Allocation of Joint Costs

and Accounting for ByProducts/Scrap

Prepared by: Christianne Nicole Ramos

Joint process

\joint-pr-ses\

process that converts a single input into

multiple outputs

Joint cost

\joint-kost\

the cost to operate joint product processes

including the disposal of waste

Outputs of a joint process

Joint products
By-products
Scrap

Allocation of joint cost

Physical measure
Monetary measure

Physical measure
proration using a common
characteristic of the joint products

physical

Monetary measure
Sales value at split-off
Net realizable value at split-off
Approximated net realizable value at split-off

Accounting for by-product

and scrap
Net realizable value approach
Realized value approach

Exercises

Exercise 13
Indianola Beef buys sides of beef to convert into
three products: steaks, roasts, and ground beef.
In April 2013, Indianola bought multiple sides of
beef for P20,000 that were converted into the
following products at a cost of P6,400:
Product

# of Pounds

Sales value at
split-off

Steaks

3,312

P4.25 per pound

Roasts
Ground beef

6,210
4,278

P3.80 per pound

P0.90 per pound

Exercise 13
The remaining 1,200 pounds were lost as waste.
Required:
a) Allocate the joint cost to the three products
using the physical units method. What
problem do you find with this method?
b) Allocate the joint cost to the three products
using the sales value at split-off method. Does
this allocation eliminate the problem
identified in (a)?

Exercise 13
Required:
c) Assume that the ground beef could be processed
into sausage that could be sold for P2.10 per pound
to a distributor that wants a special label costing
P0.15 per pound attached to the sausage. If
Indianola Beef uses the sales value at split-off
method to allocate joint cost, what is the maximum
separate cost of processing that the company could
incur to still appear to earn P0.40 per pound upon
the sale? If this separate cost were incurred, would
you consider the P0.40 per pound a real profit
amount?

Exercise 13: a
Product

# of
Pounds

Proportion

Joint Cost

Allocated
Joint Cost

Steaks

3,312

24%

P26,400

P 6,336

Roasts

6,210

45%

P 26,400

11,880

Ground
beef

4,278

31%

P26,400

8,184

13,800

100%

Total

P26,400

Joint cost= cost of beef sides + conversion cost

= P20,000 + P6,400
=P26,400

Exercise 13: a
Product

# of
Pounds

Proportion

Joint Cost

Allocated
Joint Cost

Steaks

3,312

24%

P26,400

P 6,336

Roasts

6,210

45%

P 26,400

11,880

Ground
beef

4,278

31%

P26,400

8,184

13,800

100%

Total

P26,400

This method disregarded the revenue-generating ability

of the individual joint products.

Exercise 13: b
Product

# of
Pounds

SV at
split-off

Total SV

Proportion

Allocated
Joint Cost

Steaks

3,312 P4.25/lb.

P14,076

34%

P 8,976

Roasts

6,210 P3.80/lb.

23,598

57%

15,048

Ground
beef

4,278 P0.90/lb.

3,850

9%

2,376

P41,524

100%

P26,400

Total

Yes, because it used the sales value of the joint

products.

Exercise 13: c
Selling price

P2,376/4,278

P 2.10

Allocated joint cost

Special label

(0.56)
(0.15)

Profit desired

(0.40)

Allowable separate cost

P 0.99

Exercise 15
All A-Buzz makes three products from a joint
production process using honey. Joint cost for
the process in 2013 is P123,200.
Units of
output

Per unit selling

price at splitoff

Honey
butter

10,000

P4.00

P3.00

P 6.00

Honey jam

20,000

6.40

4.00

14.00

Honey
syrup

1,000

3.00

0.40

3.60

Product

Incremental
processing
cost

Final sales
price

Exercise 15
Each container of honey butter, jam, and syrup
respectively, contains 16 ounces, 8 ounces, and 3 ounces
of product.
Required:
a) Determine which products should be processed
beyond the split-off point.
b) Assume honey syrup should be treated as a byproduct. Allocate joint cost based on units produced,
weight, and sales value at split-off. Use the net
realizable value method in accounting for the byproduct.

Exercise 15: a
Product
Honey
butter
Honey jam
Honey
syrup

Sales
Value

SV at
split-off

Incremental
Revenue

Incremental
Cost

Incremental
Profit

P 6.00

P 4.00

P2.00

P3.00

P(1.00)

14.00

6.40

7.60

4.00

3.60

3.60

3.00

0.60

0.40

0.20

Honey jam and honey syrup are the only ones that need
to be further processed.

