825.33
Ground 2400 $1,800 $4,320,000 0.2358 $1,273,362 $530.57
Whole 2800 $1,200 $3,360,000 0.1834 $990,393 $353.71
Total 9000 $18,320,000
Journal Entry
Work-In-Process Inventory (Turkey Processing) Dr. 5,400,000
Various accounts* Cr. 5,400,000
[To record joint processing costs]
* Various accounts includes: Material Inventory Control Account; Payroll Control Account; Factory O/H Control Account / Factory O/H Applied Account
Work-In-Process – Breast Dr. 3,136,245
Work-In-Process – Ground Dr. 1,273,362
Work-In-Process – Whole Dr. 990,393
Work-In-Process – Turkey Processing Cr. 5,400,000
[To allocate joint processing costs]
Allocating Joint Cost
Now assume that all tons produced of Breast and Ground were sold out at split-off point without no further processing, however, 50% of Whole remain in inventory.
What is the gross margin percentage of each product?
Tips
The sales value at split-off method produces an identical gross margin for each joint product
Allocating Joint Cost
Product Whole: Revenues: 2800*0.5*1200 $1,680,000 Less: Cost of goods sold:
Joint product cost $990,393
Less: Ending Inventory $495,197
$495,196 Gross Margin $1,184,804
Allocating Joint Cost
Product $Sales Joint Cost Allocated
Gross Margin Gross Margin Percentage
Breast
$10,640,000 $3,136,245 $7,503,755 70.52%
Ground
$4,320,000 $1,273,362 $3,046,638 70.52%
Whole
$1,680,000 $495,196 $1,184,804 70.52%
Estimated Net Realizable Value Method
Products may processed further beyond the split-off point to make them marketable or increase their value
The estimated NRV Method allocate joint costs to joint products on the basis of the relative estimated NRV
NRV = (Expected Final Sales Value in the Ordinary Course of Business) –(Expected Separable Costs of the Total Production of
These Products)
Estimated Net Realizable Value Method Assume that Harkins Poultry can process products
Breast, Ground, and Whole into QBreast, BGround, and HQWhole. The new sales price per ton after the processing are $3200, $2100, and $1500 respectively. Additional processing costs (separable costs) are $300, $200, and $110 per ton respectively.
Required:
1. What is the estimated NRV of each product at the split-off point?
2. How much of the joint cost is allocated to each product?
Estimated Net Realizable Value Method
Product QuantityNew Sales Price
Additional Processing Cost NRV Proportion
Allocated Cost
Cost Per Ton
QBreast 3800 3200 300 11020000 0.566 3056081 804.23
BGround 2400 2100 200 4560000 0.234 1264585 526.91
HQWhole 2800 1500 110 3892000 0.200 1079334 385.48
TOTAL 19472000
Journal EntryWork-In-Process Inventory (Turkey Processing) Dr. 5,400,000
Various accounts* Cr. 5,400,000
[To record joint processing costs]
Work-In-Process – QBreast Dr. 3,056,081
Work-In-Process – BGround Dr. 1,264,585
Work-In-Process – HQWhole Dr. 1,079,334
Work-In-Process – Turkey Processing Cr. 5,400,000
[To allocate joint processing costs]
Work-In-Process – QBreast Dr. 300
Work-In- Process – BGround Dr. 200
Work-In-Process – HQWhole Dr. 110
Various Account Cr. 610
[To record separable costs]
Physical Measure Method
Product Quantity Proportion Joint Cost Allocated Cost
Cost Per Ton
Breast
3800 0.422 2280000 600Ground
2400 0.267 5400000 1440000 600Whole
2800 0.311 1680000 600Total
9000
Problem for self-study
Problem for self-study
Requirement (a)
Requirement (b)Work – In – Process Inventory (Processing) 520000
Various Accounts 520000
To record joint processing costs
Work – In – Process Inventory (Division 1) 312000
Work – In – Process Inventory (Division 1) 208000
Work – In – Process Inventory (Processing) 520000
To record joint costs to joint products
Work – In – Process Inventory (Division 1) 649026
Work – In – Process Inventory (Division 1) 387600
Various Accounts 1036626
To record separate processing costs
Requirement (b)Work – In – Process Inventory (Division 1) 122094
Various Accounts 122094
To record processing costs for JP#89-43A
Finished goods Inventory JP#89-43A 1083120
Finished Goods Inventory JP#89-43B 595600
Work – In – Process Inventory (Division A) 1083120
Work – In – Process Inventory (Division B) 595600
To Transfer completed production to finished goods
Requirement (c)
Product Quantity Produced
NRV Total NRV
Weight Joint Cost
Allocated Joint Cost
JP#89-43A 214200* 3.60 771120 0.70520000
364000
JP#89-43B 204000** 2.65 336600 0.30 156000
WORKINGS
* Final Output of Division A =(600000-90000)*0.6*0.7 = 214200
NRV (JP#89-43A): (8.00 - 3.03 - 0.57 – 0.80) = 3.60
Separable cost per unit (Division A) = 649026/214200Packaging cost per unit (Division A) = 122094/214200Selling cost per unit (Division A) = 0.80**Final Output of Division B = (600000-90000)*.4 =204000NRV (JP#89-43B): (3.70 – 1.90 – 0.15) = 1.65Separable cost of (Division B) = 387600/204000 = 1.90Selling cost per unit (Division B) = 0.15
Requirement (d)
