Joint & by Product

8/11/2019 Joint & by Product

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Joint Product and By-Product Costing 147

HAPTER 7Joint Product and By-Product Costing

L E A R N I N G O B J E T I V E S

After studying this chapter, you should be able to:1. Identify the characteristics of the joint production process.2. Allocate joint product costs according to the benefits-received approaches and the relative

ar!et value approaches.3. "escribe ethods of accounting for by-products.4. #$plain %hy joint cost allocations ay be isleading in anage ent decision a!ing.

5. "iscuss %hy joint production is seldo found in service industries.

H A P T E R S U M M A RY

&his chapter describes the joint production processes and their outputs'joint products and by-products. (everal ethods are developed to allocate joint costs to joint products. By-products arenot usually allocated any of the joint costs. Instead, noncost ethods are fre)uently used toaccount for by-products. &his chapter concludes %ith the caution that allocated joint costs are notuseful for output and pricing decisions. *urther processing costs are used in anage entdecision a!ing.

H A P T E R R E V I E W

I. General Characteristics of Joint Production

Joint products are t%o or ore products produced si ultaneously by the sa e process.

Joint products beco e separate and identifiable at the split-off point .

Review textbook Exhibit 7-1, which depicts the joint production process.

A. Cost (eparability and the +eed for Allocation

. Joint costs are the total of the ra% aterial, labor, and overhead costs incurred upto the initial split-off point.

a. Joint costs can be allocated to the final product only in so e arbitrary anner because such costs cannot be traced directly to the products they benefit.

b. Joint cost allocation is perfor ed to eet the re)uire ents of financialreporting AAP/ and federal inco e ta$ la% for inco e easure ent andinventory valuation. In addition, joint cost allocation is useful in costing for

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148 Chapter 3

govern ent cost-type contracts and in justifying prices for legislative or ad inistrative regulations.

c. Joint cost allocation is uch less useful for cost control and anagerialdecision a!ing.

4. Separa le costs are those costs incurred after the split-off point5 they can be easilytraced to individual products.

B. "istinction and (i ilarity Bet%een Joint Products and By-Products

. &he distinction bet%een joint products and by-products rests solely on the relativei portance of their sales value.

4. A !-product is a secondary product %hose total sales value is relatively inor inco parison %ith the sales value of the ain product joint product/.

6. 7elationships bet%een joint products and by-products change over ti e astechnology and ar!ets change.

a. By-products ay beco e ore and ore i portant, eventually beco ing jointproducts.

b. 8hen the relative i portance of individual products changes, the productsneed to be reclassified and the costing procedures need to be changed.

Review textbook Exhibit 7-3, which gives examples o joint products and b!-products or various industries.

II. "ccountin# for Joint Product Costs

A. Introduction

. Joint cost allocations ust be done for financial reporting purposes: to value

inventory and to deter ine inco e. An allocation ethod ust be found, thougharbitrary, to allocate the joint costs as reasonably as possible.

4. &he joint cost allocation approaches include the follo%ing:

a. Benefits-received approaches, %hich include the follo%ing ethods:

Physical units ethod

8eighted average ethod

b. Allocation based on the relative ar!et value, using the follo%ing ethods:

(ales-value-at-split-off ethod

+et reali9able value ethod

Constant gross argin percentage ethod

(ales-to-production-ratio ethod

B. Benefits-7eceived Approaches

. Physical nits ;ethod

a. nder the ph!sical units $ethod , units of physical output, such as heatcontent, volu e, or %eight, that easure the benefits received are used to



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Joint Product and By-Product Costing 14%

distribute joint costs. &his ethod allocates to each joint product the sa eproportion of joint costs as the underlying proportion of units.

#$a ple: ;anufacturers of forest products use the physical unitsethod to apply the average conversion cost to all finished products,

regardless of their type, grade, or ar!et value.

b. "isadvantages of the physical units ethod include the follo%ing:It ignores the fact that not all costs are directly related to physical

)uantities.

It ay result in incorrect anagerial decisions because high profitay be reflected fro the sale of high-grade products, %ith lo% profit or

losses reflected fro the sale of lo%-grade products.

