CH 8: Costing By-Products and Joint Products - Cost Accounting Test 3

34 terms by lindsey_strickland 

Create a new folder

Advertisement Upgrade to remove ads

By-Product

A product of relatively small total value produced simultaneously with a product of greater total value.

Main Product

The product with the greater value.

Usually produced in greater quantities than the by-products.

Joint Products

Are produced simultaneously by a common process or series of processes, with each product possessing more than nominal value in the form in which it is produced.

Production is simultaneous because the manufacturing process inevitably creates all of the products.

An increase in one product's output will bring about an unavoidable increase in the quantity of the other product or products (v.v), but not necessarily in the same proportions.

Split-Off Point

The point at which these several products emerge as separable, individual units.
Before that point, the products form a homogenous whole.

Origins of the By-Product

*From the cleansing of the main product (generally have a residual value).

*Leftover scrap or waste.

*From preparing raw materials before they are used in the manufacture of the main product.

By-products can be classified into 2 groups:

(according to their marketable condition at the split off point)

(1) Those sold in their original form without need of further processing

(2) Those that require further processing to be salable

Joint Cost

The cost that arises from the simultaneous manufacturing of products produced from the same process.

Whenever 2 or more different joint or by-porducts are created from a single resource, a joint cost results.

Incurred prior to the split-off point,
in an indivisible sum for all products,
& requires allocation to the individual products.

Separable Product Costs

The total production cost of multiple products involves both joint cost and separate, individual product costs.

Identifiable with the individual product & need no allocation.

Difficulties in Costing By-Products & Joint Products

A true joint cost is indivisible.

Methods of Costing By-Products
2 Categories:

(1) A joint production cost is not allocated to the by-product, 2 methods are used
Method 1
Method 2

(2) Some portion of the joint cost is allocated to the by-product, 2 methods are used
Method 3
Method 4
*This allocation of joint costing is often
equivalent to viewing the by-product as a
joint product.
**Inventory costs are based on this allocated joint cost plus any cost of processing the by-product after split-off.

Method 1: Recognition of Gross Revenue

Any revenue resulting from sales of the by-product is credited to either income or to the cost of the main product.

This method is distinguished by its treatment of GROSS revenue from the by-product.

The gross revenue from sales of the by-product is presented on the income statement as any of the following:

a. Other Income
b. Additional Sales Revenue
c. A deduction from the Cost of Goods Sold of the main product
d. A deduction from the Total Production Cost of the main product

Method 2: Recognition of Net Revenue

The by-product's cost subsequent to split-off are offset against the by-product revenue.

This variation is distinguished by its treatment of the NET revenue from the by-product.

Net By-Product Revenue

Ex.
Revenue from sales of the by-product
Less: marketing and administrative costs
Less: any cost of processing the by-product after split off

The net by-product revenue is presented on the income statement as any of the following:

a. Other Income
b. Additional Sales Revenue
c. A deduction from the Cost of Goods Sold of the main product
d. A deduction from the Total Production Cost of the main product

Method 3: Replacement Cost Method

...

Method 4: Market Value Method

a.k.a. the Reversal Cost Method

Gross Revenue Method (M1)

The final inventory cost of the main product is overstated to the extent that some of the cost belongs to the by-product.

Method 1A: By-Product Revenue as OTHER INCOME

Sales (main product)
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit
- Marketing & Administrative Expenses
Operating Income
- **Other Income: Revenue from sales of by-
product**
Income Before Income Tax $4,500

Method 1B: By-Product Revenue as ADDITIONAL SALES REVENUE

Sales (main product)
+ *Revenue from sales of by-product*
Total Sales Revenue
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit (^)
- Marketing & Administrative Expenses
Operating Income (^) $4,500

Method 1C: By-Product Revenue as A DEDUCTION FROM THE COGS

Sales (main product)
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
- *Revenue from sales of by-product*
Gross Profit (^)
- Marketing & Administrative Expenses
Operating Income (^) $4,500

