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averaging costs recorded in the past and making technical estimates of the
number of units of original raw material going into the main product and the
number forming the by-product or by adopting some other consistent basis.
This method may be adopted where the by-product is not saleable in the
condition in which it emerges or comparative prices of similar products are not
available.
(c) Comparative price- Value of the by-product is ascertained with reference to
the price of a similar or an alternative material.
(d) Re-use basis- The value put on the by-product should be same as that of the
materials introduced into the process.
4. Treatment of By-Product Cost in Cost-Accounting
(i) When they are of small total value:
1. The sales value of the by-products may be credited to the Profit and Loss
Account and no credit be given in the Cost Accounts. The credit to the
Profit and Loss Account here is treated either as miscellaneous income or
as additional sales revenue.
2. The sale proceeds of the by-product may be treated as deductions from
the total costs. The sale proceeds in fact should be deducted either from
the production cost or from the cost of sales.
(ii) When the by-products are of considerable total value - The joint costs may be
divided over joint products and by-products by using relative market values ;
physical output method (at the point of split off) or ultimate selling prices (if sold).
(iii) Where they require further processing -The net realisable value of the by-
product at the split-off point may be arrived at by subtracting the further
processing cost from the realisable value of by-products.
If total sales value of by-products at split-off point is small, it may be treated as per
the provisions discussed above under (i).
In the contrary case, the amount realised from the sale of by-products will be
considerable and thus it may be treated as discussed under (ii).
Question 1
Pokemon Chocolates manufactures and distributes chocolate products. It purchases Cocoa
beans and processes them into two intermediate products:
Chocolate powder liquor base
Milk-chocolate liquor base
These two intermediate products become separately identifiable at a single split off point.
Every 500 pounds of cocoa beans yields 20 gallons of chocolate powder liquor base and 30
gallons of milk-chocolate liquor base.
The chocolate powder liquor base is further processed into chocolate powder. Every 20
gallons of chocolate-powder liquor base yields 200 pounds of chocolate powder. The milk-
chocolate liquor base is further processed into milk-chocolate. Every 30 gallons of milk-
chocolate liquor base yields 340 pounds of milk chocolate.
Production and sales data for October, 2004 are:
Answer
(i) Comparison of alternative joint-cost allocation methods
Sales value at split-off point method
Chocolate powder Milk chocolate Total
liquor base liquor base
Sales value of products at split off ` 2,99,250 ` 5,55,750 ` 8,55,000
Weights 0.35 0.65 1.00
Joint cost allocated ` 7,12,500 x 0.35 ` 7,12,,500 x
0.65
= ` 2,49,375 = ` 4,63,125
300 x 997.50 = ` 2,99,250
450 x 1235 = ` 5,55,750
Physical measure method
Chocolate powder Milk chocolate Total
liquor base liquor base
Output 300 gallons 450 gallons 750 gallons
Weight 300/750 = 0.40 450/750 = 0.60 1.00
Joint cost allocated ` 7,12,500 x 0.40 ` 7,12,500 x 0.60 ` 7,12,500
=` 2,85,000 = ` 4,27,500
Net realisable value method
Chocolate powder Milk chocolate Total
liquor base liquor base
Final sales value of 3,000 lbs x ` 190 5.100 lbs x ` 237.50 ` 17,81,250
production = ` 5,70,000 = ` 12,11,250
Less: separable costs ` 3,02,812.50 ` 6,23,437.50 ` 9,26,250
Net realisable value at ` 2,67,187,50 ` 5,87,812.50 ` 8,55,000
split off point
Weight 2,67,187.50/8,55,000 5,87,812.5/8,55,000
= 0.3125 = 0.6875
Joint cost allocated ` 7,12,500 x 0.3125 ` 7,12,500 x 0.6875
= ` 2,22,656.25 = ` 4,89,843.75 ` 7,12,500
N 1,00,000 8,00,000
`40,00,000
x.1,00,000
5,00,000 gallons
O 50,000 4,00,000
`40,00,000
x.50,000
5,00,000 gallons
P 50,000 4,00,000
` 40,00,000
x.50,000
5,00,000 gallons
Total 5,00,000 40,00,000
(c) Statement of joint cost allocated between each
product by using estimated net realizable value method
Products Sales Sales Further Net Joint cost allocated
revenue revenue at processing realizable
after further the point costs value
processing of split off
(` ) (` ) (` ) (` ) (` )
(a) (b) (c) (d) (e)=[(b)
(d)] or (c)
Super M 1,20,00,000 80,00,000 40,00,000 20,00,000
` 40,00,000
` 80,00,000 x ` 40,00,000
` 40,00,000
` 80,00,000 x` 8,00,000
The selling prices quoted here are expected to remain the same in the coming year. During
2002-03, the selling prices of the items and the total amounts sold were:
X 186 tons sold for ` 1,500 per ton
Y 527 tons sold for ` 1,125 per ton
Z 736 tons sold for ` 750 per ton
The total joint manufacturing costs for the year were ` 6,25,000. An additional
` 3,10,000 was spent to finish product Z.