4. 8eighted Average ;ethod

&he %eighted average ethod uses the &ei#ht factors to include such diverseele ents as a ount of aterial used, difficulty to anufacture, ti e consu ed,difference in type of labor used, and si9e of unit.

'ei#hted ph!sical units ( )u$ er of units * 'ei#ht factor

#$a ple: &he canning industry uses %eight factors to distinguish bet%eencan si9es or )uality of product. &he %eighted average ethod allocates relatively

ore of the joint cost to the high-grade products because they represent oredesirable and profitable products.

C. Allocation Based on 7elative ;ar!et


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a. &he constant #ross $ar#in percenta#e $ethod allocates joint costs suchthat the gross argin percentage is the sa e for each product.

b. &his ethod assu es that the further processing yields an identical profitpercentage across all products.

c. sing the constant gross argin percentage ethod, the joint cost allocationsteps include the follo%ing calculations:

Grand #ross $ar#in percenta#e (re+enue3otal

costs43otal 0re+enue53otal

Joint product #ross $ar#in ( ar/et price * Grand #ross $ar#in

Joint cost allocated to product ( ar/et +alue 0 Gross $ar#in 0 Separa lecosts

>. (ales-to-Production 7atio

a. &he sales-to-production-ratio $ethod allocates joint costs in accordance %itha %eighting factor that co pares the percentage of sales %ith the percentageof production.

b. In this ethod, the products that sell the ost are allocated a larger share of the joint cost of current production.

c. sing the sales-to-production-ratio ethod, the joint cost allocation stepsinclude:

/ Co pute the percentage of total sales based on the joint product unitssold.

4/ Co pute the percentage of total production based on the joint productunits produced.

6/ Co pute the sales-to-production ratio of the joint product.

Sales-to-production ratio (productionof Percenta#e

salestotalof Percenta#e

>/ se the sales-to-production ratio to allocate joint cost.

?. &he li itations of allocation based on relative ar!et value include the follo%ing:

All ethods are based on price. If price is used to deter ine cost, then thosecosts cannot be used to deter ine price. &he decision %ould be circular.

Changes in relative ar!et prices %ill cause changes in the costs allocatedto the product, even %hen there has been no change in total costs or the

ethod of production.

sing allocation based on relative ar!et value produces the sa e arginper dollar of allocated cost. &his could be isleading to anage ent if thei pression is created that all products are e)ually profitable.

Review textbook Exhibit 7-", which summari#es the joint cost allocation methods.



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III. "ccountin# for 6!-Products

A. Introduction

. &he ain objective of by-product accounting is to deter ine inco e and inventoryfor financial reporting purposes. By-products are of less significance than the ainproducts and ay not re)uire precise cost allocation.

4. 7elevant factors that influence by-product valuation and accounting include:

&he uncertainty of by-product value at the ti e of production.

&he use of the by-product in other production.

&he use of the by-product as an alternative to ain products.

&he need for separate profit calculations for sales incentives or for control.

6. By-products can be accounted for using the follo%ing:

a. +oncost ethods

1ther inco e

By-product revenue deducted fro ain product costb. Cost ethods

7eplace ent cost ethod

&otal costs less by-products valued at standard price ethod

Joint cost proration ethod

B. +oncost ;ethods of Accounting for By-Products

)oncost $ethods a!e no atte pt to allocate joint cost to the by-product or itsinventory but instead a!e so e credit either to inco e or to the ain product.

. 1ther Inco e ;ethod

a. &he net sales of by-products for the current period is recogni9ed as @1ther Inco e or @;iscellaneous Inco e and is reported in the inco e state ent.&he ar!et value of by-product inventory, if aterial, should be reported in afootnote to the balance sheet.

b. &he other inco e ethod is used by those fir s %here:

&he value of the by-product is s all,

Any other allocation %ould be ore e$pensive than the benefitsreceived, or

Carrying by-products %ith the ain products %ould not appreciablyaffect the cost of the ain product.

c. "isadvantages of this ethod include the follo%ing:

Inventories on the balance sheet are isstated since no value isplaced on the by-products.

