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Joint Product and By-Product Costing. Prepared by Douglas Cloud Pepperdine University. Objectives. 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. - PowerPoint PPT Presentation
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Joint Product Joint Product and By-and By-Product Product CostingCosting
Prepared by Douglas Cloud
Pepperdine University
Prepared by Douglas Cloud
Pepperdine University
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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.
ObjectivesObjectivesObjectivesObjectives
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
After studying this After studying this chapter, you should chapter, you should
be able to:be able to:
ContinuedContinuedContinuedContinued
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4. Explain why joint cost allocations may be misleading in management decision making.
5. Discuss why joint production is seldom found in service industries.
ObjectivesObjectivesObjectivesObjectives
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Joint Production ProcessJoint Production ProcessJoint Production ProcessJoint Production Process
Material: Material: Hog Hog ProcessingProcessing
Split-Off
Point
Pork MeatPork Meat
HidesHides
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Independent Multiple-Independent Multiple-Product ProductionProduct Production
Independent Multiple-Independent Multiple-Product ProductionProduct Production
ProcessingProcessing
ProcessingProcessing
MustangMustang
TaurusTaurus
Material: Material: Steel Steel
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Joint Production ProcessJoint 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.
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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.
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By-products can be characterized by their By-products can be characterized by their relationship to the main products in the relationship to the main products in the following manner: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).
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Examples of Joint Products and Examples of Joint Products and By-ProductsBy-Products
Examples of Joint Products and Examples of Joint Products and By-ProductsBy-Products
Agriculture and Food Industries:
Flour milling Patent flour, clear flour, bran, and wheat germ
Extractive Industries:Copper mining Copper, gold, silver, and
other metalsChemical Industries:
Soap making Soap and glycerineManufacturing:
Cement Concrete pipe and aggregate
IndustryIndustry Joint Products and By-ProductsJoint Products and By-Products
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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
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A sawmill processes logs into four grades of lumber totaling 3,000,000 board feet as follows:
Accounting For Joint Product Costs
Physical Units MethodPhysical Units Method
Percent Joint Cost Grades Board Feet of Units Allocation
First and second 450,000 0.15 $ 27,900
No. 1 common 1,200,000 0.40 74,400
No. 2 common 600,000 0.20 37,200
No. 3 common 750,000 0.25 46,500
Totals 3,000,000 $186,000
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Accounting For Joint Product Costs
Weighed Average MethodWeighed 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. AllocatedGrades of Cases Factor of Cases Percent Joint Cost
Fancy 100 1.30 130 0.21667 $1,083
Choice 120 1.10 132 0.22000 1,100
Standard 303 1.00 303 0.50500 2,525
Pie 70 0.50 35 0.05833 292
Totals 600 $5,000
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Accounting For Joint Product Costs
Sales-Value-at-Split-Off MethodSales-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 second 450,000 $300 $135,000 0.2699 $ 50,201No. 1 common 1,200,000 200 240,000 0.4799 89,261No. 2 common 600,000 121 72,600 0.1452 27,007No. 3 common 750,000 70 52,500 0.1050 19,530 Totals 3,000,000 $500,100 $185,999*
*Rounding error
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Accounting For Joint Product Costs
Net Realizable Value MethodNet 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 $4 1,000 $ 4,000 $2,300Beta 4 2 2 3,000 6,000 3,450
$10,000 $5,750
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Accounting For Joint Product Costs
Constant Gross Margin Percentage MethodConstant Gross Margin Percentage Method
PercentRevenue ($5 x 1,000) + ($4 x 3,000) $17,000 100 %Costs [$5,750 + ($1 x 1,000) + ($2 x 3,000)] 12,750 75 % Gross margin $ 4,250 25 %
Alpha Beta
Eventual market value $ 5,000 $12,000Less: Gross margin at 25% of market value 1,250 3,000Cost of goods sold $ 3,750 $ 9,000Less: Separable costs 1,000 6,000 Allocated joint costs $2,750 $ 3,000
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Accounting For Joint Product Costs
Sales-to-Production Ratio MethodSales-to-Production Ratio Method
Sales-to- % of % of Production Costs AssignedProduct Total Sales Production Ratio Percent Sales/Production
A 10 10 1.0000 19.9338 % $ 199,338B 20 15 1.3333 26.5778 % 265,778C 15 25 0.6000 11.9603 % 119,603D 40 30 1.3333 26.5778 % 265,778E 15 20 0.7500 14.9504 % 149,504
100 100 5.0166 100.001 % $1,000,001*
*rounding error
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Accounting for By-Accounting for By-Product CostsProduct Costs
Accounting for By-Accounting for By-Product CostsProduct Costs
One possibility is to show net sales of by-products in the
“Other Income” section of the income statement.
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.
By-product revenue also can be treated as a
deduction from the cost of the main product.
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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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