PMA2133 | Cost Accounting Techniques and Applications

Session: July 2020

CHAPTER THREE
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JOINT AND BY PRODUCT

LEARNING OUTCOMES:

Upon Completion of this chapter, students should be able to:

 Distinguish between Joint Product and By Product

 Identify the Methods of Allocating Costs: Physical Measures Method,

Sales Value at Split off Point Method, Net Realizable Value Method and

Constant Gross Profit Percentage Method

 Compare all those Methods

 Prepare Accounting for By Products

 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

3.1 JOINT AND BY-PRODUCT

Joint and by-products are complications that can occur within the context of process costing. Joint
products and by-products arise in situations where the production of one product makes inevitable
the production of other products. It is frequently difficult to differentiate between a joint product
and a by-product. When some products are considered as being insufficient or not important such
as having low market value, then they are categorized as by-product. Examples of industries that
produce both joint and by-products include chemicals, oil refining, mining, flour milling and gas
manufacturing.

3.1.1 Joint products

Joint products are two or more products separated in the course of processing, each having a
sufficiently high saleable value to merit recognition as a main product. For the purpose of product
costing, a joint product cost generally is assigned to the joint products that result from the
production process. It is necessary to assign that cost for the valuation of stock and determination
of income. Joint products include products produced as a result of the oil-refining process, for
example, petrol and paraffin. Petrol and paraffin have similar sales values and are therefore
equally important (joint) products.

3.1.2 By-products
By-products are outputs of some value produced incidentally in manufacturing something else
(main products). It also can be referred as a joint product with very little value relative to the other
joint product. By-products may be sold in the same form in which they emerge or they may be
further processed in order to be saleable. By-products, such as sawdust and bark, are secondary
products from the timber industry (where timber is the main or principal product from the process).
Sawdust and bark have a relatively low sales value compared to timber or plank which is produced
and therefore classified as by-products.

Example of main products, by-products and the usable value of the by-products:
Industry Main products By-products Uses
Saw mills Planks Rejected wood, off- Used for firewood
cuts
Saw dust Prevent ice from
melting
Powder Used in linoleum
manufacture
Oil Petrol and lubricant Gas For industrial,
medical or home use
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Sulphur For fertilizer or

chemical making
Fish trade Dressed fish Organs Used to make oil or
ferilizer

3.1.3 Split-off point

A distinguish feature of the production of joint and by-products is that the products are not
identifiable as different individual products until a specific point in the production process is
reached, known as the split-off point. All products may separate at one time, or different products
may emerge at intervals. Before the split-off point, costs cannot be traced to particular products.
For example, it is not possible to determine what part of the cost of processing a barrel of crude
oil should be allocated to petrol, kerosene or paraffin. After the split-off point, joint products may
be sold or subjected to further processing. If it is decided to process further, any further processing
costs can be traced to the specific products involved.

Split-off point
Joint Labour and
product A overhead
Labour
and
overhead
Joint Joint Labour and
process product B overhead
Raw
materials
By-product
C

Figure 3.1: Split-off-point

In the above figure, joint products A and B and by-product C all emerge at the same split-off point.
Before the split-off point, they share the same raw materials, labour and overheads costs. After
split-off point, further processing cost are added to the joint products before sale, and this costs
can be specifically allocated to them. It can be see that by-product C is sold at split-off point
without further processing.
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

3.2 Methods of Allocating Joint Costs

The most frequently used methods that are used to allocate joint costs up to split-off point can be
divided into the following two categories:
i. Methods based on physical measures such as weight or volume
ii. Methods based on allocating joint costs relative to the market values of the products.

For the purpose of this chapter, we will look into the four methods.

3.2.1 Physical Measures Method

Using the physical measures method, the joint cost is simply allocated in proportion to volume.
Each product is assumed to receive similar benefits from the joint cost, and is therefore charged
with its proportionate share of the total cost. The physical measures method allocates joint product
costs on the basis of physical characteristics of the joint products at split-off point. This method is
less preferred since it is not based on the economic characteristics of the joint product.

EXAMPLE
During the month of July, the Nostrand Company processes a basic raw material through a
manufacturing process that yields three products – products X, Y and Z. There were no opening
inventories and the products are sold at the split-off point without further processing. It is assume
that all of the output is sold during the period. The total joint costs for the three products are
RM600, 000. The company produces 40,000 units of product X, 20,000 units of product Y and
60,000 units of product Z. The selling price per unit for product X is RM7.50, product Y RM25 and
product Z RM3.30.

