CHAPTER 7

JOINT PRODUCT AND BY-PRODUCT COSTING

QUESTIONS FOR WRITING AND DISCUSSION
1. A joint cost is a cost incurred in the
simultaneous production of two or more
products.

of the individual products when it is the

overall product package which must be
evaluated in terms of profitability.

2. The joint costing problem is determining

how best to allocate joint costs to the
various products. The difficulties are that all
of the joint costs must be incurred to
produce the products, and the allocation is
arbitrary.

7. Three methods of allocating joint product

costs are the physical units method, the
market value method, and the net realizable
method. The constant gross margin
percentage method is also used to allocate
joint cost.

3. A by-product is a jointly produced product of

relatively little sales value relative to the
main product(s).

8. Joint costs occur only in cases of joint

production. A joint cost is a common cost,
but a common cost is not necessarily a joint
cost. Many overhead costs are common to
the products manufactured in a factory but
do not signify a joint production process.

4. Joint costs are allocated to products for

financial reporting purposes, to value
inventories, and to determine income.
5. The sales-value-at-split-off method is
neutral in that joint costs are allocated in
accordance with the revenue-producing
ability of each product. In this way, products
will not show a loss due to joint cost
allocation. However, other considerations
may take precedence over this type of
neutrality. For example, the physical units
method may be easier to apply and does
not have the disadvantage of changing
prices.
6. Joint cost allocation may lead managers to
believe that part of a joint cost is avoidable
when this is not true. Additionally, allocated
joint costs may affect the pricing decisions

209

9. No. Joint costs are irrelevant. They occur

regardless of whether the product is sold at
the split-off point or processed further.
10.

All sales value methods are based on price.

If price is used to determine cost, then that
cost cannot be used to turn around and
determine price. The decision would be
circular.

11.

By-products can be accounted for using cost

or noncost methods. Cost methods involve
assigning some cost to the by-product for
inventory purposes. Noncost methods make
no attempt to cost the by-product, but
instead they make some credit either to
income or to the main product.

EXERCISES
71
Phils
Bills
Gills
Total

Units
1,000
1,500
2,500
5,000

Percent
0.200
0.300
0.500

Joint Cost
$72,000
72,000
72,000

Allocated Joint Cost

$ 14,400
21,600
36,000
$ 72,000

72

Phils
Bills
Gills
Total

Units
1,000
1,500
2,500
5,000

Price at
Split-off
$18.75
75.00
67.50

Sales Value
at Split-off
$ 18,750
112,500
168,750
$300,000

Percent
0.0625
0.3750
0.5625

Joint
Cost
$72,000
72,000
72,000

Allocated
Joint Cost
$ 4,500
27,000
40,500
$ 72,000

73

Ups
Downs
Total

Units
39,000
21,000

Price
$2.00
2.18

Eventual
Market Value
$78,000
45,780

Joint cost
Percent of hypothetical market value
Allocated joint cost

209

Separable
Costs
$18,000
5,780

Hypothetical
Market Value
$ 60,000
40,000
$100,000

Ups
$ 42,000
0.60
$ 25,200

Percent
0.60
0.40

Downs
$ 42,000
0.40
$ 16,800

74
Ups
Downs
Total

Units
39,000
21,000
60,000

Percent
0.65
0.35

Joint Cost
$42,000
42,000

Allocated Joint Cost

$ 27,300
14,700
$ 42,000

75
Value of ups at split-off (39,000 $1.80)

$ 70,200

Value of ups when processed further

Less: Further processing cost
Incremental value of further processing

$ 78,000
18,000
$ 60,000

Ups should NOT be processed further as there will $10,200 more profit if sold at
split-off.

76
1.
Grade A
Grade B
Grade C
Total

Units
3,000
4,500
7,500
15,000

2.
Grade A
Grade B
Grade C
Total

Units
3,000
4,500
7,500
15,000

Percent
0.200
0.300
0.500

Weighting
Factor
4.5
2.5
1.5

Joint Cost
$200,000
200,000
200,000

Weighted
Units
13,500
11,250
11,250
$ 36,000

210

Percent
0.3750
0.3125
0.3125

Allocated Joint Cost

$ 40,000
60,000
100,000
$200,000
Joint
Cost
$200,000
200,000
200,000

Allocated
Joint Cost
$ 75,000
62,500
62,500
$200,000

77
1.

