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Terminology
Approximated net realizable value at split-off allocation: a method of allocating joint costs to joint
products using a simulated net realizable value at the split-off point; approximated value is computed as
final sales price minus incremental separate costs
By-product: an incidental output of a joint process; it is salable, but the sales value is not substantial
enough for management to justify undertaking the joint process; it is viewed as having a higher sales
value than scrap
Joint costs: costs incurred for material, labor, and overhead during a joint process up to the split-off point
Joint process: a process during which one product cannot be manufactured without producing others
Joint product: a primary output of a joint process; each joint product individually has substantial
revenue-generating ability
Net realizable value (NRV): an amount equal to the product’s sales revenue at split-off less preparation
and disposal costs
Net realizable value approach: a method of accounting for by-products or scrap that requires that the
net realizable value of these products be treated as a reduction in the cost of the primary products
Net realizable value at split-off allocation: a method of assigning joint costs to joint products based on
the sales value at split-off minus all costs necessary to prepare and dispose of the products; it requires
that all joint products be salable at the split-off point
Offset approach: (see net realizable value approach)
Other income approach: (see realized value approach)
Physical measure allocation: a method of allocating a joint cost to products that uses a common
physical characteristic as the proration base
Realized value approach: a method of accounting for by-products or scrap that does not recognize any
value for these products until they are sold; the value recognized upon sale can be treated as other
revenue or income
Sales value at split-off allocation: a method of assigning joint costs to joint products based on the
relative sales value of the products at the split-off point as the proration base; use of this method requires
that all joint products be salable at the split-off point
Scrap: an incidental output of a joint process; it is salable but the sales value from scrap is not enough for
management to justify undertaking the joint process; it is viewed as having a lower sales value than a byproduct;
leftover material that has a minimal but distinguishable disposal value
Separate costs: costs incurred in later stages of production that are assignable to specific primary
products
Split-off point: the point at which the outputs of a joint process are first identifiable as individual products
Waste: a residual output of a production process that has no sales value
A. Introduction
1. Many companies produce and sell multiple products.
2. A joint process is a manufacturing process that simultaneously produces more than one product
line.
a. Classification of joint process output is based on management judgment about the relative
sales value of the outputs and can vary from company to company.
3. Joint cost refers to the costs incurred for material, labor, and overhead during a joint process up
to the split-off point.
a. Although joint costs must be allocated to the primary products to determine financial
statement valuations, such allocations should not be used in making internal decisions.
4. Separate costs are costs incurred in later stages of production that are assignable to specific
primary products.
5. This chapter discusses joint manufacturing processes, their related product outputs, and the
accounting treatment of the costs of those processes.
TRUE/FALSE
1. Joint costs occur after the split-off point in a production process.
2. Joint costs occur before the split-off point in a production process.
3. Joint costs may be allocated to by-products as well as primary products.
4. The primary distinction between by-products and scrap is the difference in sales value.
5. The primary distinction between by-products and scrap is the difference in volume produced.
6. The point at which individual products are first identifiable in a joint process is referred to as the split-off point.
7. Joint costs include all materials, labor and overhead that are incurred before the split-off point.
8. Two methods of allocating joint costs to products are physical measure allocation and monetary allocation.
10. Allocating joint costs based upon a physical measure ignores the revenue-generating ability of individual products.
11. Allocating joint costs based upon a physical measure considers the revenue-generating ability of individual products.
12. Monetary allocation measures recognize the revenue generating ability of each product in a joint process.
13. The relative sales value method requires a common physical unit for measuring the output of each product.
14. Joint costs may be allocated to main products, but not to by-products.
15. Net realizable value equals product sales revenue at split-off plus any costs necessary to prepare and dispose of the
product.
16. Net realizable value equals product sales revenue at split-off minus any costs necessary to prepare and dispose of the
product.
17. If incremental revenues beyond split-off are less than incremental costs, a product should be sold at the split-off
point.
18. If incremental revenues beyond split-off exceed incremental costs, a product should be processed further.
19. The net realizable value approach requires that the net realizable value of by-products and scrap be treated as a
reduction in joint costs allocated to primary products.
20. Net realizable value is considered to be the best measure of the expected contribution of each product to the
coverage of joint costs.
21. The net realizable value approach is used to account for scrap and by-products when the net realizable value is
insignificant.
22. The net realizable value approach is used to account for scrap and by-products when the net realizable value is
significant.
23. Under the realized value approach, no value is recognized for by-products or scrap until they are actually sold.
24. Under the net realizable value approach, no value is recognized for by-products or scrap until they are actually sold.
25. Not-for-profit entities are required to allocate joint costs among fund-raising, program, and administrative functions.
