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Chapter 11:
Allocation of Joint Costs and
Accounting for By-Product/Scrap
Cost Accounting:
Foundations and Evolutions, 9e
Kinney ● Raiborn
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Learning Objectives





How are the outputs of a joint process classified?
What management decisions must be made before
beginning a joint process?
How is the joint cost of production allocated to joint
products?
How are by-product and scrap accounted for?
How should retail and not-for-profit organizations
account for the cost of a joint activity?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Joint Process

Joint process—single process in which one product
cannot be manufactured without producing others





Extractive industries
Agriculture industries
Food industries
Chemical industries
Industries that produce both first-quality and factory
seconds merchandise in a single operation


When the process is unstable and is unable to maintain output
at a uniform quality level or
The output quality varies
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Joint Costs

Joint costs—material, labor, and overhead
incurred during a joint process

Allocate to primary products of a joint process
using



Physical measures
Monetary measures
Interpret costs allocated to joint products
carefully

Product profitability is determined largely by the
allocation method
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Joint Process Products

A joint process produces




Joint products—primary outputs of a joint process;
substantial revenue-generating ability
By-products—incidental output of a joint process
with a higher sales value than scrap but less than
joint products
Scrap—incidental output of a joint process with a
low sales value
Waste—residual output with no sales value
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Cost at Various Stages of Production



Separate cost—incurred in later states of
production; assignable to specific primary products
Split-off point—when joint products are first
identifiable as individual products
At split-off, joint costs are allocated to joint products


Joint costs are sunk costs once the split-off point is
reached
Joint costs may be reduced by the sales value of byproducts and/or scrap
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Illustration of a Joint Process

D’s Chicken Soup Company



Chicken Noodle
Chicken & Dumplings
Chicken Rice
Chicken
Water
Spices

Prepare vegetables,
discard waste
Cook
vegetables
and chicken
in water
Chicken, water, spices and vegetables are
joint inputs
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Illustration of a Joint Process
split off
point
Basic
chicken
soup
add
Cooked, canned, and
into FG inventory
Noodles
Chicken
Noodle
Rice
Chicken
Rice
Dumplings
Chicken
&
Dumplings
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
To Process or Not to Process?
Decide before the joint-process is started

Will revenues exceed total costs?

Revenue from sale of joint process outputs

Costs




Joint costs
Processing costs after split-off
Selling costs
What is the opportunity cost?

Is income from the joint process greater than
income from other uses?

Is the joint production process the best use of
capacity?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
To Process or Not to Process?
Decide at the split-off point

How to classify outputs






Primary
By-product
Scrap
Waste
Joint costs, reduced by the value of by-products and scrap,
are assigned to primary products only
Sell at split-off or process further?

If primary products are marketable at split-off, process
further only if value added to the product (incremental
revenue exceeds incremental cost)
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Allocating Joint Costs

Each method may allocate a different
cost to joint products

Physical measure


Common physical characteristic
Monetary measure
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Physical Measures

Physical Measures







Treats each unit as equally
desirable
Assigns same cost to each
unit
Provides an unchanging
yardstick of output over time
Use for products with
unstable selling prices
Use in rate-regulated
industries
Ignores revenue-generating
ability of joint product
Joint Cost
Pounds
=
Examples of Physical
Measures





$150
300 lbs
Tons of meat, bone, and
hide in meat packing and
chicken processing
Tons of ore in mining
Linear board feet in lumber
milling
Barrels of oil in petroleum
refining
Number of computer chips
in semiconductors
=
$0.50 per lb
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measures

Monetary Measure



Recognizes the revenue—generating ability of
joint products
The base is not constant— unchanging
Choices



Sales value at split-off
Net realizable value (NRV) at split-off
Approximated NRV at split-off
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure Allocation Steps






Choose a monetary allocation base
List values that comprise the base for each joint
product
Sum the values
Divide each individual value by the total value; this is
the numerical proportion for each value
Multiply joint costs by each proportion; this is the
amount to allocate to each product
Divide allocated joint cost for each product by the
number of equivalent units to obtain a cost per
equivalent unit
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure Allocation
Example (slide 1 of 3)

Choose a monetary allocation base


Sales value at split-off
List values that comprise the base for each joint product
Product
A
B
C

Revenue (at split-off)
$ 1,000
$ 4,000
$ 5,000
Sum the values

$1,000 + $4,000 + $5,000 = $10,000
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure Allocation
Example (slide 2 of 3)

Divide each individual value by the total value; this is the numerical
proportion for each value
Product
A
B
C

Revenue
$ 1,000 1,000/10,000 = 10%
$ 4,000 4,000/10,000 = 40%
$ 5,000 5,000/10,000 = 50%
$10,000
100%
Multiply joint costs ($3,000) by each proportion; this is the amount to
allocate to each product
Product
A
B
C

Joint Costs
$3,000 *
$3,000 *
$3,000 *
Joint Cost
Proportion Per Product
10%
$ 300
40%
$1,200
50%
$1,500
$3,000
$3,000 of joint costs are allocated to Products A, B and C
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure Allocation
Example (slide 2 of 3)