There were no opening inventories of X, Y or Z at the end of the year, the following inventories
of complete units were on hand:
X 180 tons
Y 60 Tons
Z 25 tons
There was no opening or closing work-in-progress.
Required:
(i) Compute the cost of inventories of X, Y and Z for Balance Sheet purposes and cost of
goods sold for income statement purpose as of March 31, 2003, using:
(a) Net realizable value (NRV) method of joint cost allocation
(b) Constant gross-margin percentage NRV method of joint-cost allocation.
(ii) Compare the gross-margin percentages for X, Y and Z using two methods given in
requirement (i)
Answer
(i) (a) Statement of Joint Cost allocation of inventories
of X, Y and Z for Balance Sheet purposes
(By using net realisable value method)
Products
Total
X Y Z
(`) (`) (`) (`)
Final sales value of total production 5,49,000 6,60,375 5,70,750 17,80,125
(Refer to working note 1) (366 tons x (587 tons x (761 tons x
` 1,500) ` 1,125) ` 750)
Less: Additional cost - - 3,10,000 3,10,000
Net realisable value 5,49,000 6,60,375 2,60,750 14,70,125
(at split-off point)
Joint cost allocated 2,33,398 2,80,748 1,10,854 6,25,000
(Refer to working note 2)
` 6,25,000
= Totalcos t of product X = x ` 5,49,000
` 14,70,125
Similarly, the joint cost of inventories of products Y and Z comes to ` 2,80,748 and
` 1,10,854 respectively.
3. Gross margin percentage
(`)
Final sales value production 17,80,125
Less: Joint cost and additional costs 9,35,000
(` 6,25,000 + ` 3,10,000)
Gross margin 8,45,125
Gross margin percentage 47.4756%
(` 8,45,125/` 17,80,125) x 100
Question 4
In a chemical manufacturing company, three products A, B and C emerge at a single split off
stage in department P. Product A is further processed in department Q, product B in
department R and product R and product C in department S. There is no loss in further
Processing of any of the three products. The cost data for a month are as under:
Cost of raw materials introduced in department P ` 12,68,800
Direct Wages Department (`)
P 3,84,000
Q 96,000
R 64,000
S 36,000
Factory overheads of Rs 4,64,000 are to be apportioned to the departments on direct wage
basis.
During the month under reference, the company sold all three products after processing them
further as under:
Products A B C
Output sold kg. 44,000 40,000 20,000
Selling Price per kg. ` 32 24 16
There are no Opening or Closing Stocks If these products were sold at the split off stage, that
is, without further processing, the selling prices would have been ` 20, ` 22 and
` 10 each per kg respectively for A, B and C.
Required:
(i) Prepare a statement showing the apportionment of joint costs to joint products:
(ii) Present a statement showing product-wise and total profit for the month under reference
as per the companys current processing policy.
(iii) What processing decision should have been taken to improve the profitability of the
company.
(iv) Calculate the product-wise and total profit arising from your recommendation in (iii)
above.