;atching of revenues %ith e$penses is i proper if production of by-products occurs in one accounting period and sales occur in another. +oentry for by-products is ade at the ti e of production, only at the ti e of sale.


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152 Chapter 3

+o atte pt is ade to control the inventory of by-products and toprevent the fro losses due to fraud or errors.

4. By-Product 7evenue "educted fro ;ain Product Cost

a. &he net sales of by-products %ill be treated as a deduction fro the cost of theain product.

#$a ple: &he beef-pac!ing industry uses this ethod because of the great variety of products resulting fro operations and the co ple$ityof the processing.

b. "isadvantages of this ethod include the follo%ing:

&he ethod tends to understate the value of the ain product.

&he cost of the ain product can vary fro onth to onthbecause of the varying )uantities of by-products sold.

C. Cost ;ethods of Accounting for By-Products

Cost ethods atte pt to allocate so e joint costs to by-products and to carry

inventories at the allocated cost levels.. 7eplace ent Cost ;ethod

&he replace$ent cost $ethod values the by-product inventory at its opportunitycost of purchasing or replacing the by-products.

#$a ple: In the oil refining industry, increasing output of one product %illcause a reduction in the output and the profit of the other product.

4. &otal Costs 0ess By-Products


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A. 1utput "ecisions

. 1utput decisions are nor ally based on the co parison of total cost of the jointproducts and the co bined sales revenues for easuring profitability at any givenpoint.

4. If anage ent cannot change the product i$ or the product i$ is deter ined bycusto er de and, cost allocation is useless for output decisions because theentire pac!age has to be produced.

B. *urther Processing "ecisions

. In a!ing decisions on %hether to sell a joint product at split-off or to process itfurther, only the costs and revenues incurred after the split-off point are pertinent.

4. Joint costs include those costs incurred prior to the split-off point and, thus, areconsidered sun! costs %ith respect to further processing decisions that is, the jointcost is not a relevant cost/.

C. Pricing Joint Products

;ethods used to set joint product prices include:

. (ales or ar!et price ethod

a. &his ethod aintains a constant relationship of cost to ar!et prices, but itcannot be used to set prices since price has to be !no%n in order to deter inecost.

b. &he ethod is circular but useful in li ited situations.

#$a ple: &he eat-pac!ing industry uses the ar!et value of by-products as an i portant deter inant of the ain product=s price.

#$a ple: &he natural gas industry uses it to justify prices ande$isting price relationships to regulatory bodies. Joint cost allocation isused to deter ine inventory values, not as a basis to deter ine a cost tobe used in price regulation.

4. istorical ar!et differentials bet%een products ethod

8hen ar!et differentials are stable over ti e, this ethod provides a guide topricing individual products by giving figures co parable to those of co petitors.

". Pricing Based on Cost of *urther Production

&his ethod differs fro the benefits-received approaches because it does not assignaverage cost based on physical or %eighted units. It is different fro the relative

ar!et value because the joint product itself does not have a ar!et value.

#$a ple: &he practice of organ transplant sets the costs of the jointly

available organs based on the eventual cost of the subse)uent transplantoperation.

. Joint Production of Ser+ices

+or ally services do not yield a true joint output because a service can be directed to oneeffect rather than to t%o effects si ultaneously.

Joint cost allocation issues %ith services usually relate to pricing proble s.

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154 Chapter 3

#$a ple: An insurance co pany ay allo% only a portion of a assage therapycharge to be allocated to the therapeutic aspect.

#$a ple: &he I7( ight allo% the cost of a t%o-day se inar as a deductible businesse$pense. But if the se inar %ere offered on a cruise ship and spread out over a five-day period, the I7( %ould loo! closely if clai ed as a deduction and not separated

fro the overall cost of the cruise.


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K E Y T E R M S T E S T

From the list that follows, select the term that best completes each statement and write it in thespace provided.

net reali9able value ethodnoncost ethodsphysical units ethodreplace ent cost ethodsales-to-production-ratio ethod

sales-value-at-split-off ethodseparable costssplit-off point%eight factor

1. Costs that are easily traced to individual products are .

2. &he allocates joint prduction costs by co paring the percentage of sales to the percentage of production.