The cost allocations and profit calculations using the physical measures method are as follows:
Product Units Sales Cost per Allocation of Profit (Loss) Profit/Sales
produced revenue unit* Joint Cost** (%)
X 40,000 RM300,000 RM5 RM200,000 RM100,000 33.33%
Y 20,000 RM500,000 RM5 RM100,000 RM400,000 80%
Z 60,000 RM200,000 RM5 RM300,000 (RM100,000) (50%)
Total 120,000 RM1,000,000 RM600,000 RM400,000 40%
Note: This method assumes that the cost per unit is the same for each of the products.
* Cost per unit = Total cost / Total units
* RM600,000 / 120,000 = RM5
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Thus the ** joint cost allocated

Product X: 40,000 x RM5 = RM200,000
Product Y: 20,000 x RM5 = RM100,000
Product Z: 60,000 x RM5 = RM300,000

3.2.2 Sales Value at Split off Point Method

Joint costs are allocated to the joint products in proportion to their sales values at the split-off
point. A product with higher sales value will be allocated a higher proportion of the joint costs.
Using the same data of Nostrand Company above, the allocations under this method would be
as follows:

EXAMPLE
The cost allocations and profit calculations using the Sales Value at Split off Point Method are
as follows:
Product Units Sales value Proportion of Allocation Profit (Loss) Profit/Sales
produced sales value of Joint (%)
to total (%) Cost
X 40,000 RM300,000 30 RM180,000 RM120,000 40%
Y 20,000 RM500,000 50 RM300,000 RM400,000 40%
Z 60,000 RM200,000 20 RM120,000 RM80,000 40%
Total 120,000 RM1,000,000 RM600,000 RM400,000

3.2.3 Net Realizable Value Method

The net realizable value (NRV) of each final product is its sales value less any separable costs
incurred after the split-off point. In this method, joint costs are allocated to the joint products in
proportion to NRV of each joint product.

EXAMPLE
Assume the same situation as example above except that further processing costs now apply.
The further processing costs for product X, Y and Z are RM80,000, RM100,000 and RM20,000
respectively.
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Product Sales Further Estimated Propor Joint cost Profit Profit/

revenue processing net tion to alllocated (Loss) Sales
cost realizable total (%)
value at (%)
split-off
point
X RM300,000 RM80,000 RM220,000 27.5 RM165,000 RM55,000 18.33
Y RM500,000 RM100,000 RM400,000 50 RM300,000 RM100,000 20
Z RM200,000 RM20,000 RM180,000 22.5 RM135,000 RM45,000 22.50
Total RM1,000,000 200,000 800,000 RM600,000 RM200,000 20

3.2.4 Constant Gross Profit Percentage Method

The constant gross profit percentage method allocates joint costs such that the gross profit
percentage is the same for each product. This method assumes that the further processing
produces an identical profit percentage across all products. Using the constant gross profit
percentage method, the joint cost allocation steps include the following calculations:

(Total revenue – Total costs)

Grand gross profit percentage =
Total revenue
Joint product gross profit = Market price × Grand gross profit
Joint cost allocated to product = Market value – Gross profit – Separable costs

EXAMPLE
From the above example, they are 18.33% for product X, 20% for product Y and 22.5% for Z. In
this constant gross profit percentage method, the joint costs would be allocated in such a way that
the resulting gross profit percentage for each of the three products is equal to the overall gross
profit percentage of 20%.

Grand gross profit percentage = RM1,000,000 – RM800,000

RM1,000,000
= 20%
X Y Z Total
Sales/Revenue RM300,000 RM500,000 RM200,000 RM1,000,000
Less: Gross profit at 20% (RM60,000) (RM100,000) (RM40,000) (RM200,000)
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Cost of goods sold RM240,000 RM400,000 RM160,000 RM800,000

Less: Separable further (RM80,000) (RM100,000) (RM20,000) (RM200,000)
processing costs
Allocation of Joint cost RM160,000 RM300,000 RM140,000 RM600,000

3.3 Comparison of all those Methods

In selecting the most appropriate method for allocation of joint cost, companies need to consider
all relevant factors. Cause-and–effect relationship cannot be used since there is no cause-and-
effect relationship between the individual products and the incurrence of joint cost. Another factor
that should be considered is the benefits received. If the benefits received cannot be obtained,
costs should be allocated based on the principle of equity or fairness.

It might be seen that a physical measures method is most broadly used, despite of its
disadvantages. However, company tend to use a method where the output from the joint process
can be measured without too much difficulty. Below are the summary of advantages and
disadvantages of each allocation method:

Methods Advantages Disadvantages

Physical Measures Method  Simple to operate  Can distort profit
where there is a reporting and inventory
common unit of valuation
measurement  Can be difficult to find a
common unit of
measurement
Sales Value at Split off Point  Provides more  Assumes that sales
Method realistic inventory value determines prior
valuations costs
 Assumes that a sales
value at split-off point
can be determined
Net Realizable Value  Takes further  Can be difficult to
Method processing costs into calculate for a complex
account process with many
 Simple to apply if split-off ponts
there is only one split-
off point
Constant Gross Profit  Appropriate only if a  Only appropriate if a
Percentage Method constant gross profit constant gross profit for
for each joint product each product makes
is a logical assumption sense
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

3.4 Accounting for By-products

By products are products that have a minor sales value and that emerge incidentally from the
production of the major product. As the major objective of the company is to produce the joint
products, it can justifiable be argued that the joint costs should be allocated only to the joint
products and that the by-products should not be allocated with any portion of the joint cost that
are incurred before the split-off point. Any further costs that are incurred in producing by-products
after the split-off point can justifiably be charged to the by-product, since such costs are incurred
for the benefit of the by-product only.