Answer
(i) Statement showing the apportionment of joint costs to joint products
Products
A B C Total
Output sold Kgs.: (I) 44,000 40,000 20,000
Selling price per kg. at split off (` ): (II) 20 22 10
Sales value at split off (` ): (I) x (II) 8,80,000 8,80,000 2,00,000 19,60,000
Joint costs (costs incurred in department P 8,80,000 8,80,000 2,00,000 19,60,000
(` )
(apportioned on the basis of sales value at
the point of split off) i.e. (22:22:5)
(ii) Statement showing product-wise and total profit for the
month under reference (as per the companys current processing policy)
Products
A B C Total
Output Kgs.: (a) 44,000 40,000 20,000
Selling price per kg. after further 32 24 16
processing (` ): (b)
Sales value after further processing 14,08,000 9,60,000 3,20,000 26,88,000
(Rs).:(c) = {(a) x (b)}
Joint costs (` ): (d) 8,80,000 8,80,000 2,00,000 19,60,000
(Refer to b (i) working notes & 2(i)
Further processing costs (` ): (e) 1,72,800 1,15,200 64,800 3,52,800
(Refer to working note 2 (ii)
Total costs (` ): (f) = [(d) + (e)} 10,52,800 9,95,200 2,64,800 23,12,800
Profit/ (Loss) (` ): [(c)) (f)} 3,55,200 (35,200) 55,200 3,75,200
Alternatively:
Incremental sales revenue (` ) 5,28,000 80,000 1,20,000
(44,000 units (40,000 units x ` (20,000 units x `
x ` 12 2) 6)
Less: Further processing costs (` ): 1,72,800 1,15,200 64,800
[Refer to working note 2 (ii)]
Incremental net profit / (loss) 3,55,200 (35,200) 55,200
(iii) Processing decision to improve the profitability of the company.
44,000 units of product A and 20,000 units of product C should be further processed
because the incremental sales revenue generated after further processing is more than
the further processing costs incurred. 40,000 units of product B should be sold at the
point of-split off because the incremental revenue generated after further processing is
less than the further processing costs.
(iv) The product wise and total profit arising from the recommendation in (iii) above is
as follows:
Product A B C Total
Profit (` ) 3,55,200 - 55,200 4,10,400
Working notes:
1. Statement of department-wise costs
P Q R S
(`) (`) (`) (`)
Raw materials 12,68,800
Wages 3,84,000 96,000 64,000 36,000
Overheads 3,07,200 76,800 51,200 28,800
(Apportioned on the basis of
departmental direct wages i.e.
96:24:16:9)
Total Cost 19,60,000 1,72,800 1,15,200 64,800
2. Joint costs and further processing costs
(i) Costs incurred in the department P are joint costs of products A, B and C and
are equal to ` 19,60,000.
(ii) Costs incurred in the departments Q, R and S are further processing costs of
products A, B and C respectively. Further processing costs of products A, B
and C thus are ` 1,72,800; ` 1,15,200 and ` 64,800 respectively.
Question 5
A companys plant processes 1,50,000 kgs. of raw material in a month to produce two
products, viz, P and Q. The cost of raw material is ` 12 per kg. The process costs month
are:
(`)
Direct Materials 90,000
Direct Wages 1,20,000
Variable Overheads 1,00,000
Fixed Overheads 1,00,000
The loss in process is 5% of input and the output ratio of P and Q which emerge
simultaneously is 1:2. The selling prices of the two products at the point of split off are: P
` 12 per kg. And Q ` 20 Per kg. A proposal is available to process P further by mixing it with
other purchased materials. The entire current output of the plant can be so processed further
to obtain a new product S. The price per kg. of S is ` 15 and each kg of output of S will
require one kilogram of input P. The cost of processing of P into S (including other materials)
is ` 1,85,000 per month.
You are required to prepare a statement showing the monthly profitability based both on the
existing manufacturing operations and on further processing.
Will you recommend further processing?
Answer
Working Notes:
Kgs.
1. Material input 1,50,000
Less: Loss of Material in process 7,500
(5% of 1,50,000)
Total output 1,42,500
2. Output of P and Q are in the ratio of 1 : 2 of the total output:
1,42,500 1
P= = 47,500 kg
3
1,42,500 2
Q= = 95,500 kg
3
3. Joint Costs:
(`)
Material (input) (1,50,000 kg. X ` 12) 18,00,000
Direct materials 90,000
Question 6
Three joint products are produced by passing chemicals through two consecutive processes.