Constant gross margin percentage method:

Total revenue ($12 4,000) + ($5 12,000)
Less costs: $80,000 + $4,000 + $8,340
Gross margin
Eventual market value
Less: Gross margin at 14.5% of market value
Cost of goods sold
Less: Separable costs
Allocated joint costs

2.

Net realizable value method:

Eventual
Units Price Market Value
High
4,000 $12
$48,000
Low
12,000
5
60,000
Total

Separable
Costs
$4,000
8,340

$108,000
92,340
$ 15,660

100.0%
85.5%
14.5%

High
$ 48,000
6,960
$ 41,040
4,000
$ 37,040

Low
$ 60,000
8,700
$ 51,300
8,340
$ 42,960

Hypothetical
Market Value
$44,000
51,660
$95,660
High
$ 80,000
0.46
$ 36,800

Joint cost
Percent of hypothetical market value
Allocated joint cost

Percent
46%
54%
100%
Low
$ 80,000
0.54
$ 43,200

78

High
Low
Total

Percent
of Sales
0.40
0.60

Percent of
Production
0.25
0.75

211

Sales to
Production
1.60
0.80
2.40

Percent
0.6667
0.3333

Allocated
Joint Cost
$ 53,336
26,664
$ 80,000

79

Alpha
Beta
Gamma
Delta
Rho
Chi
Psi
Omega

Number
of Units
1,000
2,000
2,500
6,000
3,000
150
1,000
10

Price at
Split-Off
$ 2.00
4.50
3.75
8.00
0.50
0.20
0.04
10.00

Total Revenue
at Split-Off
$ 2,000
9,000
9,375
48,000
1,500
30
40
100
$ 70,045

Chi, Psi, and Omega are, at best, by-products. Arguably, Chi and Psi could be
considered scrap. The amount of revenue they produce is not worth a great deal
of effort in handling or in accounting. Note that Omega has the highest price per
unit of any of the eight. Still, it is a by-product for this company unless and until
they can figure out a way to produce more of it.
(Note: A similar situation exists in copper mining. Copper ore may contain gold.
While the gold refined from copper ore is very valuable per ounce compared to
copper, the gold is accounted for as a by-product since so little of it is produced.)
Beta, Gamma, and Delta are joint or main products due to their considerable
revenue.
Alpha and Rho are probably by-products. Together, they account for just under 5
percent of the total revenue. Still, the company may choose to consider them
main products based on future revenue estimates or their importance to the
overall product line.

710
1.

High-Density
Income Percent
Sales
$5,250 100.0%
Less: Joint cost 2,000a
38.1%
Gross margin
$3,250
61.9%
a

[375/(375 + 1,125)] $8,000

[1,125/(375 + 1,125)] $8,000

212

Low-Density
Income Percent
$9,000 100.0%
6,000b
66.7%
$3,000
33.3%

710
2.

Concluded

High-Density
Income Percent
Sales
$5,250 100.0%
Less: Joint cost 1,500a
28.6%
Gross margin
$3,750
71.4%

Low-Density
Income Percent
$9,000 100.0%
4,500b
50.0%
$4,500
50.0%

Defective
Income Percent
$
25 100.0%
2,000c

$(1,975)

(375/2,000) $8,000
(1,125/2,000) $8,000
c
(500/2,000) $8,000
a

Previously, defective chips were thrown out and never appeared on the
income statement. The entire joint cost was absorbed by the high-density and
low-density chips. These product lines maintained gross margins well above
the 25 percent limit.
Clearly, the gross margin for the defective chips is negative and doesnt come
close to meeting the Ultratech requirements. Yet, this result would imply that
LaTonya should throw away the chips instead of selling them for $25. This is
a counterintuitive result.
3.

A preferred method is to recognize that the defective chips are a by-product.

One possibility is to treat the $25 revenue from by-product sales as a
reduction in joint cost; then, allocate the remaining joint cost to the main
products as follows:

Sales
Less: Allocated
joint cost
Gross profit
a

High-Density
Income Percent
$5,250 100.0%

Low-Density
Income Percent
$9,000 100.0%

1,994a
$3,256

5,981b
$3,019

38.0%
62.0%

66.5%
33.5%

(375/1,500) ($8,000 $25)

(1,125/1,500) ($8,000 $25)

An alternative approach is to account for the by-product revenue as Other

income or Revenue from sales of the by-product which would leave the
gross margins for the main products as calculated in Requirement 1.

