1-1

8
Joint Process Costing
Student Tutorial

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-2

COMMON
Joint
COMMONIMPUT
IMPUT
Processes
JOINT
JOINTPROCESS
PROCESS

FINAL
FINAL FINAL
FINAL
PRODUCT
PRODUCTAA PRODUCT
PRODUCTBB

INTERMEDIATE
INTERMEDIATE INTERMEDIATE
INTERMEDIATE
PRODUCT
PRODUCT AA PRODUCT
PRODUCT BB

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-3

COMMON
Joint
COMMONIMPUT
IMPUT
Processes
SPLIT-OFF
SPLIT-OFF
POINT JOINT
JOINTCOSTS
COSTSare
are
POINT
Point
Pointatat which
which
JOINT
JOINTPROCESS
PROCESS costs
coststo
tooperate
operate
joint-products joint
jointprocesses
processes
joint-products
appear
appear

AAJOINT
JOINT
FINAL
FINAL FINAL
FINAL PROCESS
PROCESS
PRODUCT
PRODUCTAA PRODUCT
PRODUCTBB simultaneously
simultaneously
converts
convertsaa
common
commoninput
input
INTERMEDIATE
INTERMEDIATE INTERMEDIATE
INTERMEDIATE into
intoseveral
several
PRODUCT
PRODUCT AA PRODUCT
PRODUCT BB outcomes
outcomes

Return
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-4

Joint
Logs
Logs Processes -
Example
Sawmill
Sawmill

Specially
Specially Standard
Standard
Lumber
Lumber Lumber
Lumber

Woodchips
Woodchips Woodchips
Woodchips
&&Sawdust
Sawdust &&Sawdust
Sawdust

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-5

The Decision Challenge: Which

Joint Products to Produce

The objective
governing
production of joint
products is
maximizing profit

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-6

Estimating
Profit From Joint Products
Four
Foursteps
stepsfor
forusing
usingconstrained
constrainedmill
millcapacity:
capacity:

1.
1. Identify
Identifyall
allalternative
alternativesets
setsand
andquantities
quantitiesof
offinal
final
products
productspossible
possiblefrom
fromthe
thejoint
joint process.
process.

2.
2. Forecast
Forecast the
thesales
salesprice
priceof
of each
eachproduct.
product.

3.
3. Estimate
Estimatethe
thecosts
costs(if
(ifany)
any)required
requiredto
tofurther
further
process
processjoint
joint products
productsinto
intosalable
salableproducts.
products.

4.
4. Choose
Choosethe
theset
set of
of products
productswith
with the
theoverall
overallmaximum
maximum
profit.
profit.

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-7

Sell Intermediate Products Or

Process Them Further?

What is the potential

What are the
additional revenue
additional costs of
after further
further processing?
processing?

Net
Netrealizable
realizablevalue
value(NRV)
(NRV)
== Sales
Salesvalue
value--further
furtherprocessing
processingcosts
costsafter
aftersplit
split off
off

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-8

Which Products Should Acme

Produce And Sell?
TheAcme
The AcmeCompany
Companyprocesses
processeschemical
chemicalR-1R-1through
throughaa
jointproduction
joint productionprocess.
process. The
Thecomplete
completeprocess
process
producesthree
produces threeproducts:
products:
A, B,
A, B,and
and C.
C. The
Theproducts
productscannot
cannot bebesold
soldat
at the
thesplit-off
split-off
point.The
point. Theproducts
productsgenerate
generatethe
thefollowing
followingsales
salesafter
after
furtherprocessing.
further processing.
AA BB CC ..
Salesrevenues:
Sales revenues: $$20,000
20,000 $$35,000
35,000 $$55,000
55,000
Furtherprocessing
Further processingcosts:$
costs:$38,000
38,000 $$30,000
30,000 $$40,000
40,000
GrossMargin
Gross Margin ?? ?? ??

