CHAPTER 6
JIONT PRODUCT AND BY PRODUCTS
Meaning of terms
Joint product: are products which are processed and manufactured in the same
processes
o Raw milk: cream & liquid skim
o Coal: Ammonia, coke, Gas, Benzene, tare
o Petroleum: crude oil, gas, raw LPG
o Salt: Hydrogen, chlorine, caustic soda
Joint cost is the cost of a single process that yields multiple products (joint products)
simultaneously.
Split off point is the junction in the process when one or more products in a joint
setting become separately identified.
Separable cost is costs incurred beyond the spilt off point to further process each joint
product separately.
Main product is a joint product having high sales value
Byproduct s are joint products having low sales value compared to the main product
Approaches to allocating joint cost
The benefit received criteria is used to allocate joint cost to the joint products.
There are four methods of allocating joint cost. These are:
Physical measure method: allocates joint cost on the bases of their relative
proportion at the split off point using a common physical measure such as weight or
volume
Sales value at split off point method: allocates joint cost on the bases of the relative
sales value at the split off point of each product.
Estimated neat realizable value method: allocates joint cost on the basis of there
relative estimated net realizable value.
Net realizable value= final sales value – separable cost
Constant gross margin percentage neat realizable value method: allocates joint
cost in such away that the over all gross margin percentage is identical for all the
individual products
Steps to use this method
1. Compute the over all gross margin percentage for all sales value
2. Use this gross margin percentage to find gross margin of each product
3. Deduct separable cost from cost of goods available for sale
Among the four methods, the sales value at split of method is better when sales value data are
available because of the following reasons
It does not require information after split off point
Availability of meaningful basis to allocate joint cost to products
Simplicity to compute
It measures the value of joint product immediately at the end of the joint process
Example1: Farmers’ dairy purchases raw milk from individual farmers and process it up to
the split off point, where two products (cream and liquid skim) are obtained. The two
products are sold to an independent company, which markets and distribute them to super
markets and other retail outlets.
110 gallon of raw milk yields 100 gallon of good product with 10-gallon shrinkage.
Products Gallons produced sales
cream 25 gallons 20 gallons at $8 per gallon
Liquid skim 75 gallons 30 gallons at $4 per gallon
Cost of purchasing 110 gallons of raw milk and processing it up to split of point to yield 25
gallon of cream and 75 gallon of liquid skim is $400.
Requirements:
I. Show the process diagrammatically
II. Allocate the joint cost using physical measure method and prepare partial income
statement.
III. Allocate the joint cost using sales value at split off method and prepare partial income
statement.
Example2: Assume the same situation as in example one except that both cream and liquid
skim can be processed further.
Additional information:
25 gallons of cream are further processed to yield 20 gallons of butter cream at
additional processing separable cost of $280.
Butter cream is sold for $25 per gallon
75 gallons of liquid skim are further processed to yield 50 gallons of condensed milk
at additional processing separable cost of $520.
Condensed milk is sold for $22 per gallon
Sales during the accounting period were 12 gallons of butter cream and 45 gallons of
condensed milk.
Requirements:
I. Show the process diagrammatically
II. Allocate the joint cost using ENRV method and prepare partial income
statement.
III. Allocate the joint cost using constant GM method and prepare partial income
statement.
IV. Prepare income statement without allocating the joint cost (no allocation of the
joint cost)
Irrelevance of joint cost for sell or process further decision making
The decision to sell at the split of point or process further should be based on incremental
operating income attainable beyond the split of point. The joint cost incurred up to the split of
point is irrelevant for such decision.
Example3: Do farmers dairy sell at the split of point or process further the two products in
example two above? Make analysis
Accounting for by products.
By products are joint products that have low sales value compared to the main product. There are
two accounting methods for by products
Production method: recognize by products in the financial statement at the time
production is completed as a cost reduction.
Sales method: recognizes by products in the financial statement at the time when the
byproduct is sold as a separate income
Example 4: A company is engaged in processing meat from slaughter house. One of its
department cuts lump shoulder and generates two products
Shoulder meat (The main product) ---sold for Br 60 per pack
Hock meat (The by product) ---------sold for Br 4 per pack
Both products are sold at the split off point with out further processing .Data for this department
in July 2004 is as follows
Beg. Inventory production sales End. inventory
Shoulder meat(in pack) 0 500 400 100
Hock meat( in pack) 0 100 30 70
The total manufacturing cost of the products were Br25, 000
Requirements
I. Show the process using diagram
II. What is the gross profit under the two methods
III. What is the inventory amount to be reported in balance sheet under each method
IV. Which method do you recommend for the company