213

711
1. Net realizable value of by-product = $2 60,000 = $120,000
Joint cost to be allocated = $2,520,000 $120,000 = $2,400,000
2.
First main product
Second main product
Total

Units
90,000
150,000
240,000

Percent
0.375
0.625

Joint Cost
$2,400,000
2,400,000

Allocated
Joint Cost
$ 900,000
1,500,000
$ 2,400,000

712
1.
Two Oil
Six Oil
Distillates
Total

Units
300,000
240,000
120,000
660,000

Percent
0.4546*
0.3636
0.1818

Joint Cost
$10,000,000
10,000,000
10,000,000

Allocated
Joint Cost
$ 4,546,000
3,636,000
1,818,000
$10,000,000

*Rounded up
2.
Two Oil
Six Oil
Distillates
Total

Units
300,000
240,000
120,000
660,000

Price at
Split-off
$20
30
15

Market Value
at Split-off Percent Joint Cost
$ 6,000,000 0.4000 $10,000,000
7,200,000 0.4800
10,000,000
1,800,000 0.1200
10,000,000
$15,000,000

214

Allocated
Joint Cost
$ 4,000,000
4,800,000
1,200,000
$10,000,000

PROBLEMS
713
1.
Revenue
Variable expenses
Contribution margin
Joint costs
Operating income
2.

Liquid Skin
$432,000
252,000
$180,000

Silken Skin
$468,000
108,000
$360,000

Total
$900,000
360,000
$540,000
420,000
$120,000

The special order requires two additional standard production runs (2

120,000 gallons = 240,000 gallons). These two runs will also generate 360,000
gallons of Liquid Skin.

Revenue
Variable expenses
Contribution margin
Joint costs
Operating income (loss)
a

Income from Special Order

Liquid Skin
Silken Skin
Total
$576,000a
$876,000
$ 1,452,000
504,000b
204,000
708,000
$ 72,000
$672,000
$ 744,000
840,000
$ (96,000)

Revenue: (360,000 $1.60) and (240,000 $3.65)

Variable expenses: (360,000 $1.40) and (240,000 $0.85)

No. The special order will result in a $96,000 loss.

215

714
1.

@ 500 lbs.
Revenuesa
Bagsb
Shippingc
Grindingd
Bottlese

Process Further
$ 8,750
0
(250)
(1,575)
(500)
$ 6,425

Sell
$6,000
(65)
(300)
0
0
$5,635

Difference
$ 2,750
65
50
(1,575)
(500)
$
790

500 5 $3.50; $12 500

$1.30 (500/10)
c
[(5 500)/25] $2.50 = $250; $0.60 500
d
$3.15 500
e
5 500 $0.20
a

Pharmadon should process the chemical further.

2.

$790/500 = $1.58 additional income per pound

$1.58 180,000 = $284,400

715
1.

Revenues
Joint costs
Gross margin

$141,500
131,000
$ 10,500

2.
Revenues
Further processing costs
Gross margin

Sell
$ 40,000
0
$ 40,000

Process Further
$ 70,000
11,500
$ 58,500

Difference
$ 30,000
11,500
$ 18,500

The company should process Inex further as gross margin would increase by
$18,500.
(Note: Joint costs are irrelevant to this decision, as the company will incur
them whether or not Inex is processed further.)

216

716
1.

If Altox is processed further:

Revenue ($5.50 150,000) $825,000
Further processing costs
250,000
Gross margin
$575,000

If Altox is sold at split-off:

Units at split-off
170,000
Price
$3.50
Gross margin
$595,000

Altox should be sold at split-off.

If Lorex is processed further:
Revenue ($5 500,000)
$2,500,000
Further processing costs 1,400,000
Gross margin
$1,100,000

If Lorex is sold at split-off:

Units at split-off
500,000
Price

$2.25
Gross margin
$1,125,000

Lorex should be sold at split-off.

If Hycol is processed further:
Revenue ($1.80 412,500) $742,500
Further processing costs
75,000
Gross margin
$667,500

If Hycol is sold at split-off:

Units at split-off
330,000
Price
$2.00
Gross margin
$660,000

Hycol should be processed further.

