Chapter 9 Joint Product and By-Product Costing LEARNING OBJECTIVES Chapter 9 addresses the following questions: Q1 What is a joint process, and what is the difference between a by-produ
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LEARNING OBJECTIVES
Chapter 9 addresses the following questions:
Q1 What is a joint process, and what is the difference between a by-product and a main product?
Q2 How are joint costs allocated?
Q3 What factors are considered in choosing a joint cost allocation method?
Q4 What information is relevant for deciding whether to process a joint product beyond the split-off point?
Q5 What methods are used to account for the sale of by-products?
Q6 How does a sales mix affect joint cost allocation?
Q7 What are the uses and limitations of joint cost information?
These learning questions (Q1 through Q7) are cross-referenced in the textbook to individual exercises and problems
COMPLEXITY SYMBOLS
The textbook uses a coding system to identify the complexity of individual requirements in the exercises and problems
Questions Having a Single Correct Answer:
No Symbol This question requires students to recall or apply knowledge as shown in the
textbook
e This question requires students to extend knowledge beyond the applications
shown in the textbook
Open-ended questions are coded according to the skills described in Steps for Better Thinking (Exhibit 1.10):
Step 1 skills (Identifying)
Step 2 skills (Exploring)
Step 3 skills (Prioritizing)
Step 4 skills (Envisioning)
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QUESTIONS
9.1 Some goods are produced jointly; many products result from a common process These
are called joint products Main products have high sales value relative to other products when split-off occurs By-products have low sales value relative to the main products’ values
9.2 Because all of the other products are sold at $200 or more, the product that sells for only
$10 would probably be considered a by-product Main products have relatively high sales values compared to by-products
9.3 There are two methods of recognizing revenue from by-products The revenue can be
recognized at the split-off point, or recognized at the time of sale The treatment depends
on whether the NRV is positive or negative, and also on whether it is recognized at the time of production or sale Negative NRV is always added to joint costs When positive NRV is recognized at time of production, it is subtracted from joint costs When positive NRV is recognized at time of sale, it may be treated as revenue, treated as non-revenue income, or subtracted from COGS
9.4 Products from any of the following industries would be appropriate: oil and gas,
chemical, lumber products, tour companies, meat production, wheat production, milling companies
9.5 Joint costs are product costs that cannot be separately traced to individual products, so
they are indirect with respect to individual products Separable costs are the direct costs
of producing separate products (but these costs may or may not be direct with respect to individual units)
9.6 The split-off point in a joint process occurs at the point when the individual joint products
become separately identifiable All costs incurred up to the split-off point are joint costs and (assuming no further split-off points) the costs that follow are separable costs
identifiable with a specific joint product
9.7 Here are a few examples; students may think of others that are also appropriate A
professor may do some consulting work that simultaneously generates ideas for a journal article (main product), a case for a book (main product), and a problem for an exam (by-product) A CPA firm may work on client development that simultaneously produces prospective engagements for the auditing and tax services (all probably main products)
A research scientist may have an individual project that results in twenty-two patentable items (some may be main products, some may be by-products, and some may be
scrapped)
9.8 Once the joint product emerges, the joint cost should be viewed as a "sunk" cost; it is a
past cost that should not influence subsequent product decisions Further processing decisions should be made based on the additional revenues obtained in relation to the additional separable costs needed to obtain those revenues
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9.9 If all joint products were sold in the period produced, costs might not need to be
allocated But for financial reporting, all production costs must be assigned to cost of goods sold and ending inventories of the joint products to match revenues and expenses
9.10 The contribution of each product is the selling price less separable costs Revenues and
separable costs are relatively easy to identify and measure Therefore accountants know each product’s contribution However, if profit is defined to mean accounting income, all costs including fixed and joint costs are allocated To allocate costs, an allocation base must be chosen Different allocation bases result in different profit figures Hence, the profitability of one joint product cannot be uniquely determined, but will vary with different allocation bases