4. In joint product costing and analysis, which one of the following costs is relevant when
deciding the point at which a product should be sold in order to maximize profits?
a. Purchase costs of the materials required for the joint products
b. Separable costs after the split-off point
c. Joint costs to the split-off point
d. Sales salaries for the period when the units were produced
5. Before committing resources to a joint process, management must first decide whether
total expected revenue from selling the joint output ‘basket’ of products is likely to exceed the:
a. selling expenses for the goods.
b. joint costs and separate processing costs after split-off.
c. disposal costs for any waste generated.
d. All of the above.
6. When estimating unit selling prices for use in allocating joint production costs, which of the
following should be considered?
a. Competitor prices
b. Consumers’ sensitivity to price changes
c. Costs
d. All of the above
7. All of the following are common monetary measures for allocating joint costs to joint
products except:
a. approximated net realizable value at split-off.
b. gross margin at split-off.
c. net realizable value at split-off.
d. sales value at split-off.
8. LS Company manufactures two products, Product L and Product S in a joint process. The
joint (common) costs incurred are $420,000 for a standard production run that generates 180,000
units of L and 120,000 units of S. Product L sells for $2.40 per unit while Product S sells for $3.90
per unit. Assuming both products are sold at the split-off point, the amount of joint cost of each
production run allocated to Product L on a net realizable value (NRV) basis is:
a. $252,000.
b. $218,400.
c. $201,600.
d. $168,000.
9. Products A and B are manufactured in a joint process. The joint (common) costs incurred
are $252,000 for a standard production run that generates 108,000 gallons of Product A which
sells for $2.40 per gallon and 72,000 gallons of Product B which sells for $3.90 per gallon. If no
additional costs are incurred after the split-off point, the amount of joint cost of each production
run allocated to Product B on a physical measure basis is:
a. $100,800.
b. $140,000.
c. $151,200.
d. $280,800.
10. Products X and Y are manufactured in a joint process. The joint (common) costs incurred
are $420,000 for a standard production run that generates 180,000 gallons of Product X which
sells for $2.40 per gallon and 120,000 gallons of Product Y which sells for $3.90 per gallon. If
additional processing costs beyond the split-off point are $1.40 per gallon for Product X and $0.90
per gallon for Product Y, the amount of joint cost allocated to Product Y on a net realizable value
basis is:
a. $280,000.
b. $252,000.
c. $168,000.
d. $140,000.
11. M Company incurs $10,000,000 in joint costs for its three products. The company
estimates the products’ production, final selling price, and separate costs after split-off as follows:
Estimated Estimated
Product Production Selling Price Separate Cost
Product A 3,000 $2,000 $200
Product B 2,400 $3,000 $500
Product C 1,200 $1,500 $100
How much of the joint costs should be allocated to Product A under the approximated net
realizable value at split-off? (Note: round percentages to zero decimal places.)
a. $4,600,000
b. $4,100,000
c. $1,300,000
d. None of the above
12. P Inc. always generates a certain amount of waste due to the nature of its production
activities regardless of which products it is producing at the time. After production in a recent
month, the company sold $200 of scrap. Which of the following is the correct entry to record the
sale of the scrap using the realized value approach?
a. Cash 200
Manufacturing Overhead 200
b. Cash 200
Finished Goods 200
c. Cash 200
Scrap Inventory 200
d. Cash 200
Work in Process 200
13. Select the incorrect statement concerning the accounting for by-product and scrap.
a. Reducing joint cost by the NRV of the by-product/scrap is the traditional method used to
account for such goods.
b. Regardless of whether a company uses the NRV or the realized value approach, the specific
method used to account for by-product should be established before the joint cost is allocated
to the joint products.
c. Two common methods used to account for by-products are the NRV approach and the
realized value approach.
d. Under the realized value approach, the estimated selling price of the by-product is recognized
prior its actual sale.
14. Not-for-profit organizations may charge the entire cost of a joint activity to fund-raising if all
of the following criteria are met except:
a. amount.
b. audience.
c. content.
d. purpose.
15. If a majority of compensation or fees for anyone performing a part of an activity is tied to
contributions raised, the activity automatically fails the
a. purpose criterion and all costs of the activity must be charged to program activities.
b. content criterion and all costs of the activity must be charged to fund-raising.
c. purpose criterion and all costs of the activity must be charged to fund-raising.
d. audience criterion and all costs of the activity must be charged to administrative activities.
PROBLEMS
Lamar Company
Lamar Company produces only two products and incurs joint processing costs that total $3,750. Products Alpha and
Beta are produced in the following quantities during each month: 4,500 and 6,000 gallons, respectively. Lamar
Company also runs one ad each month that advertises both products at a cost of $1,500. The selling price per gallon
for the two products are $20 and $17.50, respectively.