2.

a. Annual production of Dorzine

Price offered by Dietriech
Revenue
Savings on waste disposal
Less: Processing costs
Loss on sale of Dorzine

50,000
$0.75
$ 37,500
1,750
(43,000)
$ (3,750)

Refining the waste product appears to be a poor decision, since it will

cost Goodson an additional $3,750. However, there are other
considerations. By converting the chemical waste to a solvent, Goodson
will avoid having to locate hazardous waste disposal sites and may avoid
any future litigation regarding its waste disposal.
b. Treating Dorzine as a by-product will have no effect on the decisions to
process Altox, Lorex, and Hycol further, since joint costs were not
considered in those decisions.

217

717
Goodson could account for the by-product in the following ways:
1.

Show the $13,000 annual net revenue as Revenue from sale of by-product
on the income statement.

2.

Reduce the joint costs to be allocated to the main products by $13,000.

3.

Reduce the cost of goods sold of the main products by $13,000.

718
At first, the director would probably not view the use of the museum for weddings
as a joint costing problem. The first few rentals would add income to the museum
and would be accounted for as Other income or Miscellaneous revenue on
the income statement. Later, if the use of the museum for social affairs became
more popular, some of the cost of the grounds and restaurant would no doubt be
allocated to this use of the facilities. In effect, a by-product would turn into a main
product.

719
1.

Physical units method:

Red
Drab
Total

2.

Units
150
350
500

Percent
0.30
0.70

Joint Cost
$5,000
5,000

Allocated Joint Cost

$1,500
3,500
$5,000

Market value method:

Red
Drab
Total

Number
of Trees
150
350

Price at
Split-Off
$35
10

Sales Value
at Split-Off
$5,250
3,500
$8,750

218

Percent
60.00%
40.00%
100.00%

Joint
Cost
$5,000
5,000

Allocated
Joint Cost
$3,000
2,000
$5,000

719
3.

Concluded

Revenue (0.7 500 $35)....................................

Less:
Cost of checking seedlings ($5 500).........
Cost of additional labor..................................
Joint costs.......................................................
Operating income.................................................

$12,250
$2,500
275
5,000

7,775
$ 4,475

If Vicki undertakes the genetic testing, she will make $4,475 versus the $3,750
($8,750 $5,000) she would make selling both red and drab trees. She should
have the trees tested.

720
1.

a.
Product
Slices
Sauce
Juice
Feed

Input
270,000
270,000
270,000
270,000

Proportion
0.33
0.30
0.27
0.10

Total
Pounds
89,100
81,000
72,900
27,000

Pounds
Lost

5,400

Net
Pounds
89,100
81,000
67,500*
27,000
264,600

*Net pounds = 72,900 (0.08 Net pounds)

1.08 Net pounds = 72,900
Net pounds = 67,500
b. The net realizable value for each of the three main products is calculated
as follows:
Net
Net
Selling
Separable
Realizable
Product
Pounds
Price
Revenue
Costs
Value
Slices
89,100
$0.80
$ 71,280
$ 11,280
$ 60,000
Sauce
81,000
0.55
44,550
8,550
36,000
Juice
67,500
0.40
27,000
3,000
24,000
$142,830
$ 22,830
$120,000

219

720

Concluded

c. The net realizable value of the by-product is deducted from the production
costs prior to allocation to the main products as follows:
NRV of by-product = By-product revenue Separable costs
= $0.10(270,000 0.10) $700
= $2,000
Costs to be allocated = Joint cost NRV of by-product
= $60,000 $2,000
= $58,000
d. Gross margin for November:
Product
Slices
Sauce
Juice
Total

Net Realizable
Value
$ 60,000
36,000
24,000
$120,000

Percent
50%
30%
20%
100%

Joint
Costs
$ 29,000
17,400
11,600
$ 58,000

Gross
Margin
$ 31,000
18,600
12,400
$ 62,000

The by-product is not allocated any joint costs.

2.

Because the gross margin by main product is determined by the arbitrary

allocation of joint product costs, these cost figures and the resulting gross
margin information are of little use for planning and control. The allocation is
made only for purposes of inventory valuation and income determination.

721
1.
2.
3.

a
a
c

722
1.

Because Product N was allocated $24,000 of the joint costs, it must account
for 40 percent of the relative sales value at split-off ($24,000/$60,000 = 0.40).
Therefore, Product N has a $40,000 sales value at split-off ($100,000 0.40 =
$40,000).

2.