9.11 Because the products have relatively equal value, they should all be treated as main
products
9.12 To perform market based joint cost allocations (net realizable value and constant gross
margin NRV), an estimate is made of the sales value of each product Common and separable costs are known with reasonable certainty, but price may be estimated If the market for goods is not volatile, the price can be determined from past experience If prices change frequently, information sources such as competitor’s prices or a list of commodity prices could be used for estimates
9.13 Following are qualitative factors that might influence managers to process a joint product
beyond the split-off point The organization may offer a product mix, and dropping one
of the products could affect sales of other products, so a group of products are always processed further An example of this would be meat related products Even though round steak does not need to be processed further, some people want very lean
hamburger and customers may shop elsewhere if lean hamburger is not sold Manager preferences might affect the decision to process further For example, managers of a dairy might have a preference for a particular type of cheese that other dairies do not produce, and so they continue producing it even though sales are low and the milk could
be used for other products Resource scarcity encourages managers to consider new processes for raw materials such as sawdust and wood chips Environmental issues also influence joint product decisions Sometimes companies choose to convert waste into a by-product that can be sold to avoid contributing to waste disposal Another factor is the effect on employees and local communities Managers may choose to continue
additional processing even when the financial results are relatively weak to avoid closing production facilities and laying off employees
9.14 Some by-products are valuable and could be stolen, and so internal controls and records
are kept For by-products that are unlikely to be stolen, no controls or records need to be kept An example of a by-product that could be stolen is raw malachite, a by-product of copper production that can be further processed into cabochons for jewelry An example
of a by-product that would not need controls is whey from dairy product processing
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EXERCISES
9.15 By-Product Further Processing Decision
According to the following calculations, the contribution margin is higher if the product is sold at the split-off point rather than processed further Therefore, the by-product should not be processed further
by-Sold at split-off: 100 x $8 = $800 Processed further: 100 x ($19 - $12) = $700
9.16 Identifying Joint Products
A The following are joint products
1 Sand produced with three levels of fineness The sand is produced by processing raw dirt and includes a number of joint costs such as labor and equipment Some
of the products are processed further
3 Milk products are joint products because they all come from one liquid that is processed further, depending on the product
6 Airlines could be considered as incurring joint costs because a large proportion of cost is common to all of the products
The following are not joint products
2 Automobiles and trucks because either one can be manufactured without
producing the other
4 Motorcycles and mopeds because either one can be manufactured without
producing the other
5 Clothing can be manufactured in any style without producing other styles and is therefore not a joint product
B Two other product groups would include tour services or cruise lines, products
manufactured from crude oil such as gasoline, diesel, and heating oil, and many types of food products such as beverage manufacture, cereals, milling operations, and so on
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9.17 Cowboy Cattle Company
1 Joint All cattle require veterinary work, and the cost per specific cow is
incurred before the split-off point
2 Separable The cost occurs after the split-off point and can be traced directly to
hamburger
3 Joint The cost is incurred before the split-off point
4 Joint The cost is incurred before the split-off point
5 Separable The cost is incurred after the split-off point, specifically for leather
6 Separable The cost is incurred after the split-off point, specifically for steaks and
An alternative answer is to consider the amount of margin generated by having a separate class of passengers rather than filling the entire cruise ship with tourist-class passengers Assume that 25 tourist-class berths replaced 20 first-class berths (Students could make any reasonable assumption concerning how many tourist-class berths would replace first-class berths.) So, the trade-off is 25 tourist-class versus 20 first-class berths
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Incremental contribution margin if first-class cabins are sold to tourist-class passengers:
Contribution per passenger for first-class: $200 - $30 = $170 Contribution per passenger for tourist-class: $100 - $15 = $85 Contribution for 20 first class passengers (20 x $170) $3,400 Contribution for 25 tourist class passengers (25 x $85) 2,125
C In the example above, no allocated costs were considered because they are essentially sunk costs for the decision to use the space for first-class or tourist class Those costs are incurred either way, so only incremental contribution is analyzed
9.19 The Palm Oil Company
A Computation of $100,000 joint-cost allocation using four allocation methods:
(1) Sales value at split-off point
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(3) Estimated Net Realizable Value
Final Sales Separable Realizable Allocation
(4) Constant Gross Margin Method
First calculate the gross profit margin ratio for all products:
Product Final Sales Value Separable Costs Contribution
Gross profit margin ratio = $100,000/$570,000 = 0.175439
Second, apply the gross profit margin ratio to each product to determine cost of goods
sold Then subtract separable costs from cost of goods sold to determine the joint
cost allocation for each product
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Contribution from Processing Cooking grade oil into Superior Cooking Oil:
Contribution from Processing Heavy Moisturizer into Premium Moisturizer:
Operating income can be increased by $50,000 if both Cooking Grade Oil and Heavy Moisturizers are sold at the split-off point Soap Grade should continue to be processed
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9.21 Click and Clack Recyclers
A There are no separable costs for these products, so each product’s net realizable value is the revenue per gallon However, one gallon of oil yields 0.7 motor oil and 0.3 fuel oil,
so for each gallon of oil produced, the total NRV is $2.55 (0.7*$3 + 0.3*$1.50) The percentage of cost per gallon allocated to residual fuel oil is 0.1324 [(0.3*$1.50)/$2.55 *
9.22 Mile High Lumber Mill
A Income Statement With By-Product Value Recognized at the Time of Sale
31 would be:
An additional inventory of 100 logs’ worth of scrap is on hand at an estimated value of $10 each, or $1,000 total This value is not recognized in the accounting records
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B Income Statement With By-Product Value Recognized at the Time of Production
Value of inventory for the main product:
Product cost per board foot ($590,000/300,000 bd ft) $1.966667 Income statement:
9.23 The Paint Palette Company
A Physical output method:
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Allocation:
Allocated to premium ($4,800/$11,100)*$10,000 $ 4,324 Allocated to regular ($6,300/$11,100)*$10,000 5,676
C Constant Gross Margin NRV Method
First, determine gross margin percentage:
Next, allocate common cost:
D Compare the contribution per gallon of the two alternatives:
Contribution per gallon if processed further ($22 - $11 - $1) $10
Increase in contribution per gallon if process further $ 1
9.24 The Chile Salsa Company
This problem can be solved in a series of steps, where the answers for some parts are
needed to answer others
If joint costs are allocated based on the sales value at split-off point method, the joint
costs for Spicy Hot are: ($25,000/$100,000) * $60,000 = $15,000 (1)
Therefore, the joint cost for Medium is ($60,000 - $24,000 - $15,000) = $21,000 (2)
Now the values for sales at split-off for medium and mild can be calculated:
Medium: [($21,000/$60,000)*$100,000] = $35,000 (3) Mild: ($100,000 - $35,000 - $25,000) = $40,000 (4)
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A Allocation for Very Flexible under the sales value at split-off point method:
$120/000/($840,000 + $540,000 + $120,000) * $900,000 = $72,000 Gross profit:
Revenue – Separable costs – Allocated joint costs
A Gross margin if by-product value is recognized at time of production
Value of inventory for main product
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B Gross margin if by-product value is recognized at the time of sale
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PROBLEMS
9.27 Roses to Go
A Roses to Go must pay someone to water and tend to the roses The company must pay
for labor to cut the roses It pays for fertilizer and water and depreciation on any
buildings used in the production and cutting process If the roses are cooled after cutting, the cost of cooling must be paid All of these are joint costs
B Use the physical volume method because it is the most simple and will not distort costs if there is little difference in the packaging and pricing of the products
C If there are different prices, the sales value at split-off point method would work best here because the separable costs would be very similar This method is most simple and
would be the best choice because it does not distort the costs
A The weights are obtained by multiplying the initial 270,000 pounds by the proportion
delivered to each department and, in the case of juicing, dividing by 1.08 to account for evaporation The resulting weights are 94,500 lbs for slicing, 75,600 for crushing,
67,500 for juicing and 27,000 for feed