Accounting for Joint Products and By-Products
A single production process may yield several different
products.
When two or more product, both of significant value,
results from a single production process, they are called
joint products.
A joint product is different from a by-product, because a
by-product has insignificant value compared to the main
product or products.
For income and inventory costing purposes, the
allocation of costs to joint products and by-products is
necessary.
• Joint Products
Joint Products are individual products, each with
significant sales values, which are produced
simultaneously from the same raw materials and/or
manufacturing process .
• Joint Products
The basic characteristic of joint products are:
• Manufacturing of joint products always has a
split-off point (point of separation) in which
separate products emerge, which can be sold as
is or processed further. Cost incurred after split-
off point do not cause allocation problems since
they can be identified with the specific
products.
• None of the joint products is significantly
greater in value than other joint products . This
characteristics distinguishes joint products from
by-products.
• Joint products require simultaneous common
processing. Processing of one of the joint
products results in the processing of all the
other joint products at the same time.
• Joint Costs and the Split-Off Point
Joint costs or common costs consist of direct materials,
direct labor, and manufacturing overhead incurred from
the start of the process up to the point of separation
(split-off point). These costs are indivisible, because
they cannot be identified to any of the products being
simultaneously produced.
Additional processing costs (sometimes called further
processing costs or separable costs) are costs incurred
by each product, after they emerged from the same raw
material. Additional processing costs consist also of
additional materials, direct labor, and manufacturing
overhead incurred after the split-off point.
• Joint Costs and the Split-Off Point
• Methods for Allocating Joint Costs
Three methods is usually used to allocate joint cost to
individual products:
• The physical measures method, such as weight
(i.e., kilograms) or volume (i.e., cubic feet)/
• The sales value at split-off point method
(relative sales value), set to yield a uniform rate
of gross profit.
• The adjusted sales value method (Net
Realizable Value), considering additional
processing costs.
• Methods for Allocating Joint Costs
Case 1:
Joses’s Diary Products purchases raw milk from
individual farms and processes it until the split-off
point, when two products – cream and liquid skim-
emerge. These two products are sold to a company,
which markets and distributes them to supermarket
and other retail stores
Summary Data for April 2014 are:
• Raw milk processed, 55,000 gallons; 5,000
gallons are lost in the production process due to
evaporation, spillage, and the like, yielding
12,500 gallons of cream and 37,500 gallons of
liquid skim.
• The production data, sales and inventories are
as follows.
• Methods for Allocating Joint Costs
The following questions depict the relationships in the
above illustration:
• How much of the P200,000 joint costs should be
allocated to the cost of goods sold of 10,000
gallons of cream and 15,000 of liquid skim?
• How much should be allocated to the ending
inventory of 2,500 gallons of cream and 22,500
gallons of liquid skim?
The joint production costs of P200,000 cannot be traced
to either product. That’s because the products are not
separated until the split-point. To determine the costs
of cream and liquid skim sold different allocation basis
can be used.
Physical Measures Method
This method allocates joint costs to joint products on
the basis of the relative weight, volume, or other
physical measure at the split-off point of the production
process. The P200,000 joint costs produced 12,500
gallons of cream and 37,500 gallons of liquid skim.
Using the number of gallons produced as the physical
measure, joint costs are allocated as follows:
Jose Dairy Products, Income Statement For April 2014
Note the following features of the physical measures
method:
• The physical measure in unit (the gallon) is easy
to use because the products are measured in
gallons.
• The joint cost is easily allocated between the
two products.
• Unit cost of all the products are the same,
because they were computed by dividing the
total cost by the total units,
• No consideration is given to relative sales value,
special processing or handling required, the
content of the product, or other special
characteristics
• Not all cost are directly related to physical units
• Sales Value at Split-off Point Method
This method allocates joint costs to joint products on
the basis of their relative sales value at the split-off
point. This method uses the sales value of the entire
production of the accounting period, because joint
costs are incurred on all units produced, not just on
those sold in the current period.
When the sales value is known at the split-off point, the
total joint cost is allocated among the joint products
using the following formula:
*Units produced x unit sales value at split-off point.
Jose Dairy Products Income Statement for April 2014
Note the following features of the sales value at split-off
point method:
Cost are allocated to products in proportion to their
expected revenues.
• The cost-allocation base (total sales value at
split-off point) is expressed in terms of a
common denominator (the amount of
revenues) that is systematically recorded in the
accounting system.
• This method needs the market selling prices for
all products at the split-off point.
• This method always yield the same rate of gross
profit for the individual products when there
are no beginning inventories and all products
are sold at the split-off point.
• This method is straightforward.