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-9

Which Products Should Acme

Produce And Sell?
TheAcme
The AcmeCompany
Companyprocesses
processeschemical
chemicalR-1R-1through
throughaa
jointproduction
joint productionprocess.
process. The
Thecomplete
completeprocess
process
producesthree
produces threeproducts:
products:
A, B,
A, B,and
and C.
C. The
Theproducts
productscannot
cannot bebesold
soldat
at the
thesplit-off
split-off
point.The
point. Theproducts
productsgenerate
generatethe
thefollowing
followingsales
salesafter
after
furtherprocessing.
further processing.
AA BB CC ..
Salesrevenues:
Sales revenues: $$20,000
20,000 $$35,000
35,000 $$55,000
55,000
Furtherprocessing
Further processingcosts:$
costs:$38,000
38,000 $$30,000
30,000 $$40,000
40,000
GrossMargin
Gross Margin $(18,000) $$ 5,000
$(18,000) 5,000 $$15,000
15,000

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-10

Sell Intermediate Products Or

Process Them Further?
In
Indeciding
deciding whether
whetherto to sell
sellat
atsplit-off
split-off or
or
process
processfurther,
further,what
what should
shouldmanagement
management
dodowith
withjoint
joint costs?
costs?
A.
A. Allocate
Allocateaaportion
portionto to the
theeach
each product
product
B.
B. Process
Processfurther
furtherifif the
thejoint
jointcost
cost>> sales
sales
value
value
C.
C. Sell
Sell at
at split-off
split-off ififthe
thejoint
joint cost
cost >> sales
sales
value
value
D.
D. Ignore
Ignorethethejoint
joint cost
cost ininmaking
makingthethe
decision
decision

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-11

Sell Intermediate Products Or

Process Them Further?
In
Indeciding
deciding whether
whetherto to sell
sellat
atsplit-off
split-off or
or
process
processfurther,
further,what
what should
shouldmanagement
management
dodowith
withjoint
joint costs?
costs?
A.
A. Allocate
Allocateaaportion
portionto to the
theeach
each product
product
B.
B. Process
Processfurther
furtherifif the
thejoint
jointcost
cost>> sales
sales
value
value
C.
C. Sell
Sell at
at split-off
split-off ififthe
thejoint
joint cost
cost >> sales
sales
value
value Nope.
Nope.
D.
D. Ignore
Ignorethethejoint
joint cost
cost ininmaking
makingthethe Allocation
Allocation
decision
decision might
might
overestimate
overestimate
costs.
costs.
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-12

Sell Intermediate Products Or

Process Them Further?
In
Indeciding
deciding whether
whetherto to sell
sellat
atsplit-off
split-off or
or
process
processfurther,
further,what
what should
shouldmanagement
management
dodowith
withjoint
joint costs?
costs?
A.
A. Allocate
Allocateaaportion
portionto to the
theeach
each product
product
B.
B. Process
Processfurther
furtherifif the
thejoint
jointcost
cost>> sales
sales
value
value
C.
C. Sell
Sell at
at split-off
split-off ififthe
thejoint
joint cost
cost >> sales
sales
value
value
D.
D. Ignore
Ignorethethejoint
joint cost
cost ininmaking
makingthethe Uh, Uh,Uh.
Uh. Why
Why
decision compare
comparejoint
joint
decision
cost
cost to
tosales
sales
value?
value?
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-13

Sell Intermediate Products Or

Process Them Further?
In
Indeciding
deciding whether
whetherto to sell
sellat
atsplit-off
split-off or
or
process
processfurther,
further,what
what should
shouldmanagement
management
dodowith
withjoint
joint costs?
costs?
A.
A. Allocate
Allocateaaportion
portionto to the
theeach
each product
product
B.
B. Process
Processfurther
furtherifif the
thejoint
jointcost
cost>> sales
sales
value
value
C.
C. Sell
Sell at
at split-off
split-off ififthe
thejoint
joint cost
cost >> sales
sales
value
value Uh,
Uh,Uh.
Uh. Will
Will
D.
D. Ignore
Ignorethethejoint
joint cost
cost ininmaking
makingthethe sales
salesvalue
value
decision
decision increase
increasewith
with
more
more
processing?
processing?
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-14

Sell Intermediate Products Or

Process Them Further?
In
Indeciding
deciding whether
whetherto to sell
sellat
atsplit-off
split-off or
or
process
processfurther,
further,what
what should
shouldmanagement
management
dodowith
withjoint
joint costs?
costs?
A.
A. Allocate
Allocateaaportion
portionto to the
theeach
each product
product
B.
B. Process
Processfurther
furtherifif the
thejoint
jointcost
cost>> sales
sales
value
value
C.
C. Sell
Sell at
at split-off
split-off ififthe
thejoint
joint cost
cost >> sales
sales
value
value
D.
D. Ignore
Ignorethethejoint
joint cost
cost ininmaking
makingthethe
decision
decision