Method 1D: By-Product Revenue DEDUCTED FROM PRODUCTION COST

Sales (main product)
- COGS:
Beginning Inventory
Total Production Cost
-*Revenue from sales of by-product*
+Net Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit (^)
- Marketing & Administrative Expenses
Operating Income (^) $4,500

**Revised Production Cost results in a Reduced Average Unit Cost

Journal Entries for Methods 1a, 1b, 1c, & 1d

Methods 1A, 1B, & 1C:

Cash or Accounts Receivable
Income from Sales of By-Product

Method 1D:

Cash or Accounts Receivable
the production cost of the main
product, usually Work In Process

Net Revenue Method (M2)

Recognizes the need for assigning traceable costs to the by-product.
It does not attempt to allocate any joint production cost to the by-product.

Journal Entries for Method 2

Involve charges against by-product revenue for costs incurred after split-off.
Marketing and administrative expenses are also allocated to the by-product.

Replacement Cost Method (M3)

Used by companies whose by-products are used somewhere within the same company.
The existence of the by-product removes the necessity of purchasing equivalent materials from suppliers.
Ex. of intracompany transfer pricing.

Debit: to the dept. that uses the by-product
Credit: production cost of the main product

Market Value Method (M4)

a.k.a Reversal Cost Method

Similar to technique in 1D.
Reduces the manufacturing cost of the main product, not by the actual revenue received, but by an estimate of the by-product's value at the time of recovery.

The by-product is charged with this estimated amount, and the production cost of the main product is credited.
Any additional costs of materials, labor, or factory overhead incurred after split-off are charged to the by-product.

Methods of Allocating Joint Production Cost to Joint Products

Joint production costs (incurred before split-off), can be allocated to joint products under one of the following methods:

1. Market Value Method
based on the relative market values of
the individual products
2. Average Unit Cost Method
3. Weighted Average Method
based on predetermine weighting
factors
4. Quantitive Unit Method
based on some physical measurement
unit such as:
-weight
-linear measure
-volume

Market Value Method
for allocating joint production cost to joint products

Is neutral, and does not affect the relative probability of the joint products.

*Joint products salable at split-off
*Joint products not salable at split-off

Joint Products Salable at Split-Off

The market value method allocates joint cost on the basis of relative market values of the joint products.
~Uses the total mkt value of each product
-the total quantity produced multiplied
by the unit sales price

Under the mkt value method, each joint product yields the same gross profit percentage, assuming the units are sold without further processing.

Joint Products Not Salable at Split-Off

Require addition processing before the sale.
The basis for allocation of joint cost is a hypothetical market value at the split-off point. The subsequent processing cost is subtracted from the ultimate sale value to find a hypothetical market value.

Average Unit Cost Method

Attempts to allocate joint cost among joint products so that each product is allocated the same per unit amount of joint cost, called the average unit cost.
The average unit cost is obtained by dividing the total number of units produced into the total joint cost.

Weighted Average Method
for allocating joint production cost to joint products

In some cases, individual units of the various joint products differ markedly.
Predetermined weight factors may be assigned to each unit.

The weight factors are based on attributes such as size of the unit, difficulty to manufacture, time consumed in making the unit, difference in type of labor employed, and amount of materials used.

Finish production of every kind is multiplied by weight factors to calculate the basis for allocation of joint cost.

Quantitive Unit Method

Allocated joint cost on the basis of some common unit of measurement.

Please allow access to your computer’s microphone to use Voice Recording.

Having trouble? Click here for help.

We can’t access your microphone!

Click the icon above to update your browser permissions above and try again

Example:

Reload the page to try again!

Reload

Press Cmd-0 to reset your zoom

Press Ctrl-0 to reset your zoom

It looks like your browser might be zoomed in or out. Your browser needs to be zoomed to a normal size to record audio.

Please upgrade Flash or install Chrome
to use Voice Recording.

For more help, see our troubleshooting page.

Your microphone is muted

For help fixing this issue, see this FAQ.

Star this term

You can study starred terms together

NEW! Voice Recording

Create Set