Joint Products and By-Products
Practice As You Learn
Cost Accounting
Know how to:
1) Allocate joint costs using 4 different methods
2) Record the cost of joint products
3) Record the cost of scrap using various methods
Memorize the formulas for each method:
1. Physical quantity:
Units of physical measurement x Quantity for each
2. Sales value at split-off:
Units sold x Sales price at split off
3. Net Realizable Value
Units sold x Sales price at split off – cost to sell/dispose
4. Approximate Net Realizable Value
Units sold x (Final sales price – further processing costs – costs to sell/dispose)
Reduce the amount of total joint costs by any net realized from the sale of scrap/by products before allocating.
Allocate:
1) Work the formula for each joint product
2) Total amounts computed for all joint products
3) Compute the % of total for each joint product.
4) Multiply the % x total joint costs to be allocated to get the amount of joint costs allocated to each joint product
Journal entries:
Debit Work in Process to add allocated costs
The joint process and each product identified at split-off have a separate “Work in Process” account
Specify the product “Work in Process” account
The objective for recording scrap for each method.
Indirect, net realizable value:
Reduce cost of goods sold for the net received after the product is sold
Direct, net realizable value:
Decrease work in process for the net received after the product is sold
Realized value approach:
Reduce cost of production or increase other income (if not usually sold) for net received
Practice Problem 1: Allocating Joint Costs
A company uses a joint process to manufacture quarts of oil. Product A is sold in 2- quart bottles and product B is sold in 4-quart bottles. Joint Processing Costs are $170,000.
| Units Produced | Sales Price per unit at Split-off | Selling/Disp. cost per unit at split-off | Further cost of processing | Final Sales price per unit | |
| A | 2,000 | $13 | $0.25 | $2 | $20 |
| B | 6,000 | $30 | $2.50 | $3 | $40 |
Allocate joint costs and determine the cost per unit for product A and product B using
A. quarts produced
B. sales value at split-off
C. net realizable value
D. estimated net realizable value
Answer
A. Quarts produced:
| % of total | Joint Costs | |||
| Product A | 2,000 x 2 = 4,000 | .143 | x | 170,000 = 24,310 |
| Product B | 6,000 x 4 = 24,000 | .857 | x | 170,000 = 145,690 |
| Total | 28,000 |
Joint Cost / Units = Cost per Unit + added costs = final cost
| A | 24,310 / 2,000 = | 12.16 | + 2 | = $14.16 |
| B | 145,690 / 6,000 = | 24.28 | + 3 | = $27.28 |
B. Sales Value at Split-off
|
% total x Joint Costs Product A 2,000 x 13 = 26,000 .126 x 170,000 = 21,420 |
Joint Cost / Units = Cost per Unit + added costs = final cost
| A 21,420 / 2,000 = 10.71 + 2 = $12.71 B 148,580 / 6,000 = 24.76 + 3 = $27.76 |
C. Net Realizable Value
Units x (sales price – cost to sell/dispose) = NRV get % x Joint costs
| A 2,000 x ($13 – $0.25) = 25,500 .134 x 170,000 = 22,780 B 6,000 x ($30 – $2.50) = 165,000 .866 x 170,000 = 147,220 Total 190,500 |
Joint Cost / Units = Cost per Unit + added costs = final cost
| A 22,780 / 2,000 = 11.39 + 2 = $13.39 B 147,220 / 6,000 = 24.54 + 3 = $27.54 |
D. Approximate Net Realizable Value
Units x (final sales price – selling costs – further processing costs) = Appr. NRV
| A 2,000 x ($20 – $0.25 – $2) = 35,500 .146 x 170,000 = 24,820 B 6,000 x ($40 – $2.50 – $3) = 207,000 .854 x 170,000 = 145,180 Total 242,500 |
Joint Cost / Units = Cost per Unit + added costs = final cost
| 24,820 / 2,000 = 12.41 + 2 = $ 14.41 145,180 / 6,000 = 24.20 + 3 = $27.20 |
Practice Problem 2: Recording Joint Cost Allocation
Make the journal entries necessary to record joint costs using the allocation done in practice problem 1 using the net realizable value basis (C).
Answer
Record all product costs incurred in the joint process to Work in Process.
The breakdown of joint costs is unknown.
Joint costs are allocated and recorded as a credit to each product.
| Work in Process – Joint 170,000 Raw materials, Cash, etc. 170,000 |
Move the joint costs to each product using your allocation.
| Work in Process – A 22,780 Work in Process – B 147,220 Work in Process – Joint 170,000 |
Add separate processing costs to each product (units x cost per unit)
| Work in Process – A 4,000 Work in Process – B 18,000 Raw Materials, cash, etc. 22,000 |
Move the cost of completed units to finished goods (Total amount in each WIP)
| Finished Goods – A 26,720 Finished Goods – B 165,220 Work in Process – A 26,780 Work in Process – B 165,220 |
Costs to sell/dispose are period costs that are recorded as selling expense when the product is sold.
Practice Problem 3: Recording Scrap Sales
The following information is available relative to scrap:
| Selling price of scrap plastic: | $0.30 per pound |
| Additional processing costs to make the scrap plastic sellable: | $0.08 per pound |
| Scrap plastic sales: | 10,000 pounds |
A. Make the journal entries to account for scrap given the company uses the indirect method / net realizable value approach
B. Make the journal entry to account for scrap given the company uses the direct method/ net realizable value approach
C. Make the journal entry to account for scrap given the company uses realized value approach
Answer
A. Indirect / net realizable value approach:
Additional Processing Costs:
WIP 800
Cash 800
(10,000 x .08)
Net proceeds received
WIP 2,200
CGS 2,200
10,000 x (0.30 – 0.08)
Move costs to saleable product (total in WIP)
Scrap / By Product 3,000
WIP 3,000
Record the sale
Cash 3,000
Scrap/By Prod 3,000
(10,000 x $0.30)
Net result:
WIP = 0
CGS is reduced by the net realized from sale
B. Direct / net realizable value approach:
Cash 2,200
WIP (or CGS) 2,200
C. Realized Value
WIP (or CGS) 800
Cash 800
Cash 3,000
Other Revenues 3,000