Adjusted Sales Value Method
If the joint products must be process further before
sale, the sale value at split-off point method of
allocation does not measure the true value of the
products at the point of separation. The additional
processing costs must be deducted from the sales value
before the cost allocation is made . Similarly, if the costs
of selling the products vary widely, it may be desirable
to deduct the estimated selling cost from the sales
prices in order to arrive at the net or adjusted relative
sales value to use as the basis of allocation. Under this
method the joint cost is allocated to the joint products
using the following formula.
Adjusted Sales Value Method
Assume the same data as in previous illustration except
that both cream and liquid skim can be processed
further:
• Cream to Whipping Cream: 12,500 gallons of
cream are further processed to yield 10,000
gallons of whipping cream at additional
processing costs of P140,000. Whipping cream,
sells for P25 per gallon.
• Liquid Skim to Condensed Milk: 37,500 gallons
of liquid skim are further processed to yield
25,000 gallons of condensed milk at additional
processing costs of P260,000. Condensed milk
sells for P22 per gallon.
Sales during the period were 6,000 gallons of whipping
cream and 22,500 gallons of condensed milk. The
ending inventories are as follows:
Raw milk 0 gallons
Cream 0 gallons
Liquid skim 0 gallons
Whipping cream 4,000 gallons
Condensed milk 2,500 gallons
There are no beginning inventories.
Adjusted Sales Value Method
The following are the features of the adjusted sales
value method (net realizable method):
• This method is usually used only when the sales
value at split-off point of one or more products
is not known.
• The allocations are very similar to those made
when the sales value at split-off point is used.
• The procedures involved are simple and
relatively easy to apply.
• The costs usually present the true picture of the
values at the point of separation of the
products.
• The cost allocations are still derived from the
selling or market price, which may have little or
no relationship to the actual cost
Jose Dairy Products Income Statement for April 2014
Choosing a Method of Cost Allocation
Which method of allocating joint costs should be used?
Use the sales value at split-off method when selling
price is available (even if further processing is done).
Reasons
• It measures the value of the joint product
immediately at the end of the joint process.
• Does not require information on the processing
steps after split-off point, if there is further
processing.
• Have a meaningful basis to allocate joint costs
to products, which are revenues.
• It is simple to apply.
Accounting for By-Products
Joint production process may yield not only joint
products but also by-products. By-products are those
products of limited sales value produced simultaneously
with products of greater sales value, known as the main
or principal products. Main products are usually
produced in much greater quantity than by-products.
By-product, like joint or main products are produced
from the same raw materials and or common
manufacturing process. Joint costs are not directly
traceable to either main products or by-products. Since
by products are generally of secondary importance in
production, cost allocation methods, differ from those
used for joint products.
Two by-products accounting methods can be used as Analysis of the Method
follows: • No cost is assigned or allocated to the by-
Method A: By-products are recognized when sold. product.
This method is used when by-products are considered • The sale of the by-product has no effect on the
of minor importance and does not require additional cost of the main product.
processing costs. Net revenue from the sale of by- • The procedure is simple and practical and
product (sales value less selling costs) may be treated requires no computations of the cost of the by-
as: product.
• Addition to revenue from the sale of the main
product or as other income, and all
manufacturing costs are applied to the main
product.
• Reduction from the cost of the main product.
Method B: By-products are recognized when
produced.
This method is used when by-product are considered
important and therefore requires additional processing
costs. Two basic accounting methods can be used when
by-products are recognized at time when production is
completed.
• The net realizable value of the completed by-
product (estimated sales value less estimated
additional costs and selling costs) is charged to
By-product inventory and deducted from the
total manufacturing costs. No part of the joint
costs is allocated to the by-product.
• Part of the joint costs is allocated to the by-
product using the Normal Net Profit or Reversal
Cost Method. By-products are also charged with
any additional processing costs after separation.
Illustration Method B: By-Products Recognized When Produced
This method recognizes by-products in the financial
statements at the time production is completed.
By-product is Recorded at its Net Realizable Value
(NRV).
This method recognizes the by-product in the financial
statement - the 500 packs of potato skins – in the
month it is produced is debited to By-product Inventory
account and deducted from the costs of the main
product. The journal entry to illustrate this method is:
By-product Inventory – Potato Skins 20,000
Work in Process – Main product 20,000
To record net realizable value of the
completed by-product (500 x P40)
McBee Company Income Statement for the Month of McBee Company Income Statement for the Month of
May 2014 May 2014

Joint Costs Allocated to By-product Inventory (Reversal

Cost Method)
Under this method, the cost to be allocated to the by-
product is computed so that the by-product will yield
the normal percentage of profit on sales on that the
company makes, on the average. To illustrate this
method, assume the following data for the by-products:
• The potato skins by-product can be sold at P45
per pack.
• The selling expenses are P5 per pack
• The normal net profit of the business is 20% of
sales.
• Additional Manufacturing Costs after
separation, materials,P3,000 and conversion
costs. P2,000.