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-15

Maximizing The Profit Of Joint

Product Processes
Computingthe
Computing theNPV
NPV of
of each
eachset
set of
of products
productsprovides
provides aa
comparison of
comparison of each
eachproducts’
products’sales
salesrevenues
revenuesto
tocost
cost
aftersplit-off.
after split-off.

Whatis
What is
RELEVANT?
RELEVANT?

Allocation
Allocation of
of the
the
wood
woodmill’s
mill’s$800,000
$800,000
joint
jointprocessing
processingcosts?
costs?
NO!
NO!
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-16

Maximizing The Profit Of Joint

Product Processes
Computingthe
Computing theNPV
NPV of
of each
eachset
set of
of products
productsprovides
provides aa
comparison of
comparison of each
eachproducts’
products’sales
salesrevenues
revenuesto
tocost
cost
aftersplit-off.
after split-off.

Whatis
What is
RELEVANT?
RELEVANT?

Revenues
Revenuesfrom
fromselling
selling or
orprocessing
processing
beyond
beyondthethesplit-off
split-off and
andany
any
expenditures
expendituresfor
foradditional
additional processing?
processing?
YES!
YES!
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-17

Why Allocate Joint Costs?

! Performance measurement
! Valuing inventories for financial and
tax reporting
! Specifying and resolving contractual
interests and obligations
! Determining and responding to
regulatory rates
! Valuing cost of goods sold for
financial and tax reporting
! Estimating casualty losses

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-18

Why Allocate Joint Costs?

Specifying
Specifyingandand
Determining
Determiningand
and Resolving
Resolving
Responding
Respondingtoto Contractual
Contractual
Regulatory
RegulatoryRates
Rates Interests
Interestsand
and
Obligations
Obligations
Organizations
Organizations
Allocate
AllocateJoint
Joint
Measuring
Measuring Estimating
Estimating
Costs
Costs
Performance
Performance Casualty
CasualtyLosses
Losses
for
forMany
Many
Reasons
Reasons
Valuing
Valuing Valuing
ValuingCost
Costof
of
Inventories
Inventories Goods
GoodsSold
Soldfor
for
for
forFinancial
Financialand
and Financial
Financialand
andTax
Tax
Tax
TaxReporting
Reporting Reporting
Reporting

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 1-19

By-Products: Question #1
By-Products are the primary reason for
the production process?
A. True
B. False

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 1-20

By-Products: Question #1
By-Products are the primary reason for
the production process?
A. True
B. False Actually,
Actually, by-
by-
products
products have
have
nothing
nothing toto do
do with
with
the
the reason
reason for
for the
the
existence
existence ofof the
the
production
production process.
process.

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-21

By-Products: Question #1
By-Products are the primary reason for
the production process?
A. True
B. False

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 1-22

Joint Cost Allocation Methods

Distinguishing
Distinguishing Between
Between Main
Main &
& By-products
By-products

Do
Do not
not allocate
allocate
joint
joint costs
costs to
to by-
by-
products!
products!

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-23

Joint Cost Allocation Methods

Distinguishing
Distinguishing Between
Between Main
Main &
& By-products
By-products

MAIN
MAINPRODUCT
PRODUCT
Do
Do not
not allocate
allocate AAjoint
jointoutput
outputthat
that
joint generates
generatesaa
joint costs
costs to
to by-
by- significant
products! significant portion
portion
products! of
ofof
of the
thenet
net
realizable
realizablevalue
value

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-24

Joint Cost Allocation Methods

Distinguishing
Distinguishing Between
Between Main
Main &
& By-products
By-products

BY-PRODUCTS
BY-PRODUCTS
outputs
outputsfrom
fromaajoint
joint
Do
Do not
not allocate
allocate process
processthat
thatare
are
joint
joint costs
costs to
to by-
by- minor
minorin
inquantity
quantity
products! and/or
and/orNRV
NRVwhen
when
products!
compared
comparedto to the
the
main
main products
products

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-25

Joint Cost Allocation Methods

Net
Net Realizable
Realizable Value
Value Method
Method

Is
Is further
further
Allocates processing
processing
Allocates
joint required?
required?
jointcosts
costs
based
basedon on
the
theNRV
NRV of of Can
Canthe
themain
main
each
each main
main product
product bebe
product
product at at sold
soldatat split-off
split-off
split-off
split-off without
without further
further
processing?
processing?

