Cost Allocation of Joint Products PDF

CHAPTER XI COST ALLOCATION OF JOINT PRODUCTS AND BY-PRODUCTS Joint costs are the of a production process that yield multiple costs products simultaneously. The split-off point (orsepara...

CHAPTER XI COST ALLOCATION OF JOINT PRODUCTS AND BY-PRODUCTS Joint costs are the of a production process that yield multiple costs products simultaneously. The split-off point (orseparation point) is the juncture a jointproduction process when two or more products become separately in costs:manufacturing, administrative and Separable costs are all identifiable. to each of the beyond the split off point that are assignable selling, incurred identified at the split off point. In other words, the production specific products costs' and after this point costs to the split-off point are called 'joint incurredprior or the expenditures that are incurred for further processing are called 'separable' relating to beyond the split off point, decisions further processing' costs. At or of each identifiable product can be made independently sale or fuuther processing of decisions about the oiher products. two process can be classified into The outputs of a joint production and outputswith a zero general categories: outputs with a positive sales value positive value, or sales value. The term product describes any output that has a to avoid incurring costs. The sales value an output that enables an organization process using common set of inputs can be high or low. When a joint production to merit having sufficiently high sales values yields two or more pioducts products. When a recognition as main products, those products are called joint joint production process using common set of inputs yields only oneproduct with the with the sales values of the other products of a high sales value, compared process, that product is.called a main product.The other products of a joint with the sales value of production process that have low sales values compared are called by-products. For example, if timber the main product or jointproducts is processed into fine-grade lumber, standard lumber and wood chips, the fine and the wood chips are the grade lumber and standard lumber are joint products, and standard lumber have byproduct. That is because both the fine-grade lumber high sales values compared to wood chips. Methods of allocating jointcosts 1. Sales value at split-off point method 2. Physical measures method (weights,units, other physical measure) 3. Net realizable value (NR V) method 349 Illustration. farms and processes i Dairy Corporation purchases milk from individual a) cream and b) liquid skim the split-off point, when two products emerge: until which markets and These two products are sold to a wholesaler company, Summary data for distributes them to supermarkets and other retail outlets. January 20xlare: Raw milk proce ssed, 110,000 liters; 10,000 liters are lost in the production process due to evaporation, spillage, and the like, yielding 25,000 liters of crearn and 75,0)0 1liters of liquid skim. Production Sales Selling Price Cream 25,000 liters 20,000 liters P80.00 1iter Liquid skim 75,000 liters 30,000 liters P40.00 /liter Inventories: Beginning Ending Raw milk 0liter 0 liter Cream 0 liter 5,000 liter Liquid skim 0 liter 45,000 liter Cost of purchasing 110,000 liters of raw milk and processing it until the split-off point yield cream and liquid skim, P4,000,000. Sales value at split-off method The sales value at split-off method allocates joint costs to joint products on the basis of relative total sales value at the split-off point of the total productionof these productsduring the accountingperiod. Sales Value of the Product Cost allocated to a Joint Product X TotalJoint Costs Sales Value of Total Production 350  Cre am Liquid Skim Total I Sales value of total production at split-off point (cream, 25,000 liters x P80 /Aiter P 2,000,000.00 (iquid skin,75,000 liters x P40 / liter) P 3.000.000.00 P 5,000,000.00 2 Weight 0.40 0.60. Joint costs allocated, (crean, P4,000,000 x P4,000,000..40) 1,600,000.00 (liquid skim, P4.000.000x.60) P 2400,000.00 P 4.000.000.00 4. Joint production cost per liter (crean, P 1,600,000 /25,000 liters) P 64.00 liter P 32.00 per liter (liquid skin P2,400,000 75,000 liters) Dairy Corporation Partial Statement ofProft