3. &he allocates joint production costs based on

each product=s share of total units.4. &he allocates joint productio

costs based on each product=s share of revenue at the split-off point.

5. &he allocates joint productiocosts based on the proportionate share of the product=s eventual revenue less further processing costs.

:. A n/ tries to incorporate the relative si9e of products or thedifficulty to produce the .

7. a!e no atte pt to cost the by-product or its inventory.

8. &he is %here the joint products beco e separate andidentifiable.

%. &he values by-products at the opportu-nity cost of purchasing or replacing the products.

M U LTI P L E - H O I E Q U I Z

Complete each of the following statements by circling the letter of the best answer.

1. 8hich of the follo%ing is not an acceptable ethod of accounting for by-productsDa. &he revenue fro the sale of by-products is credited to @1ther Inco e.

. &he by-product is valued at its opportunity costs of purchasing or replacing the product.c. &he revenue fro the sale of by-products is deducted fro the costs of the ain

products.d. &he by-product is valued at a standard price5 any fluctuations in the price are isolated in a

variance account.e. All of the above ethods are acceptable approaches to accounting for by-products.


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2. 8hich of the follo%ing is a true state ent regarding joint costsDa. Joint costs are easily traced to individual products.

. &he pri ary reason for allocating joint costs is to deter ine %hether a product should besold i ediately or processed further.

c. &he pri ary reason for allocating joint costs is for inventory valuation for financial reporting.

d. Joint costs consist only of overhead, never of aterials or direct labor.e. +one of the above state ents are true.

3. 8hich of the follo%ing costs of a joint process %ould be allocated to the joint productsDa. aterials, labor, and overhead

. labor and overhead onlyc. aterials and labor onlyd. conversion costs less by-product valuese. pri e costs less by-product values

4. &he joint cost allocation ethod that yields the sa e gross argin percentage for eachproduct is the:a. net reali9able value ethod.

. sales-to-production-ratio ethod.c. physical units ethod.d. constant gross argin percentage ethod.e. sales-value-at-split-off ethod.

5. &he joint cost allocation ethod that assigns joint production costs based on the proportionateshare of eventual revenues less further processing costs is the:a. net reali9able value ethod.

. sales-to-production-ratio ethod.

c. physical units ethod.d. constant gross argin percentage ethod.e. sales-value-at-split-off ethod.

:. &he secondary product recovered in the course of anufacturing a pri ary product during a joint process is:a. a by-product.

. a joint product.c. a replace ent product.d. a split-off product.e. none of the above.

7. 8hich of the follo%ing joint cost allocation ethods is not acceptable for financial reportingunder generally accepted accounting principlesDa. net reali9able value ethod

. sales-value-at-split-off ethodc. physical units ethodd. constant gross argin percentage ethode. All of the ethods are acceptable under AAP.


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Use the following information for Questions 8 through 10

Allison, Inc., produces t%o products, E and F, in a single joint process. 0ast onth the joint costs%ere G3?,HHH %hen H,HHH units of Product E and ?,HHH units of Product F %ere produced.

Additional processing costs %ere G ?,HHH for Product E and G H,HHH for Product F. Product Esells for G H, and Product F sells for G?.

8. &he joint cost allocations to Products E and F using the net reali9able value ethod %ouldbe:

; ?,HHH

. G>4,?HH G64,?HHc. G>4, ?3 G64, >6d. G>?,HHH G6H,HHHe. none of the above.

%. &he joint cost allocations to Products E and F using the physical units ethod %ould be:; ?,HHH. G>4,?HH G64,?HH

c. G>4, ?3 G64, >6d. G>?,HHH G6H,HHHe. none of the above.

1 . &he joint cost allocations to Products E and F using the constant gross argin percentageethod %ould be:

; ?,HHH

. G>4,?HH G64,?HH

c. G>4, >6 G64, ?3d. G>?,HHH G6H,HHHe. none of the above.