Divide allocated joint cost for each product by the number of
equivalent units to obtain a cost per EUP
Joint
Product
A
B
C
Cost
Per Product
$ 300
$1,200
$1,500
$3,000
/
/
/
Equivalent
Units
100
600
300
Cost
Per EU
$3.00
$2.00
$5.00
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure:
Sales Value at Split-Off

Sales value at split-off



Uses relative sales value at split-off point
All joint products must be marketable at splitoff
Uses a weighting technique based on both


Quantity produced
Selling price of production
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Monetary Measure:
NRV at Split-Off


Sales revenue at split-off
less product disposal costs
equals NRV
NRV at split-off
 Assigns joint costs based on the proportional NRVs of the joint
products at the split-off point
 All joint products must be marketable at split-off
Approximated NRV at split-off
 Some or all joint products are not marketable at split-off
 Uses simulated NRV at split-off in place of actual NRV at split-off


Incremental separate cost equals all processing and disposal costs
incurred between split-of point and point of sale
Assumes that incremental revenue from further processing is
equal to or greater than the incremental costs of further
processing and selling
Final sales price
less incremental separate costs
equals simulated NRV at split-off
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Choosing Monetary Measures

Which monetary measure method to use?



Sales value at split-off
NRV at split-off
Approximated NRV at split-off




Superior method of measuring benefits
Matches costs of joint processing with its benefits
Provides expected contribution of each product line to
the coverage of joint costs
More complex due to required estimates
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Accounting for By-Products and
Scrap (slide 1 of 3)



By-products, scrap, and waste may provide
substantial revenue
Companies are devoting time, attention, and
creativity to developing innovative revenue sources
from by-products, scrap, and waste
Sales value of by-products/scrap is recorded using



NRV Method or
Realized Value Method
Choose method based on


Magnitude of NRV
Need for additional processing after split-off
Decide before
joint costs are
allocated to
the joint
products
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Accounting for By-Products and
Selling Price
Scrap (slide 2 of 3)
Less Process, Storage, Disposal Costs

NRV





Use this method when NRV is significant
Scrap or by-product recorded at NRV
NRV reduces joint cost of main products
Any loss is added to cost of the main products
Indirect method

NRV reduces cost of goods sold for joint products


equals NRV of By-Product/Scrap
Conservative; joint cost is reduced when the product/scrap is
sold
Direct method

NRV reduces work in process for joint products

Joint cost is reduced when by-product/scrap is produced
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Accounting for By-Products and
Scrap (slide 3 of 3)



NRV is the traditional method, not necessarily
best method
By-products have either no assignable costs
or costs equal to their net sales value
Difficult for management to


Monitor production and further processing of byproducts
Make effective decisions for by-products
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
By-Products & Scrap: Realized
Value (slide 1 of 2)

First option



Proceeds recorded as
Other Revenue
Costs of additional
processing or disposal
added to costs of primary
products
Provides little information to
management as it does not
match revenues and
expenses
By-product/scrap value is
recognized when items sold

Second option




Proceeds less related costs
shown as Other Income
Matches revenues and
related expenses for
storage, further processing,
transportation, and disposal
costs
Highlights the revenue
enhancement provided by
managing the costs and
revenues related to byproducts/scrap
Allows for better control and
improved performance
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
By-Products & Scrap: Realized
Value (slide 2 of 2)

Other clerically efficient options



Proceeds added to gross margin
Proceeds reduce cost of goods manufactured
Proceeds reduce cost of goods sold
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Impact of Realized Value and NRV

If most jobs create byproducts or scrap


Proceeds reduce the
manufacturing overhead
account
The journal entry using the
realized value approach is:
Cash
Manufacturing Overhead

If only specific jobs create
by-products or scrap


Proceeds reduce work in
process for the specific job
The journal entries using
the NRV approach are:
Scrap Inventory
Work in Process
Cash
Scrap Inventory
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Joint Costs in Retail Organizations

Joint costs include





Advertising for multiple products
Printing for multipurpose documents
Events held for multiple purposes
Not required to allocate joint costs
Allocation base


Physical (number of locations)
Monetary (sales volume)
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Joint Costs in Not-for-Profit Organizations




Joint costs related to
 Fund-raising
 Organizational programs (program activities)
 Conducting an administrative function
Joint costs must be allocated for NPFs and state and local
government entities
Method must be rational and systematic
Clearly show the amount spent for various activities




Three tests for allocation—purpose, audience, and content
If tests not met, the costs are fund-raising
Compensation tied to contributions is automatically fund-raising
Purpose is to ensure that users of financial statements can identify
fund-raising costs
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Questions



What is a joint product?
How are costs allocated to joint products?
What accounting methods are used to record
the proceeds from the sale of by-products?
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.
Potential Ethical Issues







Product decisions based on sum of joint and separate
processing costs
Misclassifying a joint product as by-product or scrap
Misclassifying products as waste and selling “off the
books”
Manipulating joint costs in ending inventory
Using sales values of by-products and scrap to
manipulate overhead allocation rates
Disposing of hazardous waste in a harmful way
Misallocating costs to programs or management
activities to reduce fund-raising costs reported by a
not-for-profit organization
© 2013 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly
accessible website, in whole or in part.