1. Refer to Lamar Company. What amount of joint processing costs is allocated to each product
based on gallons produced?
2. Refer to Lamar Company. What amount of advertising cost is allocated to each product based on
sales value?
Moore Company
Moore Company produces three products from the same process and incurs joint processing costs of $3,000.
Disposal
Sales price cost per Further Final sales
per gallon gallon at processing price per
Gallons at split-off split-off costs gallon
M 2,300 $ 4.50 $1.25 $1.00 $ 7.00
N 1,100 6.00 3.00 2.00 10.00
Q 500 10.00 8.00 2.00 15.00
Disposal costs for the products if they are processed further are:
M, $3.00; N, $5.50; Q, $1.00.
3. Refer to Moore Company. What amount of joint processing cost is allocated to the three products
using sales value at split-off?
4. Refer to Moore Company. What amount of joint processing cost is allocated to the three products
using net realizable value at split-off?
5. Ardmore Company produces two main products jointly, A and B, and C, which is a by-product of
B. A and B are produced from the same raw material. C is manufactured from the residue of the process creating B.
Costs before separation are apportioned between the two main products by the net realizable value method. The net
revenue realized from the sale of C is deducted from the cost of B. Data for April were as follows:
Costs before separation $200,000
Costs after separation:
A 50,000
B 32,000
C 4,000
6. Joplin Corporation produces three products from a common manufacturing process. The total
joint cost of producing 2,000 pounds of Product A; 1,000 pounds of Product B; and 1,000 pounds of Product C is
$7,500. Selling price per pound of the three products are $15 for Product A; $10 for Product B; and $5 for Product
C. Joint cost is allocated using the sales value method.
Required:
a. Compute the unit cost of Product A if all three products are main products.
b. Compute the unit cost of Product A if Products A and B are main products and Product C is a
by-product for which the cost reduction method is used.
7. Detroit Manufacturing Company makes three products: A and B are considered main products and
C a by-product.
Production and sales for the year were:
220,000 lbs. of Product A, salable at $6.00
180,000 lbs. of Product B, salable at $3.00
50,000 lbs. of Product C, salable at $.90
Production costs for the year:
Joint costs $276,600
Costs after separation:
Product A 320,000
Product B 190,000
Product C 6,900
Required: Using the by-product revenue as a cost reduction and net realizable value method of assigning joint
costs, compute unit costs (a) if C is a by-product of the process and (b) if C is a by-product of B.
8. Arnold Company processes raw material in Department 1 from which come two main products, A
and B, and a by-product, C. A is further processed in Department 2, B in Department 3, and C in Department 4. The
value of the by-product reduces the cost of the main products, and sales value is used to allocate joint costs.
Dept 1 Dept 2 Dept 3 Dept 4
Cost Incurred: $90,000 $10,000 $8,000 $10,000
Production:
A 10,000 lbs.
B 20,000 lbs.
C 10,000 lbs.
Selling Price:
A $10/lb.
B $5/lb.
C $2/lb.
Required:
b. Ending inventory consists of 5,000 lbs. of B and 1,000 lbs. of C. What is the value of the
inventory?
9. Knight Corporation manufactures three identifiable product lines, Products A, B, and C, from a basic
processing operation. The cost of the basic operation is $320,000 for a yield of 5,000 tons of Product A; 2,000 tons
of Product B; and 1,000 tons of Product C. The basic processing cost is allocated to the product lines in proportion
to the relative weight produced.
Knight Corporation does both the basic processing work and the further refinement of the three product lines. After
the basic operation, the products can be sold at the following prices per metric ton:
Product A—$60 Product B—$53 Product C—$35
Costs to refine each of the three product lines follow:
Product Lines
A B C
Variable cost per metric ton $8 $7 $4
Total fixed cost $20,000 $16,000 $6,000
The fixed cost of the refining operation will not be incurred if the product line is not refined.
The refined products can be sold at the following prices per metric ton:
Product A—$75 Product B—$65 Product C—$40
Required:
a. Determine the total unit cost of each product line in a refined state.
b. Which of the three product lines, if any, should be refined and which should be sold after the
basic processing operation? Show computations.
10. Bolton Company produced three joint products at a joint cost of $100,000. These products were
processed further and sold as follows:
Product Sales Additional Processing Costs
A $245,000 $200,000
B 330,000 300,000
C 175,000 100,000
The company has had an opportunity to sell at split-off directly to other processors. If that alternative had been
selected, sales would have been: A, $56,000; B, $28,000; and C, $56,000.
The company expects to operate at the same level of production and sales in the forthcoming year.
Required: Consider all the available information and assume that all costs incurred after split-off are variable.
a. Could the company increase net income by altering its processing decisions? If so, what
would be the expected overall net income?
b. Which products should be processed further and which should be sold at split-off?