11. +athan Co pany produces three products A, B, and C/ in a single joint process. All of theproducts are salable i ediately upon split-off. Alternatively, any of the products could beprocessed further and sold at a higher price. Cost and price infor ation is as follo%s:Product Price at Split-=ff "ddit ional Processin# Cost Price "fter Processin# >nit olu$e

A G H G H,HHH G 4 H,HHHB ? 4?,HHH ?,HHHC 4H ?H,HHH 6H ,HHH

&he decision that %ould a$i i9e profits %ould be:" 6 C

a. sell no% sell no% sell no%. process further process further process further

c. sell no% process further sell no%d. process further sell no% process further e. none of the above.


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12. 0a!er Co pany produces t%o products along %ith a single by-product. &he joint process coststotal G4HH,HHH. Product A can be sold for G>?H,HHH after additional processing of G4?H,HHH5 Product B can be sold for G HH,HHH after additional processing of G4HH,HHH. &heby-product BP can be sold for G4?,HHH after pac!aging costs of G?,HHH. &he by-product isaccounted for using the by-product revenue deducted fro the ain product cost approach.8hat %ould be the joint cost allocation using the net reali9able value ethodD

" 6a. G H,HHH G 4H,HHH

. G , 3 G 66,666c. G33, >6 G H4, ?3d. G ?,3 > G >,4e. none of the above

13. 0an!ip Co pany produces t%o ain products and a by-product out of a joint process. &heratio of output )uantities to input )uantities of direct aterial used in the joint processre ains consistent fro onth to onth. 0an!ip e ploys the physical units ethod toallocate joint production costs to the t%o ain products. &he net reali9able value of the by-

product is used to reduce the joint production costs before the joint costs are allocated tothe ain products. "ata regarding 0an!ip=s operations for the current onth are presentedbelo%. "uring the onth, 0an!ip incurred joint production costs of G4,?4H,HHH. &he ainproducts are not ar!etable at the split-off point and, thus, have to be processed further.

irst ain Product Second ain Product 6!-Product

;onthly output in pounds............ KH,HHH ?H,HHH H,HHH(elling price per pound............... G6H G > G4(eparable process costs............ G?>H,HHH G H,HHH

&he a ount of joint production cost that 0an!ip %ould allocate to the (econd ;ain Productby using the physical units ethod to allocate joint production costs %ould be:a. G ,4HH,HHH.

. G ,4 H,HHH.c. G ,?HH,HHH.d. G ,?3?,HHH.e. G , ?H,HHH.

Use the following information for Questions 1! and 1"

Petro-Che , Inc., is a s all co pany that ac)uires high-grade crude oil fro lo%-volu eproduction %ells o%ned by individuals and s all partnerships. &he crude oil is processed in a singlerefinery into &%o 1il, (i$ 1il, and i pure distillates. Petro-Che does not have the technology or capacity to process these products further and sells ost of its output each onth to ajor refineries. &here %ere no beginning inventories for finished goods or %or! in process on

+ove ber . &he production costs and output of Petro-Che for +ove ber are as follo%s:Crude oil ac)uired and placed in production........................... G?,HHH,HHH"irect labor and related costs.................................................. 4,HHH,HHH*actory overhead.................................................................... 6,HHH,HHH

Production and sales:&%o 1il:6HH,HHH barrels produced5 H,HHH barrels sold at G4H each(i$ 1il: 4>H,HHH barrels produced5 4H,HHH barrels sold at G6H each"istillates: 4H,HHH barrels produced and sold at G ? per barrel


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Joint Product and By-Product Costing 15%

14. &he portion of the joint production costs assigned to (i$ 1il based on physical output %ouldbe:a. G6, 6 ,HHH.

. G6,3?H,HHH.c. G , ,HHH.

d. G3,?HH,HHH.e. G>, HH,HHH.

15. &he portion of the joint production costs assigned to &%o 1il based on the relative salesvalue of output %ould be:a. G>, HH,HHH.

. G>,HHH,HHH.c. G4,4 ,HHH.d. G4,?HH,HHH.e. G>,>>?,HHH.