Output from process 1 is transferred to process 2 from which the three joint products are
produced and immediately sold. The data regarding the processes for April, 1990 is given
below:
Process 1 Process 2
Direct material 2,500 kilos at ` 4 per kilo ` 10,000
Direct labour ` 6,250 ` 6,900
Overheads ` 4,500 ` 6,900
Normal Loss 10% of input
Scrap value of loss ` 2 per kilo
Output 2,300 kilos Joint products
A 900 Kilos
B 800 Kilos
C 600 Kilos
There were no opening or closing stocks in either process and the selling prices of the output
from process 2 were:
Joint product A ` 24 per kilo
Joint product B ` 18 per kilo
Joint product C ` 12 per kilo
Required:
(a) Prepare an account for process 1 together with any Loss or Gain Accounts you consider
necessary to record the months activities.
(b) Calculate the profit attributable to each of the joint products by apportioning the total
costs from process 2
(i) According to weight of output;
(ii) By the market value of production.
Answer
Working Notes:
(1) Joint Cost of three products under Process 2
(`)
By Transfer of output from process-I 20,700
Direct Labour 6,900
Overhead 6,900
Total 34,500
(2)
Joint Products Output in Apportionment of joint cost on the
Kg. basis of weight of output
A 900 `34,500 9
= ` 13,500
23
B 800 `34,500 8
= ` 12,000
23
C 600 `34,500 6
= ` 9,000
23
(3)
Joint Output S.P. Sales Apportionment of Joint Cost on the
Products In Kg. (p.u.) Revenue basis of market value of production
(`) (`)
A 900 24 21,600 ` 34,500 3 = ` 17,250
6
B 800 18 14,400 `34,500 2 = ` 11,500
6
C 600 12 7,200 ` 34,500 1 = ` 5,750
______ 6 _______
43,200 34,500
(a) Process 1 Account
Kg. Rate Amount Kg. Rate Amount
per kg. per kg.
(` ) (`) (` ) (`)
To Direct material 2,500 4 10,000 By Process 2 2,300 9 20,700
To Direct labour - - 6,250 (Refer to Note 1)
To Overhead - - 4,500 By Normal Loss 250 2 500
To Abnormal gain 50 9 450 (10% of input) ___ ___
2,550 21,200 2,550 21,200
Question 7
Distinguish between Joint products and By-products.
Answer
Joint products and By-products: Joint Products are defined as the products which are
produced simultaneously from same basic raw materials by a common process or processes
but none of the products is relatively of more importance or value as compared with the other.
For example spirit, kerosene oil, fuel oil, lubricating oil, wax, tar and asphalt are the examples
of joint products.
By products, on the other hand, are the products of minor importance jointly produced with
other products of relatively more importance or value by the common process and using the
same basic materials. These products remain inseparable upto the point of split off. For
example in Dairy industries, batter or cheese is the main product, but butter milk is the by-
product.
Points of Distinction:
(1) Joint product are the products of equal economic importance, while the by-products are
of lesser importance.
(2) Joint products are produced in the same process, whereas by-products are produced
from the scrap or the discarded materials of the main product.
(3) Joint products are not produced incidentally, but by-products emerge incidentally also.
Question 8
A company produces two joint product X and Y, from the same basic materials. The
processing is completed in three departments.
Materials are mixed in department I. At the end of this process X and Y get separated. After
separation X is completed in the department II and Y is finished in department III. During a period
2,00,000 kgs of raw material were processed in department I, at a total cost of ` 8,75,000, and the
resultant 60% becomes X and 30% becomes Y and 10% normally lost in processing.
In department II 1/6 of the quantity received from department I is lost in processing. X is
further processed in department II at a cost of ` 1,80,000.
In department III further new material added to the material received from department I and
weight mixture is doubled, there is no quantity loss in the department and further processing
cost (with material cost) is ` 1,50,000.
The details of sales during the year:
Product X Product Y
Quantity sold (kgs) 90,000 1,15,000
Sales price per kg (` ) 10 4
There were no opening stocks. If these products sold at split-off-point, the selling price of X
and Y would be ` 8 and ` 4 per kg respectively.