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-26

Joint Cost Allocation Methods

Net
Net Realizable
Realizable Value
Value Method
Method
Estimate
Estimatethe theNRV
NRV
at
at split-off
split-off by
by
Is
Is further
further deducting
deducting
Allocates processing
processing
Allocates estimated
estimatedadded-
added-
joint required?
required?
jointcosts
costs processing
processing costscosts
based
basedon on from
fromsales
salesvalue
value
the
theNRV
NRV of of Can
Canthe
themain
main
each
each main
main product
product bebe Use
Usemarket
marketvalue
value
product
product at at sold
soldatat split-off
split-off or
orsales
salesprice
pricefor
for
split-off
split-off without
without further
further allocation
allocation
processing?
processing?

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 1-27

Joint Cost Allocation Methods

PHYSICAL MEASURES
PHYSICAL MEASURESMETHOD
METHOD

Energy
Energy Example: BTU
Example: BTU
Allocation is
Allocation is Content content
Content content
basedon
based onaa
physical
physical
measure
measure Example:
Example:
Volume
Volume
ofthe
of thejoint
joint Gallons
Gallons
products
products
at split-off
at split-off
point Example:
Example:
point Weight
Weight Pounds
Pounds

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 1-28

Joint Cost Allocation Methods -

Question #2
When
When would
would the
the physical
physical measures
measures
method
method NOT
NOT be
be used?
used?
A.
A. prices
pricesare
arehighly
highlyvolatile
volatile&&unpredictable
unpredictable
B.
B. Significant
Significantprocessing
processingoccurs
occursbetween
betweenthe
the
split-off
split-off point
point and
andthe
thefirst
first sales
salesopportunity
opportunity
C.
C. The
Themarket
market sets
setsproduct
product prices
prices

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-29

Joint Cost Allocation Methods -

Question #2
When
When would
would the
the physical
physical measures
measures
method
method NOT
NOT be
be used?
used?
A.
A. prices
pricesare
arehighly
highlyvolatile
volatile&&unpredictable
unpredictable
B.
B. Significant
Significantprocessing
processingoccurs
occursbetween
betweenthe
the
split-off
split-off point
point and
andthe
thefirst
first sales
salesopportunity
opportunity
C.
C. The
Themarket
market sets
setsproduct
product prices
prices

Actually, we would use this

method in this circumstance.
Try again.

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-30

Joint Cost Allocation Methods -

Question #2
When
When would
would the
the physical
physical measures
measures
method
method NOT
NOT be
be used?
used?
A.
A. prices
pricesare
arehighly
highlyvolatile
volatile&&unpredictable
unpredictable
B.
B. Significant
Significantprocessing
processingoccurs
occursbetween
betweenthe
the
split-off
split-off point
point and
andthe
thefirst
first sales
salesopportunity
opportunity
C.
C. The
Themarket
market sets
setsproduct
product prices
prices

The
Thephysical
physicalmeasures
measuresmethod
methodWOULD
WOULD
be
beused
usedhere.
here. This
Thismethod
methodis isbased
based on
on aa
physical
physical measure
measureof ofthe
thejoint
jointproducts
productsat
at
split-off
split-off point.
point. Try
Tryagain.
again.
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-31

Joint Cost Allocation Methods -

Question #2
When
When would
would the
the physical
physical measures
measures
method
method NOT
NOT be
be used?
used?
A.
A. prices
pricesare
arehighly
highlyvolatile
volatile&&unpredictable
unpredictable
B.
B. Significant
Significantprocessing
processingoccurs
occursbetween
betweenthe
the
split-off
split-off point
point and
andthe
thefirst
first sales
salesopportunity
opportunity
C.
C. The
Themarket
market sets
setsproduct
product prices
prices

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-32

Joint Cost Allocation Methods -

Question #3
Apexproduces
Apex producesthree
threeproducts
productsfrom
fromthethesame
same process.
process.
Joint product
Joint product costs
costsare
are$20,000.
$20,000. Using
Usingthetheinformation
information
below and
below andthe
thephysical
physicalmeasures
measuresmethod,
method,determine
determine
how much
how muchshould
shouldbe
beallocated
allocated to
toeach
eachproduct.
product.