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P R A T I E T E S T

; ?CIS 17on Che icals produces four products fro a joint process costing G ?H,HHH per onth. After leaving the joint process, the products ust be further refined before they are salable. Fouhave been provided %ith the follo%ing infor ation:

Product olu$e urther Processin# Costs Sellin# Price per >nit

A- ?,HHH G6?H,HHH G HB-6 4?,HHH >HH,HHH >HC-4 H,HHH HH,HHH 44L-K ?H,HHH 4?H,HHH H

#e$uired

1. Allocate the joint costs using the physical units ethod.

2. Allocate the joint costs using the net reali9able value ethod.


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Joint Product and By-Product Costing 1:1

; ?CIS 2Bishop Corporation produces three products at a joint anufacturing cost of G ,4?H,HHH. &hefollo%ing infor ation has been provided:

Product olu$e urther Processin# Costs Sellin# Price per >nit

A 4?,HHH G3?H,HHH G>HB >H,HHH 3?H,HHH ?HC 6?,HHH 4 H,HHH 4H

#e$uired

Allocate the joint costs using the constant gross argin percentage ethod.


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; ?CIS 4ranite City ;onu ent 8or!s is a anufacturer of ce etery headstones and architectural

granite slabs. ranite City e$cavates bloc!s of granite fro its )uarry fro its joint processes of Luarry and Cutting. &%o joint products ce etery onu ents and architectural granite/ areproduced along %ith a by-product called grit.

Ce etery onu ents are cut, polished, and engraved in a variety of standard shapes, si9es,and patterns and sold to funeral ho es. Architectural granite slabs are special-ordered bycontractors for office buildings. &hese slabs are cut and polished to e$acting specifications. &hes all pieces of granite resulting fro the cutting process are crushed and sold to far -supplyoutlets as poultry grit.

ranite City has provided the follo%ing costs and output infor ation:Process Cost ons of =utput

Luarry G6?H,HHH HH,HHHCutting 4?H,HHH KH,HHH;onu ents 6HH,HHH 4?,HHH

ranite slabs >HH,HHH H,HHHrit H,HHH ?,HHH

Luarry and Cutting are joint processes. A local far -supply distributor purchases all of the gritthat is produced at G>H per ton. Assu e that ranite City uses the physical units ethod toallocate joint costs.

#e$uired

1. 8hat %ould be the cost per ton of onu ents and granite slabs, assu ing that the grit isaccounted for as @1ther Inco e D


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1:4 Chapter 3

; ?CIS 4 %Continued&2. 8hat %ould be the cost per ton of onu ents and granite slabs, assu ing that the grit is

accounted for as by-product revenue deducted fro the ain product costD

; ?CIS 5&aldot Co pany produces three products E, F, and M/ in a joint process costing G HH,HHH. &heproducts can be sold as they leave the process, or they can be processed further and sold. &hecost accountant has provided you %ith the follo%ing infor ation:

Sales Price Separa le urther Sales Price "fter Product >nit olu$e at Split-=ff Processin# Costs urther Processin#

E 6,HHH G H G H,HHH G4?F >,HHH ? ?H,HHH 6HM ,HHH 4H KH,HHH 6?

Assu e that all processing costs are variable costs.

#e$uired

8hich products should &aldot sell at split-off, and %hich products should be processed furtherD


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A N Y OU ? H E K L I S T

Can you define the ter s joint product , split-o point , b!-product , and separable costs D

Can you allocate joint product costs using a benefits-received approach such as the:

physical units ethodD%eighted average ethodD

Can you allocate joint product costs using a relative ar!et value approach such as the:

sales-value-at-split-off ethodD

net reali9able value ethodD

constant gross argin percentage ethodD

sales-to-production-ratio ethodD

Can you identify different ethods for accounting for by-productsD Can you e$plain ho% todistinguish bet%een a by-product and a ain productD

Can you e$plain joint cost allocations related to:output decisionsD

further processing decisionsD

pricing of joint productsD

pricing based on the cost of further productionD

Can you e$plain ho% joint production costing could be used in a service industryD

A N S W E R S

@ < ? S S1. separable costs2. sales-to-production-ratio ethod3. physical units ethod4. sales-value-at-split-off ethod