or Loss For the Month Ended January 31, 20xI Cream Liquid Skim Total Revenues: Cream, 20.000 liters x P80 per liter P 1,600,000.00 x P40 per Iter P 1,200,000.00 P 2,800,000.00 Liquid skim, 30,000 liters Cost of Sales Production Costs 1.600.000.00 Cream, P4,000.000 x.40 2400,000.00 4,009,000.00 Liquid skin, P4.000.000 x.60 Less: Ending Inventory 320,000.00 Cream, 5,000 liters x P64 per liter 1440,000.00 1.760,000.00 Liguid skim, 45.000 liters x P32 per liter 1.280,000.00 960,000.00 2.240,000.00 P 320,000.00 P 240.000.00 P 560,000.00 Gross Profit 20.00% 20.00% 20.00% Gross Profit percentage Physical-measures method The physical-measure method allocates joint costs to joint produetion on the basis of the relative weight, volume or other physical measure at the split-off point of the total production of these products during the accounting period. 351  Quantity of the Product Total Joint Cost allocated toa Joint Product Costs Quantity of TotalProduction Cre am Liquid Skim Total 25,000 75.000 1. Physical measures of total production (liters) 100.000 0.25 0.75 i2 Weight 3. Jont costs allocated. P4.000.000. (cream,P4,000.000 x.25) P 1.000,000.00 (iquid skim., P4,000,000 x.75) P.3.000.000.00 P 4.000.000.00 4. Jont production cost per liter (cream, PL.000.000/25,.000 liters) P 40.00 / iter P 40.00 / liter (liquid skim, P3,000.000 75.000 liters) Dairy Corporation Statement of Profit or Loss Partia! For the Month Ended January 31, 20xl Cre am Liquid Skim Total Revenues: Cream, 20,000 Iiters x P80 per liter 1.,600.000.00 Liquid skim, 30,000 liters x P40 per P liter 1.200.000.00 P 2,800,000.00 Cost of Sales Production Costs Cream. P4.000.000 x 25 1,000,000.00 Liquid skim, P4,000.000 x.75 Less: Ending 3.000,000.00 4.000,000.00 Inventory Cream, 5.000 iters x P40 per liter 200,000.00 Liquid skim, 45.000 liters x P40 per liter 1,300,000.00 2,000,000,00 800.000,00 1,200,000.00 2,000,000.00 Gross Profit P 800.000.00 P Gross Profit P 800,000.00 percentage 50.00% 0% 28.57% Under the benefits-received criterion, the sales value at preferred than the split-off physical-measure method pont is because it has revenue-producingpower of the relationship to he individual products, 352 Net Realizable Value (NRV)method the split-off point to bring In some products are processed beyond cases, selling price at the increase their value above them to a marketable form or to allocates joint costs to split-off point. The net realizable value (NRV)method the the final sales value minus basis of the relative NRV, joint products on the during the accounting production of the joint products separable costs, of the total sales value at used in preference to the period. The NRV method is typically products at split split-off method only when market selling prices for one or more off are not known. NRV of the Product X Total Jont Costs Cost allocated to a Joint Pioduct NRV of the Total Production be processed further. Assume that Cre am and Liguid Skim can to of cream are further processed Cream to butter cream. 25,000 liters of processing costs 20,000 liters of butter cream at additional yield sells for P250 per liter. P2,800,000, which of liquid skim are further Liquid skim to condensed milk. 75,000 liters yield 50,000 liters of condensed milk at additional processing processed to P220 per liter. costs ofP5,200,000, which sells for were 12,000 liters of butter cream and Sales during the accounting period milk. 45,000 liters of condensed Beginning Ending Inventory: 0 liter 0 liter Raw milk Cream 0 0 Liquid skim Butter creann 0 8,000 liters Condensed milk S,000 liters 353  Butter cream Condens edmilk Total 20,000 1iter 50,000 liter 1. Final sales value of total production (Butter cream, 20,000 liters x P250 /liter P 5,000,000,00 50,000 liters x P220/ liter) P 11,000,000.00 P 16,000,000.00 (Condensed milk, 2,800,000.00 5.200,000.00 2. Deduct separable costs to complete and sell 8,000,000.00 Net realizable value at split-off point P 2.200,000.00 P 5,800,000.00 P 8,000,000.00 3. 27.50% 72.50% 4. Weight P 1,100,000.00 P 2.900,000.00 P 4,000,000.00 5. Joint costs allocated, P4.000,000. 