Use the following steps:

1. Calculate Net Revenue from By-Product (NRBP)
NRBP = Sales - Further processing cost
2. Calculate balance of joint cost
BOJC = Original Joint cost – NRBP
3. Calculate joint cost allocation and profit for each joint product using four methods

COMPREHENSIVE EXAMPLE:

The Neopolitan Company operates a manufacturing process, which produces joint product A and
B, and by-product C. The total joint cost incurred to manufacture all products is amounted to
RM3,020,000

PRODUCT UNITS PRODUCE (KG) SELLING PRICE

A 30,000 RM100
B 50,000 RM40
C 5,000 RM5

Required: Calculate the allocation of cost and profit for each joint product using Physical Units
Method.

Answer:

1. NRBP = (5,000 kg x RM5) – (5,000 kg x RM1)

= RM25,000 – RM5,000
= RM20,000
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

2. BOJC = RM3,020,000 – RM20,000

= RM3,000,000

3. Joint cost allocation and profit calculation using Physical Units method
Product Units Sales CPU JCA Profit/Loss Profit/Sales
produced (RM) (RM) %
A 30,000 30,000 x 37.50 1,125,000 1,875,000 62.5%
RM100
= 3,000,000
B 50,000 50,000 x 37.50 1,875,000 125,000 6.25%
RM40
= 2,000,000
Total 80,000 5,000,000 3,000,000 2,000,000 40%

CPU = RM3,000,000 / 80,000 kg

= RM37.50
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

TUTORIAL QUESTIONS

Question 1
Allison Company produces two products, X and Y, in a single joint process. Last month the joint
costs were RM75,000 when 10,000 units of Product X and 15,000 units of Product Y were
produced. Product X sells for RM10 per unit and Product Y sells for RM5 per unit.

Required:
Calculate the joint cost allocations to Products X and Y using the physical units method.

Question 2
Nathan Company produces three products (A, B, and C) in a single joint process. All of the
products are salable immediately upon split-off. Cost and price information is as follows:

Product Selling Price at Split-Off Unit volume

A RM10 10,000
B RM15 5,000
C RM20 8,000

The total joint production costs were RM218,500.

Required:
Calculate the costs and product profit allocated to each of the joint product (using the Physical
Units Method and Sales Value at Split off Point Method).

Question 3
Strawberry Company produces two joint products, J and K. The following information relating to
last month production is as follows:

Product Units produced and sold Selling price per unit

J 6,000 RM11.50
K 4,000 RM13.00
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Joint production costs last month were RM110,000 and these were apportioned to the joint
products based on the number of unit produced.

Required:
Calculate the costs and product profit allocated to each of the joint product (using the Physical
Units Method and Sales Value at Split off Point Method).

Question 4
Two products, Red and Blue are created from a joint process. Both products can be sold
immediately after split-off. The total joint production costs were RM770,000.

Product Units produced and sold Selling price per unit

Red 12,000 RM10.00
Blue 10,000 RM42.00

Required:
Calculate the costs and product profit allocated to each of the joint product (using the Physical
Units Method and Sales Value at Split off Point Method).

Question 5
Bon Bon Chemicals produces four products from a joint process costing RM150,000 per month.
After leaving the joint process, the products must be further refined before they are salable. You
have been provided with the following information:

Product Volume Further Processing Costs Selling Price per Unit

A-1 15,000 RM350,000 RM80
B-3 25,000 RM400,000 RM40
C-2 10,000 RM100,000 RM22
Q-9 50,000 RM250,000 RM10
Required:
a. Allocate the joint costs using the physical units method.
b. Allocate the joint costs using the net realizable value method.
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Question 6
SK Sdn Bhd produces three products at a joint manufacturing cost of RM1,250,000. The following
information has been provided:

Joint Product Units Further Processing Costs Selling Price per Unit

A 25,000 RM750,000 RM40

B 40,000 RM750,000 RM50

C 35,000 RM210,000 RM20

Required:
Allocate the joint costs using the constant gross margin percentage method.

Question 7

Sunshine Company produces three main products namely, SS1, SS2, SS3 and a by-product SS4
out of a joint process. During the month, Sunshine incurred joint production costs of RM539,500.
Each of the main product is saleable immediately upon the split-off point or alternatively
processed further and sold at a higher price. However, the by-product can be sold only after
additional process of refining and packaging. Data regarding Sunshine’s cost and price
information are presented below:

Product SS1 SS2 SS3 SS4

Unit volume (46,000) 35% 30% 15% 20%

Selling price at split-off point RM20.50 RM15.50 RM18.50 RM3.00

Additional processing cost RM10,500 RM12,200 RM11,800 RM7,900

Selling price after further RM28.50 RM23.50 RM26.50 RM5.50

processing
Note: Show all your workings.
 PMA2133 | Cost Accounting Techniques and Applications
Session: July 2020

Required:

a. Calculate the net revenue from by product.

b. Calculate total joint cost to be allocated to the joint products.

c. If the joint products are sold upon the split off point, calculate cost per unit and joint cost
allocation to each joint product.

d. Calculate profit or loss and its percentage of each joint product.