If the units produced approach is used, Product N will receive $30,000 in joint
costs since it accounts for half of the total units produced.

220

723
1.

a. Relative sales value method at split-off:

Monthly Sales
Relative
Unit
Price
Sales Value Percent of
Output per Unit at Split-Off
Sales
Studs
75,000
$ 8
$ 600,000
46.15%
Decorative pieces 5,000
60
300,000
23.08%
Posts
20,000
20
400,000
30.77%
Total
$1,300,000
100.00%

Allocated
Joint
Costs
$ 461,500
230,800
307,700
$1,000,000

b. Physical units method at split-off:

Studs
Decorative pieces
Posts
Total

Units
75,000
5,000
20,000
100,000

Percent
0.750
0.050
0.200

Joint Cost
$1,000,000
1,000,000
1,000,000

Allocated
= Joint Costs
$ 750,000
50,000
200,000
$1,000,000

c. Estimated net realizable value method:

Monthly
Unit
Output
Studs
75,000
Decorative pieces 4,500*
Posts
20,000
Total

Fully
Processed Estimated
Sales
Net
Allocated
Price
Realizable Percent
Joint
per Unit
Value
of Value
Costs
$ 8
$ 600,000
44.44% $ 444,400
100
350,000** 25.93%
259,300
20
400,000
29.63%
296,300
$1,350,000
100.00% $1,000,000

*5,000 monthly units of output 10% Normal spoilage = 4,500 good units
**4,500 good units $100 = $450,000 Further processing cost of
$100,000 = $350,000

221

723

Concluded

2.

Units
Dollars
Monthly unit output...............................................................
Less: Normal further processing shrinkage......................
Units available for sale...................................................
Final sales value (4,500 units @ $100 per unit).................
Less: Sales value at split-off...............................................
Differential revenue.........................................................
Less: Further processing costs..........................................
Additional contribution from further processing.........

3.

5,000
500
4,500
$450,000
300,000
$150,000
100,000
$ 50,000

Assuming Sonimad Sawmill, Inc., announces that in six months it will sell the
rough-cut product at split-off due to increasing competitive pressure, at least
three types of likely behavior will be demonstrated by the skilled labor in the
planing and sizing process, including the following:
a. Poorer quality
b. Reduced motivation and morale
c. Job insecurity, leading to nonproductive employee time looking for jobs
elsewhere
Management actions that could improve this behavior include the following:
a. Improve communication by giving the workers a more comprehensive
explanation as to the reason for the change in order to help them better
understand the situation and bring about a plan for future operation of the
rest of the plant.
b. Offer incentive bonuses to maintain quality and production and align
rewards with goals.
c. Provide job relocation and internal job transfers.

222

COLLABORATIVE LEARNING EXERCISE

724
1.

Units produced method:

Coming
Going
Total

2.

Percent
20%
80

Joint Cost
$6,000
6,000

Coming
Going
Total

Eventual
Price
$12
14

Allocated Joint Cost

$1,200
4,800
$6,000

Separable
Hypothetical
Number
Hypothetical
Costs
=
Price
of Units =
Revenue
$3
$9
1,000
$ 9,000
2
12
4,000
48,000
$ 57,000

Hypothetical
Revenue
$ 9,000
48,000

Percent
15.789%
84.211

Joint Cost
$6,000
6,000

Allocated
= Joint Costs
$ 947
5,053
$ 6,000

Constant gross margin percentage method:

Revenue [($12 1,000) + ($14 4,000)]
Costs [$6,000 + ($3 1,000) + ($2 4,000)]
Gross margin
Coming
$ 12,000
9,000
$ 3,000
3,000
$
0

Eventual market value

Less: Gross margin
Cost of goods sold
Less: Separable costs
Allocated joint costs
4.

Net realizable value method:

Coming
Going
Total

3.

Units
1,000
4,000

$ 68,000
17,000
$ 51,000

Percent
100%
25
75%

Going
$56,000
42,000
$14,000
8,000
$ 6,000

The revenue provided by Going is so much higher than that provided by

Coming that any allocation method relying on revenue will allocate much
more of the joint cost to Going. At the extreme is the constant gross margin
percentage method which allocates all of the joint costs to Going. Given this
information, it would be preferable to treat Coming as a by-product and
allocate all joint costs to Going. Therefore, the least desirable method is the
units produced method.

223

CYBER RESEARCH CASE

725
Answers will vary.

224