6. Total costs allocated (joint + separable costs) P 3.900.000.00 P 8,100,000.00 P 12,000,000.00 P 195.00 /liter P P162.00 / Titer 7. Production cost per liter Dairy Corporation Partial Statement of Profit or Loss For the Month Ended January 31, 20x1 Butter cream Conde nsed milk Total Revenues: Butter cream, 12,000 liters x P250 per Iter P 3,000,000.00 x P220 per P 9,900,000.00 P 12,900,000.00 Condensed milk, 45,000 liters liter Cost of Sales Joint costs 1,100,000.00 2,900,000.00 4,000,000.00 2,800,000.00 5,200,000.00 8,000,000.00 Separable costs 3,900,000.00 8.100,000.00 12,000,000.00 Cost of goods available for sale Deduct: Ending inventory Butter crean, 8,000 liters x P195 per liter 1,560,000:00 Condensed milk, 5,000 lners x P162 per liter 810,000.00 2,370,000.00 2,340,000.00 7,290,000.00 9,630,000.00 Gross Profit P 660,000.00 P 2,610,000.00 P 3,270,000.00 26.36% 25.35% Gross Profit percentage 22.00% 354 Examples of Joint Cos ts Situations Cocoa beans Cocoa powder, butter, drink mix, tamíng crean Raw milk Cream, liquid skim Chicken Breast, thighs, drumsticks, digest, wings, poultry meal Salt Chlorine, hydrogen, caustic soda Petroleum Crude oil, gasoline, raw LPG By-products only joint products and main Jomt production processes may yield not which arises products but byproducts also. A by-product is a product in the production of the main product/s and which has a relatively incidentally have the main product/s. Although byproducts small sales yalue compared with the values of joint or main products, much lower sales values than the sales the allocationof joint production process can affect presence of byproducts in a used in is the residue from the materials incidental joint costs.Scrap without further operations which is recoverable and measureable manufacturing strategy be subject to further processing and market processing. Byproduct may before it is saleable but scrap is sold without furtherprocess. Accounting for by-products of the byproducts is usually insignificant, Since the value can vary. Here are two methods of accounting the accounting for the byproducts for byproducts: (By-products recognized at time. A. With joint costs allocated to by-product production is completed). The byproducts could be valued at the split-off This amouit reduces the common costs Doint at their net realizable value. which will be allocated to thejoint products at the split-off point. (By-products recognized at time of B. No joint cost allocated to by-product is assigned to the byproducts. As a resultthe sale). None of the common costs the joint products at the split full amount of the common costs are allocated to are reported as a revenue item in the off point. Revenues of the byproduct of sale. income statement at the time 355  Illustration: The Fresh Meats Company processes meat from slaughterhouse. One of the departmentscuts hog shouldersand generates two products: Shoulder meat (the main product), sold for P240.00 per kilo. Bone (the byproduct), sold for Pl6.00 per pack (netof any selling costs). Beginning Ending Production Sales Inventory Inventory Shoulder Meat 5,000 kg 4.000 kg Bone 1,000 kg 1,000packs 300 packs 0 700packs The joint manufacturing costs of these products in January 20x0 Were P1,000,000, comprising P600,000 for direct materials and conversion costs. P400.000 for Both products are sold at split-off point witheut processing. further MethodA MethodB (Recognized (Recognized Revenues at production) at sale) Main product, (4.000 kg x P240 kg) Byproduct, (300packs x Pl6/pack) 960.000,00 P 960,000.00 Total Revenue 4,800.00 960,000.09 964.800.00 Less: Cost of sales Total manufactring costs Less: total byproduct revenue (1.000 packs x 1.000,000.00 Net manufacturing P16) 1,000,000.00 costs 16.000.00 Less: main product inventory 984,000.00 Cost of sales 1,000.000,00 196.800.00 200,000.00 Gross Profit 787.200.00 800.000.00 Gross profit percentage 172,800.00 P 164,800.00 18.00% 17.08% Inventoriable costs, end of period Main Product *1000 pack /5,000 kg) x net **((1.000 pack /5,000 manufacturing costs) kg)x net manufacturing 196,800,00 costs)) Byproduct (700 packs 200,000.00 x Pl6) 11.200.00 P 356  A - With costs allocated to by-product): Accounting entries (Method joint 600,000.00 1. Work in Process 600,000.00 Accounts Payable Torecord direct naterials purchased and used, January 20xl. 400,000.00 2. Work in Proces 400,000.00 Various Accounts 20x1. To record conversion costs, January 16,000.00 3. Byproduct Inventory - Bone (1,000x P16) 984,000.00 Pl6,000) Finished Goods -Shoulder