5. net reali9able value ethod

:. %eight factor 7. +oncost ethods8. split-off point%. replace ent cost ethod

>A IPA -C =IC B>I1. e2. c3. a

4. d5. a:. a

7. e


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1:: Chapter 3

8. b +et reali9able values are co puted as follo%s:E: H,HHH units N G H/ O G ?,HHH G ?,HHHF: ?,HHH units N G ?/ O G H,HHH ?,HHH&otal net reali9able value G ?H,HHH

Joint cost allocation ratios are co puted using the net reali9able value ethod, and joint cost allocation isperfor ed as follo%s:E: G ?,HHH Q G ?H,HHH/ N G3?,HHH G>4,?HHF: G ?,HHH Q G ?H,HHH/ N G3?,HHH G64,?HH

%. a Joint cost allocation ratios are co puted using the physical units ethod, and joint cost allocation isperfor ed as follo%s:E: H,HHH units Q 4?,HHH units/ N G3?,HHH G6H,HHHF: ?,HHH units Q 4?,HHH units/ N G3?,HHH G>?,HHH

1 . c Joint cost allocation ratio is co puted using the constant gross argin percentage ethod as follo%s:#sti ated gross argin G 3?,HHH O G3?,HHH O G4?,HHH G3?,HHH#sti ated gross argin ratio G3?,HHH Q G 3?,HHH >4. ?3R

Joint cost allocation is co puted as follo%s:E: G HH,HHH O G ?,HHH O G HH,HHH N >4. ?3R/ G>4, >6F: G3?,HHH O G H,HHH O G3?,HHH N >4. ?3R/ G64, ?3

11. d A: Incre ental revenue if processed further G 4 O G H/ N H,HHH units G4H,HHH Additional processing cost G H,HHHConclusion: Process further because the incre ental revenue is higher than the incre ental costs.

B: Incre ental revenue if processed further G O G ?/ N ?,HHH units G ?,HHH Additional processing cost G4?,HHHConclusion: (ell i ediately because the incre ental revenue is lo%er than the incre ental costs.

C: Incre ental revenue if processed further G6H O G4H/ N ,HHH units G H,HHH Additional processing cost G?H,HHHConclusion: Process further because the incre ental revenue is higher than the incre ental costs.

12. a Adjusted joint cost after reduction of net sale of by-product G4HH,HHH O G4?,HHH O G?,HHH/ G H,HHH

Joint cost allocation ratios are co puted using the net reali9able value ethod as follo%s: A: G>?H,HHH O G4?H,HHH G4HH,HHHB: G HH,HHH O G4HH,HHH >HH,HHH&otal net reali9able value G HH,HHH

Joint cost allocation is co puted as follo%s: A: G4HH,HHH Q G HH,HHH N G H,HHH G H,HHHB: G>HH,HHH Q G HH,HHH N G H,HHH G 4H,HHH

13. c &otal revenue G4,?4H,HHH O By-product net sales H,HHH pounds N G4/ G4,>HH,HHH Allocation ratio for (econd ;ain Product ?H,HHH pounds Q KH,HHH pounds S ?H,HHH pounds/ H. 4?Joint cost allocated to (econd ;ain Product G4,>HH,HHH N H. 4? G ,?HH,HHH

14. a &otal units produced 6HH,HHH S 4>H,HHH S 4H,HHH H,HHH barrels Allocation ratio for (i$ 1il 4>H,HHH barrels Q H,HHH barrels H.6 6Joint cost allocated to (i$ 1il G?,HHH,HHH S G4,HHH,HHH S G6,HHH,HHH/ N H.6 6 G6, 6 ,HHH

15. b &%o 1il G4H N 6HH,HHH barrels/ G ,HHH,HHH(i$ 1il G6H N 4>H,HHH barrels/ 3,4HH,HHH "istillates G ? N 4H,HHH barrels/ , HH,HHH &otal G ?,HHH,HHH

Allocation ratio G ,HHH,HHH Q G ?,HHH,HHH >HRJoint cost allocation G?,HHH,HHH S G4,HHH,HHH S G6,HHH,HHH/ N >HR G>,HHH,HHH