Product Gallons
Product Gallons
AA 4,000
4,000
BB 5,000
5,000
CC 1,000
1,000

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 1-33

Joint Cost Allocation Methods -

Question #3
Apexproduces
Apex producesthree
threeproducts
productsfrom
fromthethesame
same process.
process.
Joint product
Joint product costs
costsare
are$20,000.
$20,000. Using
Usingthetheinformation
information
below and
below andthe
thephysical
physicalmeasures
measuresmethod,
method,determine
determine
how much
how muchshould
shouldbe
beallocated
allocated to
toeach
eachproduct.
product.

Product Gallons
Product Gallons
AA 4,000==(4,000
4,000 (4,000÷÷ 10,000)
10,000) ×× $20,000
$20,000== $$ 8,000
8,000
BB 5,000==(5,000
5,000 (5,000÷÷ 10,000)
10,000) ×× $20,000
$20,000== $10,000
$10,000
CC 1,000== (1,000
1,000 (1,000÷÷10,000)
10,000)×× $20,000
$20,000==$$ 2,000
2,000

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-34

Joint Cost Allocation Methods

Choosing
Choosing Among
Among Joint-cost
Joint-cost Allocation
Allocation Methods
Methods

Impossible
Impossibleto to Can
Canbebe
use
usecause-
cause- arbitrary
arbitrary
effect
effect basis
basis

Do
Do not
not base
baseproduct
product or orservice
serviceproduction
production decisions
decisionsonon
joint
jointmargins
margins(I.e.,
(I.e., after
afterjoint-cost
joint-cost allocation)
allocation)unless
unlessthe
the
choice
choiceisisin
inresponses
responsesto toregulatory
regulatoryopportunities.
opportunities.

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-35

Joint Cost Allocation Methods

Choosing
Choosing Among
Among Joint-cost
Joint-cost Allocation
Allocation Methods
Methods

Impossible
Impossibleto to Can
Canbebe
use
usecause-
cause- arbitrary
arbitrary
effect
effect basis
basis

Choose
Choose the
the joint-cost
joint-cost allocation
allocation method
method that
that
maximizes
maximizes regulated
regulated profits
profits of
of cost
cost
reimbursements.
reimbursements.

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-36

Joint Cost Allocation Methods

Choosing
Choosing Among
Among Joint-cost
Joint-cost Allocation
Allocation Methods
Methods

Impossible
Impossibleto to Can
Canbebe
use
usecause-
cause- arbitrary
arbitrary
effect
effect basis
basis

Clearly
Clearlydefine
definehow
how to
toallocate
allocatejoint
joint costs
costsin
incontractual
contractual
agreements
agreementsamong
amongparties
partiesthat
that share
shareoutputs
outputsand
andjoint
joint
costs
costsof
of joint
joint processes
processes

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-37

Accounting For By-Products

Question #4
By-products are
By-products are
A.
A. Not allocated
Not allocatedaaportion
portionof
of joint
joint
productioncosts
production costs
B.
B. Discardedrather
Discarded rather than
thansold
sold
C.
C. AAresidual
residual of
of the
theproduction
production
processthat
process thathas
haslimited
limitedsales
sales
value
value
D.
D. Theprimary
The primaryreason
reasonmanagement
management
undertookthe
undertook theproduction
productionprocess
process

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 1-38

Accounting For By-Products

Question #4
By-products are
By-products are
A.
A. Not allocated
Not allocatedaaportion
portionof
of joint
joint
productioncosts
production costs
B.
B. Discardedrather
Discarded rather than
thansold
sold
C.
C. AAresidual
residual of
of the
theproduction
production
processthat
process thathas
haslimited
limitedsales
sales
value
value You are a
D.
D. Theprimary
The primaryreason
reasonmanagement
management
undertookthetheproduction
productionprocess
process
champ!
undertook