Meat (Pl,000,000- 1,000,000.00 Work in Process 20x1. To record cost of goods completed, January 787,200.00 4. Cost of Sales ((4,000kg/S,000 kg) x P984,000) 787,200.00 Finished Goods - Shoulder Meat January 20xl. To record cost of products sold, 960,000.00 (4,000 kg x P240) Cash or Accounts Receivable 960,000.00 Revenues - Shoulder Meat January 20x1. Torecord sales of the main product, 4,800.00 packs x Pl6) Receivable (300 4,800.00 5. Cash or Accounts Byproduct Inventory-Bone of thebyproduct,January 20x1. To record sales by allocated to by-product method, recognizes Method A, with joint costs position at thetime production is completed, of financial products in the statement value (NRV), The total selling or net realizable recorded at its total selling price is offset against the cost of the main produced price or NRV from the byproduct product. 357  entries (Method B-Nojointcost allocated to by-product): Accounting 600,000.00 1. Work in Process 600,000.00 Accounts Payable To record direct materials purchased and used, January 20x1. 400,000.00 2. Work in Process 400,000.00 Various Accounts To record conversion costs, January 20xl. 1,000,000.00 3. Finished Goods Shoulder Meat - 1,000,000.00 Work in Process To record cost of goods completed, January 20x1. 4. Cost of Sales (4,000 kg /5,000 kg) x Pl,000,000) 800,000.00 Finished Goods - Shoulder Meat 800,000.00 Torecord cost of mainproduct sold, January 20x1. Cash or Accounts Receivable (4,000 kg x P240) 960,000.00 Revenues - Shoulder Meat 960,000.00 To record sales of themain product,January 20x1. S. Cash or Accounts Receivable (300packs x P16) 4,800.00 Cost of Sales 4,800.00 To record sales of the byproduct, January 20x1. Method B, no joint cost allocated to by-product method, delays the recognition of byproducts until the time of sale. No journal entry of by-product until sale of the by-product occurs. Revenues of the byproducts are reported n the statement of income at the tine of sale either, grouped with other sales, separate as other income or deducted from cost of sales. Theoretically, both methods of accounting for financial by-products violate Method A recognizes byproduct reporting standards. time products are produced, revenues at ue but accrual accounting would not recognize revenue until sale occurs. Method B violates financial reporting standards because it does not recognize by-product inventory as an asset. These permissible because the theoretical violations ar peso values of byproducts are immaterial.. practice, method B is preferred. In accoununs 358  Score: Date: Name: Section: Professor: Program/Year/ Exercise salt and processes it into three (3) joint products: Organic Solutions purchases In January 20xl, Organic soda, chlorine and polyvinyl chloride (PVC). caustic were salt for P4.000.000. Conversion costs P6,000,000 Solutions purchased were time, two salable products up to the split-off point, at which incurred processed into soca and chlorine. Chlorine can be further produced: caustic and sales informationis: PVC. The January 20x 1 production Selling Price Sales Production 1,200 tons P 5,000 /ton Caustic soda 1,200 tons Chlorine 800 tons 500 tons P20,000 /ton PVC 500tons at an incremental cost of were further processed, All 800. tons of chlorine or ending 500 tons of PVC.There were no beginning P2,500,000 to yield an active January 20x1. There is of caustic soda, chlorine or PVC in have sold all of its January inventories Organic Solutions could market for chlorine. productionof chlorine at P7,500 per ton. Required: caustic soda and chlorine joint costsof P10,000,000 between 1, Allocate the a. Sales value at split-off point method: under the following b. Physical measure (tons) c. NRV method soda and PVC under the four What is the gross profit percentage of caustic 2. allocation methods? in February Swimming Pool purchase 800 tons of chlorine offers to Lifeguard This sale would mean that no PVC 3. would be 20x1 at P7,500 per ton. in February 20x1. How would accepting the offer affect Organic produced income? Soutions' February 20x1 operating 359 Name: Date: Score: Program/Year/ Section: Professor: Multiple Choice 1. Mabait Inc., Manufactures products X, Y and Z from a joint process, Joint product cost were P120,000 Additional information is provided below: If processed Further Units Value