Required:
(i) Prepare a statement showing the apportionment of joint cost to X and Y in proportion of
sales value at split off point.
(ii) Prepare a statement showing the cost per kg of each product indicating joint cost,
processing cost and total cost separately.
(iii) Prepare a statement showing the product wise profit for the year.
(iv) On the basis of profits before and after further processing of product X and Y, give your
comment that products should be further processed or not.
Answer
Calculation of quantity produced
Dept I Dept II Dept III
Input (kg) 2,00,000 1,20,000 60,000
Weight lost or added (20,000) (20,000) 60,000
1,80,000 1,00,000 1,20,000
Production of X 1,20,000 1,00,000
Production of Y 60,000 1,20,000
(i) Statement of apportionment of joint cost
(Joint cost ` 8,75,000)
Product X Product Y
Out put (kg) 1,20,000 60,000
Selling price per kg (` ) 8 4
Sales value (` ) 9,60,000 2,40,000
Share in Joint cost (4:1) 7,00,000 1,75,000
(ii) Statement of cost per kg
Product X Product Y
Share in joint cost (` ) 7,00,000 1,75,000
Out put (kg) 1,00,000 1,20,000
Cost per kg (` ) (Joint cost) 7.00 1.458
Further processing cost per kg (` ) 1.80 1.250
Total cost per kg (` ) 8.80 2.708
per unit of production is obtained. The effect of application of this method is that all joint
products will have uniform cost per unit.
(ii) Contribution Margin Method: under this method joint costs are segregated into two
parts variable and fixed. The variable costs are apportioned over the joint products on
the basis of units produced (average method) or physical quantities. If the products are
further processed, then all variable cost incurred be added to the variable cost
determined earlier. Then contribution is calculated by deducting variable cost from their
respective sales values. The fixed costs are then apportioned over the joint products on
the basis of contribution ratios.
(iii) Market Value at the Time of Separation: This method is used for apportioning joint
costs to joint products upto the split off point. It is difficult to apply if the market value of
the products at the point of separation are not available. The joint cost may be
apportioned in the ratio of sales values of different joint products.
(iv) Market Value after further Processing: Here the basis of apportionment of joint costs
is the total sales value of finished products at the further processing. The use of this
method is unfair where further processing costs after the point of separation are
disproportionate or when all the joint products are not subjected to further processing.
(v) Net Realisable Value Method: Here joint costs is apportioned on the basis of net
realisable value of the joint products,
Net Realisable Value = Sale value of joint products (at finished stage)
(-) estimated profit margin
(-) selling & distribution expenses, if any
(-) post split off cost
EXERCISE
Answer : Refer to Chapter No. 7 i.e. Method of Costing (II) of Study Material.
Answer : Refer to Chapter No. 7 i.e. Method of Costing (II) of Study Material.
3. In the course of manufacture of the main product P, by products A and B also emerge. The joint
expenses of manufacture amount to ` 1,19, 550. All the three products are processed further after
separation and sold as per details given below:
P A B
A B
(1) If the products are sold after further processing is carried out in the mills.
5. A company processes a raw material in its Department 1 to produce three products, viz. B and X at the
same split-off stage. During a period 1,80,000 kgs of raw materials were processed in Department 1 at a
total cost of ` 12,88,000 and the resultant output of A, B and X were 18,000 kgs, 10,000 kgs and 54,000
kgs respectively. A and B were further processed in Department 2 at a cost of ` 1,80,000 and ` 1,50,000
respectively.
X was further processed in Department 3 at a cost of Rs 1,08,000. There is no waste in further processing.
The details of sales effected during the period were as under:
A B X
Quantity Sold (kgs.) 17,000 5,000 44,000
Sales Value (` ) 12,24,000 2,50,000 7,92,000
There were no opening stocks. If these products were sold at split-off stage, the selling prices of A, B and X
would have been ` 50, ` 40 and ` 10 per kg respectively. Required:
(i) Prepare a statement showing the apportionment of joint costs to A, B and X.
(ii) Present a statement showing the cost per kg of each product indicating joint cost and further
processing cost and total cost separately.
(iii) Prepare a statement showing the product wise and total profit for the period.