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 1-39

Accounting For By-Products

Question #4
Why would
By-products are
By-products are you discard
something
A.
A. Not allocated
Not allocatedaaportion
portionof
of joint
joint
productioncosts
costs you could
production
B.
B. Discardedrather
Discarded rather than
thansold
sold sell? Try
C.
C. AAresidual
residual of
of the
theproduction
production again.
processthat
process thathas
haslimited
limitedsales
sales
value
value
D.
D. Theprimary
The primaryreason
reasonmanagement
management
undertookthe
undertook theproduction
productionprocess
process

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 1-40

Accounting For By-Products

Question #4
By-products are
By-products are What about
diamond
A.
A. Not allocated
Not allocatedaaportion
portionof
of joint
joint chips as a
productioncosts
production costs by-product
B.
B. Discardedrather
Discarded rather than
thansold
sold
of making
C.
C. AAresidual
residual of
of the
theproduction
production
processthat
thathas
haslimited
limitedsales
sales jewelry? Try
process
value
value
again.
D.
D. Theprimary
The primaryreason
reasonmanagement
management
undertookthe
undertook theproduction
productionprocess
process

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-41

Accounting For By-Products

Question #4
By-products are
By-products are If this is so,
why don’t
A.
A. Not allocated
Not allocatedaaportion
portionof
of joint
joint we call
productioncosts
production costs these items
B.
B. Discardedrather
Discarded rather than
thansold
sold
PRIMARY
C.
C. AAresidual
residual of
of the
theproduction
production
processthat
thathas
haslimited
limitedsales
sales products?
process
value
value
Try again.
D.
D. Theprimary
The primaryreason
reasonmanagement
management
undertookthe
undertook theproduction
productionprocess
process

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-42

By-Product Accounting: the Basics

By-products
By-productsareareminor
minorproducts
productsand
and alternative
alternative
methods
methodsarearenot
notlikely
likelyto
tohave
haveaamaterial
materialeffect
effecton
onthe
the
financial
financialstatements
statementsfor forinternal
internalor
orexternal
external reporting.
reporting.

Whether
Whethertotosell
sell the
theby-product
by-product at
at split-off
split-off or
orprocess
process
them
themfurther
furtherusually
usuallydepends
dependsononthe
thehighest
highest NPR
NPR
obtainable
obtainablelike
likeaamajor
majorproduct.
product.

Consider
Consider Two
Two Deduct
Deductby-product
by-product
by-product
by-product standard
standard NRV
NRVfrom
fromcosts
costs
NRV
NRVasasother
other
methods as
asmain
mainproduct
product
revenue
revenue methods

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 1-43

By-Product Accounting: the Basics

Method
Method1:
1: The
TheNRV
NRVof
ofthe
theby-product
by-product is
istreated
treatedas
as
Other
OtherRevenue
Revenue

This
Thismethod
method Sales Revenue
is
isused
usedwhen
when
by-product Main products $1,144,400
by-product
NRVs
NRVsareare Other revenue 62,400
small
smalland
andthe
the Total revenue 1,206,800
effects
effectson
on Cost of goods sold 849,700
income
incomeareare Gross margin $357,100
immaterial
immaterial

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 1-44

By-Product Accounting: the Basics

Method
Method11Example:
Example:The TheTennessee
TennesseeCompany
Company
produces
producestwo
two main
mainproducts
products(A
(A&&B)
B)and
and aaby-
by-
product
product (C)
(C) from
fromaachemical
chemicalprocess.
process.

Sales Cost of
Revenue Goods Sold
Product A $750,000 $300,000
Product B $1,250,000 $800,000
Product C $50,000 $20,000

What is the NRV of Product C?

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 1-45

By-Product Accounting: the Basics

Method
Method11Example:
Example:The TheTennessee
TennesseeCompany
Company
produces
producestwo
two main
mainproducts
products(A
(A&&B)
B)and
and aaby-
by-
product
product (C)
(C) from
fromaachemical
chemicalprocess.
process.

Sales Cost of
Revenue Goods Sold
Product A $750,000 $300,000
Product B $1,250,000 $800,000
Product C $50,000 $20,000

What is the NRV of Product C?