at Sales Additional Product Produced Split-Off Values Cost X 12,000 P80.000 P110,000 P18,000 Y 8,000 P70,000 P 90,000 P14,000 4,000 P50,000 P 60,000 P10,000 Assuming that joint product cost are allocated using the physical measure (units produced) approach, what were the total cost allocated to product X? a. P54,000 b. P58,000 C. P66,000 d. P78,000 (AICPA) 2. Using the same information in No.1 and assuming that joint product costs are allocated using the relative sales value at split-off approach, what were the total cost allocated to product Y? a. P54,000 b. P56,000 C. P56,700 d. P64,400 (AICPA) 3. Magalang, In., which manufactures products P, Q and R from a joint process additional information: P R Total Units produced 4,000 2,000 1,000 7,000 Joint costs P36,000 ? P 60,000 Sales value at split-óff ? 2 P1S,000 P100,000 Additional cost if processed Further P 5,000 P3,000 P 15,000 P 7,000 Sales value if processed further P70,000 P30,000 P20,000 P120,000 360  of split Assuming that joint costs are allocated using the relatiye sales value off approach,what was the sales value at split-off forproductP? a. P58,333 b. P59,500 c. P60.000 d. P63.000 (AICPA) Wet and Dry from a joint operating Matalino, Inc., makes two products. 4. was the total joint cost of processing process. For the month of May 2011. processing after the point of split-ofi aswell P120,000 and the costs of further as other relevant data are shown below: Wet Dry 800 1,600 Units after 400 split-offT P 200 P Salesprice per unit P140.000 PI00,000 Further processing costs for allocating the joint company uses the next net realizable value method The the joint cost allocated to May 2011, costsof processing. For the month of product Wet was: b. P66.000 a. P60.000 d. P80,000 c. P72,000 (Adapted) R, S andT in a joint process. 5. Masipag Company manufactures three products, input, the output is five kilos of R. three For every ten kilos of raw materials of kilos ofSand two kilos T. costing P120,000 were August, 50.000 kilos of raw materials During conversion costs of P200.000. processed and completed, with joint be allocated to the products on the basis of market Conversion costs are to were based on units produced. values while materials make the products salable, further processing which does not require To materials was done at the following costs: additional Product R P30,000 Product S P20,000 Product T P30,000 361  The unit selling prices are: Product R P10 Product S P12 Product T P15 The unit cost of Product R is: a. P7.12 b. P8.00 C. P10,00 d. P25.32 (PhilCPA) 6. Using the same informationin No.5 and assuming that all units are considered sold, compute the grossprofit on sales forProduct S: a. P80,000 b. P72,000 C. P60,000 d. P48,000 (PhilCPA) 7. Using the same informationin No.5and assume that all units of product T are sold, and selling and administrative expenses are 20% of sales, the net income from the sale of Product T is: a. P18,000 b. P22,000 C. P240,000 d. P64,000 (PhilCPA) 8. Maligaya Corporation which manufactures products C, and from a joint D E processthe joint costs are allocated on the basis of relative salesvalue at split off. Additionalinformationis presented below: D Total Units produced 6,000 4.000 2,000 12,000 Jont costs Sales vahue Additonal at spit-of costs if processed further P P P ?P? T2,000.00 14,000.00 P. P ? 10,000.00 P P ?P 30,000.00 6,000,00 P P 120.000.00 200,000.00 30,000.00 Sales value if processed further P 140,000.00 P 60,000.00 P 40,000.00 P 240,000.00 How much of the joint cost should Maligaya allocate to product D? a. P24,000 b. P28,800 c. P30,000 d. P32,000 (AICPA) 362  8. and assuming that the 2,000 units of 9. Using the same information in No, Maligaya and sold for P40,000, what was product E were processed further Corporation's gross profit on the sale? a. P 4,000 b. P14,000 c. P16,000 d. P22,000 (AICPA) system and sells a varicty of ready-to 10. Marunong products uses a process cost products were recovered during May 20x1 as cook meat products. Four joint follows: Ham 1,000 kilos 9,000 kilos Bacon 500 kilos Meat Loaf 5,000 kilos Sausage for direct materials, up to the spit-off point were: P40,000 Cost incurred applied. Using the P30,000 for direct labor,and P14,000 for factory overhead how much joint cost would product Ham absorb? physical output method, a. P2,580 