### 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