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P?"C IC S

; ?CIS 1 ?on Che$icals1. Physical nits ;ethod

ProductD "-1 6-3 C-2 B-% otalnits............................................................ ?,HHH 4?,HHH H,HHH ?H,HHH HH,HHH

Allocation R........... ............... ...... ...... ..... ..... ?R 4?R HR ?HRJoint cost allocated R N G ?H,HHH/.......... G44,?HH G63,?HH G ?,HHH G3?,HHH G ?H,HH

2. +et 7eali9able HH,HHH/ >H,HHH/0ess: (eparable further processing costs.. 3?H,HHH / 3?H,HHH / 4 H,HHH/Joint cost allocated..................................... G ?H,HHH / G ?H,HHH/ G 6?H,HHH/ G ,4?H,HHH/

; ?CIS 3 Buoru$E Inc.(ales-to-Production-7atio ;ethod

Percenta#e Percenta#e Sales-to- Joint Cost>nits of otal >nits of otal Production "llocation Joint Cost

Product Sold Sales Produced Production ?atio ?atio "llocationL- H 4?,HHH . R 6H,HHH 4.HHR H.K4?K 3.K3R G 3K, K?7-6> >H,HHH 3.3 R 6H,HHH 4.HHR .> ? 4 .3?R 4 3,?(-KK 6?,HHH ?.? R ?H,HHH 4H.HHR H.333 ?.HKR ?H,K>6&- > ?H,HHH 44.44R H,HHH 4>.HHR H.K4?K 3.K3R 3K, K?- 4 3?,HHH 66.66R H,HHH 64.HHR .H> 3 4H.44R 4H4, ?

&otal 44?,HHH 4?H,HHH ?. ?4 G ,HHH,HHH


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1:8 Chapter 3

; ?CIS 4 Granite Cit! onu$ent 'or/s(ales of grit ?,HHH tons N G>H/............................ G4HH,HHH0ess: (eparable costs of processing....... .. .. .. .. .. .. H,HHH (ho%n as @1ther Inco e ..................................... G KH,HHH

1. rit accounted for as @1ther Inco e :Joint cost to be allocated G6?H,HHH Luarry S G4?H,HHH Cutting G HH,HHH

ProductD onu$ents Sla s otal&ons................................................................. 4?,HHH H,HHH ?,HHH

Allocation ratio...... ................ .............. ..... ...... . 4K.> 4R 3H.? RJoint cost allocation R N G HH,HHH/............. G 3 ,>34 G>46,?4 G HH,HHH

Add: (eparable further processing costs...... . 6HH,HHH >HH,HHH&otal...... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. G>3 ,>34 G 46,?4"ivided by tons............................ .......... ......... U 4?,HHH U H,HHHCost per t on.................................................... G K.H G 6.36

2. rit accounted for as by-product revenue deducted fro ain product cost:Joint cost to be allocated G6?H,HHH Luarry S G4?H,HHH Cutting O G KH,HHH By-product net sales G> H,HHH

ProductD onu$ents Sla s otal

&ons................................................................. 4?,HHH H,HHH ?,HHH Allocation ratio...... ................ .............. ..... ...... . 4K.> 4R 3H.? RJoint cost allocation R N G> H,HHH/............. G 4H,? K G4 K,> G> H,HHH0ess: (eparable further processing costs...... 6HH,HHH >HH,HHH&otal...... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. G>4H,? K G K,>"ivided by tons............................ .......... ......... U 4?,HHH U H,HHHCost per t on.................................................... G . 4 G .>K

; ?CIS 5 aldot Co$pan!Incre$ental ?e+enue Separa le urther "dditional

Product if Processed urther Processin# Costs Contri ution ar#inE G >?,HHH G4? O G H/ N 6,HHH G H,HHH G ?,HHH/F H,HHH G6H O G ?/ N >,HHH ?H,HHH H,HHHM 4H,HHH G6? O G4H/ N ,HHH KH,HHH 6H,HHH

Based on the analysis above, Product E should be sold i ediately at the split-off point. Products F and M should beprocessed further and then sold because they can generate ore profit if processed further.

Joint & by Product

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