b. P2,840 P4,520 d. P5,420 c. (Adapted) common process and 11. Masunurin Company produces B-1, B-2 and B-3 from a allocates joint costs on the basis of relative sales value at split-off. B-1 B-2 B-3 Units produced 25,000 20,000 5,000 Sales value at split-off P210,000 P135,000 P30,000 Further processing cost P 44,000 P 15,000 P 6,000 Sales value if processed further P269,000 P160,000 P39,000 If joint cost are P225,000 the allocated share of B-1 is: a. P 99,000 b. P112,500 C. P126,000 d. P137,500 (Adapted) 363  joint products Pep and Vim and a hv 12. Matapang comnpany manufactures to the joint products by the market value product Zest. Costs are assigned cost in subsequent operations. Por method which considers fürther processing method ie the market value or reversal cost allocating cost to the by-product, used. were P172,000 during the The total manufacturing cost for 10,000 units quarter. Production and costs data follow: Pep Vim Zest Units produced 5,000 4,000 1,000 Sales price per unit P 50 P 40 P5 Further processing cost per unit P 10 P 5 P - Selling & admin. Expense per unit P 2 Operating profit per unit P1 The value of Zest to be deducted from the joint costs is: a. P5,000 b. P3,000 C. P2,000 d. P 0 (PhilCPA) 13!Using the same informationin No.12 Compute the gross profit for Pep: a. P 70.000 b. P80,000 c. P100,000 d. P 0 (PhilCPA) 364  Co Ri, Sa and Co. with product Masarap company manufactures products Ma, 14. Sales, including that for and sold at lower price. as a by-product anmounted to P99,538.00. classiñed while production cost productCo, totaled P49,200 concerning ti P2,460, The following information amounted Selling expenses the company's records: are obtained from the company's operationsfor 2001 Units in Kilos Sales Prices On-hand Produced Sold Products Per Kilo 346 610 264 Ma P100 108 274 166 Ri P100 24 20 8 Pl00 44 Sa 220 340 120 Co P 35 market) at December 31, lower of cost or inventory (at Computethe ending on a unit with cost apportionment method of accounting 20x1 using joint cost basis: cost per kilo b. P53,275.15 a. P44,838.00 d. P56,159.00 c. P54,793.00 (PhilCPA) (atlower the ending inventory infomation in No. 14 Compute 15.Using the same joint cost allocation December 31, 20x1, using market) at basis, cost of cost on on a unit cost per kilo with cost,apportionment which from the by method of accounting income in the period in company recognizes from the total assuming the of which should be deducted the revenue product is produced, to the by-product: no selling expenses assigned with production cost b. P56,159 a. P55.159 P52,841 d. c. P53,275 (PhilCPA) and it uses the net two joint products for P30 16. Mahinhin Mfg. Co manufactures Product A sells allocating joint costs. nmethod for realizable value June,20x1 were: Joint costs for while Product B sells for P60. P 30,000 Materials 15,000 Direct Labor 10,000 Factory overhead 365  Furtherprocessing cost after the split-off point in order to finish the products into their final form amounted to P24,000 for product A and P36.000 fo Product B. the total units produced during the month were 2,000 forproduct A and 1,000 for product B. The amount of joint costs allocated to product A was: a. P33,000 b. P27,500 C. P22,000 d. P36.000 (PhilCPA) 17.Mapagbigay company X amd Y using a joint process. manufactures. products The joint process costs are P20,000. Products X and Y can be sold at split-off for P24,000 and P16,000 respectively. After split-off product X is processed further at a cost of P10,000 and sold for P42,000 whereas product Y is sold without further proçessing. If the company uses the net realizable value method for allocating jointcost, the joint cost allocated to X is a. P8.000 b. P10,000 c. P12,000 d. P13.334 (CIA) 18. Maginoo Corporation manufactures liquid chemicals A and B from a joint process. Joint costs are allocated on the basis of relative sales value at split off: It cost P9,120 to process 500 liters of product A and 1,000 liters of product B to the split-off point. The salesvalue at split-off is P20 per liter for product A and P28 for product B. Product B requires an additional process beyond split-off at a cost of P2 per liter before it can be sold. What is Maginoo's costs to produce 1,000 liters of product B? a. P6,720 b. P7,320 C. P8,080 d. P8,720 (AICPA) 366