(iv) State with supporting calculations as to whether any or all the products should be further processed
or not
Answer : Products A B X
6. Two products P and Q are obtained in a crude form and require further processing at a cost of ` 5 for P and
` 4 for Q per unit before sale. Assuming a net margin of 25 percent on cost, their sale prices are fixed at
` 13,75 and ` 8.75 per unit respectively. During the period, the joint cost was ` 88,000 and the outputs
were:
P 8,000 units
Q 6,000 units
Answer : Products P Q
7. SUNMOON Ltd. produces 2,00,000; 30,000; 25,000; 20,000 and 75,000 units of its five products A, B, C
and E respectively in a manufacturing process and sells them at ` 17, ` 13, ` 8, `10 and ` 14 per unit.
Except product D remaining products can be further processed and then can be sold at ` 25, ` 17, ` 12
and ` 20 per unit in case of A, B, C and E respectively.
Raw material costs ` 35,90,000 and other manufacturing expenses cost ` 5,47,000 in the manufacturing
process which are absorbed on the products on the basis of their. Net realisable value. The further
processing costs of A, B, C and E are ` 12,50,000, ` 1,50,000; ` 50,000 and ` 1,50,000 respectively. Fixed
costs are ` 4,73,000.
You are required to prepare the following in respect of the coming year.
(a) Statement showing income forecast of the company assuming that none of its products are to be
further processed.
(b) Statement showing income forecast of the company assuming that products A, B, C and E are to be
processed further.
Can you suggest any other production plan whereby the company can maximise its profits. If yes, then
submit a statement showing income forecast arising out of adoption of that plan.
8. J B Limited produces four joint products A, B, C and D, all of which emerge from the processing of one raw
material. The following are the relevant data:
(`)
Carriage inwards 1,000
(a) Calculate the maximum price that may be paid for the raw material.
(b) Prepare a comprehensive cost statement for each of the products allocating the materials and other costs
based upon
Answer : (a) Maximum price to be paid for the raw material (` ) 10,000
(b) A B C D
9. A company operates a chemical process which produces four products: K, L M and N from a basic raw
material. The companys budget for a month is as under:
(`)
Raw materials consumption 17,520
Initial processing wages 16,240
Initial processing overheads 16,240
Required:
10. The yield of a certain process is 80% as to the main product, 15% as to the by-product and 5% as to the
process loss. The material put in process (5,000 units) cost ` 23,75 per unit and all other charges are `
1
14,250, of which power cost accounted for 33 %. It is ascertained that power is chargeable as to the main
3
product and by-product in the ratio of 10 : 9.
11. A factory is engaged in the production of a chemical BOMEX and in the course of its manufacture, a by-
product BRUCIL is produced, which after further processing has a commercial value. For the month of April
1990, the following are the summarised cost data:
Joint Expenses Separate Expenses
BOMEX BRUCIL
(`) (`) (`)
Materials 1,00,000 6,000 4,000
Labour 50,000 20,000 18,000
Overheads 30,000 10,000 6,000
Selling Price per unit 98 34
Estimated profit per unit on sale of BRUCIL 98 34
Units Units
No. of units produced 2,000 2,000
The factory uses reverse cost method of accounting for by-products whereby the sales value of by-products
after deduction of the estimated, profit, post separation costs and selling and distribution expenses relating
to the by products is credited to the joint process cost account.
(ii) The product-wise and overall profitability of the factory for April 1990.
13. The following information is given about two products produced jointly upto a stage.
Joint cost (Rs) 40,000
Number of units of Product A 2,000
B 600
Selling price (` ) A 30
B 25
Special (separate) expenses (` ) A 8,000
B 3,000
Ascertain the profit earned in total and by each product.
Subsequent Cost
Joint Costs (` ) P (` ) Q (` )
Material 5,000 3,000 1,500
Labour 3,000 1,400 1,000
Overheads 2,000 600 500
10,000 5,000 3,000
Selling Price Are P : ` 16,000, and Q : ` 8,000
Estimated profit on selling prices are 25% for P and 20% for Q. Assume that selling and distribution
expenses are in proportion of the sale prices. Show how you would apportion joint costs of manufacture and
prepare a statement showing cost of production of P and Q.
Answer ` 4,795