$50,000 - $20,000 = $30,000
Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001
 1-46

By-Product Accounting: the Basics

Method
Method11Example:
Example:The
TheNRV
NRV of
ofProduct
ProductCCis
isshown
shown
in
inthe
theincome
incomestatement
statementas
asOther
OtherRevenue.
Revenue.

Note that C’s

Sales Revenue Revenues and
Main products $2,000,000 Expenses are
“NETTED”
Other revenue 30,000 together. They
Total revenue 2,030,000 are not part of
Main Products
Cost of goods sold 1,100,000 Revenue or Cost
Gross margin $930,000 of Goods Sold!

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 1-47

By-Product Accounting: the Basics

Method
Method2:2: The
TheBy-Product’s
By-Product’sNRV
NRVisistreated
treated as
asaa
reduction
reductionofofthetheMain
MainProducts
ProductsCost
Cost of
of Goods
Goods Sold.
Sold.
ItItgenerally
generallydoes
doesnot
not show
show up
up as
asaaseparate
separateline-
line-
item
itemononthe
theincome
incomestatement.
statement.

Sales Revenue $$$$$

Cost of goods sold
Cost of main products sold $$$$
Less NRV of by-products -$$$
Adjusted Cost of goods sold $$$$
Gross margin $$$$$

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 1-48

By-Product Accounting: the Basics

Method
Method22Example:
Example: InInour
ourTennessee
TennesseeCompany
Company
example,
example,Product
Product C’s
C’sNRV
NRV would
wouldreduce
reducethe
theMain
Main
Product
ProductCOGS
COGS by by$30,000.
$30,000.

Sales Revenue $2,000,000

Note that Gross
Cost of goods sold Margin is the
Cost of main products sold 1,100,000 same
Less NRV of by-products -30,000 regardless of
Adjusted Cost of goods sold 1,070,000 the method
used.
Gross margin $930,000

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 1-49

By-Product Accounting: the Basics

Method
Method22Example:
Example: We
Wehave
haveassumed
assumed that
thatall
all of
of
Products
ProductsAAand
andBBproduced
producedthis
thisperiod
periodwere
weresold.
sold.

Sales Revenue $2,000,000 IfIfany

anyof
ofProduct
ProductAAor orBB
remains
remainsunsold
unsoldat
atthe
Cost of goods sold end
the
endof ofthe
theperiod,
period,then
then
Cost of main products sold 1,100,000 the
theNRV
NRVofofProduct
ProductCC
Less NRV of by-products -30,000 (the
(theby-product)
by-product)must
must
be
bepro-rated
pro-ratedbetween
between
Adjusted Cost of goods sold 1,070,000 Main
MainProducts
Products
Gross margin $930,000 Inventory
InventoryandandCOGS.
COGS.

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 1-50

By-Product Accounting: the Basics

Pounds Pounds Pounds in
Produced Sold Inventory
Product D 10,000 8,000 2,000
Product E 15,000 12,000 3,000
By-Product Z 7,000 7,000 0

Method
Method22Example:
Example:Forage,
Forage, Inc.
Inc.uses
usesthethePhysical
Physical
Measures
MeasuresMethod
Methodtoto allocate
allocatejoint
joint costs.
costs.By-Product
By-Product
NRV
NRV== $180,000.
$180,000. Based
Basedon onthe
theinformation
informationabove,
above,how
how
much
much of
of By-Product
By-Product Z’s
Z’sNRV
NRV should
should gogo to
toinventory
inventoryand
and
to
toCOGS?
COGS?

Irwin/McGraw-Hill Ryerson © McGraw-Hill Ryerson Limited, 2001

 1-51

By-Product Accounting: the Basics

Pounds Pounds Pounds in
Produced Sold Inventory
Product D 10,000 8,000 2,000
Product E 15,000 12,000 3,000
By-Product Z 7,000 7,000 0
Total Pounds Sold (Main Product) 20,000
÷ Total Pounds Produced 25,000
= % of By-Product NRV assigned to COGS 80.00%
By-Product NRV $180,000
× % Assigned to COGS 80.00%
= Amount Assigned to COGS $144,000
Amount Assigned to Inventory $36,000
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 1-52

End Of Chapter

Irwin/McGraw-Hill Ryerson
8 © McGraw-Hill Ryerson Limited, 2001