Exercise 15: b

Unit-based allocation
Product

Units

Proportion

Honey
butter

10,000

33%

Honey
jam

20,000

67%

Total

30,000

Joint Cost

Allocated
Joint Cost

P120,000 P 40,000
120,000

80,000
P120,000

Exercise 15: b
Weight-based allocation
Product

Honey
butter
Honey
jam
Total

Weight

Proportion

Joint Cost

160,000

50%

P120,000

P 60,000

160,000

50%

120,000

60,000

320,000

Allocated Joint Cost

P120,000

Exercise 15: b
Sales value at split-off allocation
Product

SV at SplitProportion
off

Joint Cost

Allocated Joint
Cost

Honey
butter

P 40,000

24%

P120,000

P 28,800

Honey
jam

128,000

76%

120,000

91,200

P168,000

100%

Total

P120,000

Exercise 19
Bright Red Cannery makes three products from a
single joint process. For 2013, the cannery
processed all three products beyond split-off.
The following data were generated for this year:
Product
Candied apples
Apple jelly
Apple jam

Incremental
Separate Cost
P26,000
32,000
15,000

Total Revenue
P690,000
775,000
271,000

Exercise 19
Analysis of 2013 market data reveals that
candied apples, apple jelly, and apple jam could
have been sold at split-off for P670,000,
P730,000, and P260,000, respectively.
a) Based on hindsight, evaluate managements
production decisions in 2013.
b) How much additional profit could the
company have generated in 2013 if it had
made optimal decisions at split-off?

Exercise 19: a

The company should not have processed the candied

apples and the apple jam further because their
incremental costs exceeded their incremental revenue.

Exercise 19: b
Candied apples= P6,000
Apple jam= P4,000

Exercise 20
MediaForum has three operating groups: Games,
News, and Documentaries. In May, the company
incurred P24,000,000 of joint cost for facilities
and administration. May revenues and separate
production costs of each group are as follows:
Revenue
Separate costs

Games
P34,040,000
31,040,000

News
Documentaries
P30,720,000
P189,320,000
16,320,000
110,720,000

Exercise 20
Required:
a) What amount of joint cost is allocated to each operating group
using the net realizable value approach? Compute the profit for
each operating area after the allocation.
b) What amount of joint cost is allocated to each operating group if the
allocation is based on revenues? Compute the profit for each
operating group after the allocation.
c) Assume you are the head of the Games Group. Would the
difference in allocation bases create significant problems for you
when you report to the top management of the company? Develop a
short presentation for top management if the allocation base in (b)
is used to determine each operating groups relative profitability. Be
certain to discuss important differences in revenues and cost figures
for the Games and Documentaries groups.

Exercise 20: a
Revenue
Separate costs
NRV
Group

Games
News
Documentaries
P 34,040,000 P30,720,000
P 189,320,000
(31,040,000) (16,320,000)
(110,720,000)
P 3,000,000 P 14,400,000
P 78,600,000
NRV

Proportion

Joint cost

Allocated
Joint Cost

Games

P 3,000,000

3%

P 24,000,000

News

14,400,000

15%

24,000,000

3,600,000

Documentaries

78,600,000

82%

24,000,000

19,680,000

P 96,000,000

100%

Total

720,000

P 24,000,000

Exercise 20: a

Revenue
Separate costs
Allocated costs
Net profit

Games
News
Documentaries
P 34,040,000 P30,720,000 P 189,320,000
(31,040,000) (16,320,000) (110,720,000)
(720,000) (3,600,000)
(19,680,000)
P 2,280,000 P 10,800,000
P 58,920,000

Exercise 20: b
Revenue

Proportion

Joint
Cost

Allocated
Joint Cost

Games
News
Documentaries

P 34,040,000
30,720,000
189,320,000

13%
12%
75%

P 24M P 3,120,000
24M
2,880,000
24M 18,000,000

Total

P 254,080,000

100%

P 24,000,000

Exercise 20: b
Games
Revenue
Separate costs
Allocated costs
Net profit(loss)

News

P 34,040,000 P30,720,000
(31,040,000) (16,320,000)
(3,120,000)
(2,880,000)
P (120,000) P 11,520,000

Documentaries
P 189,320,000
(110,720,000)
(18,000,000)
P 60,600,000

Exercise 20: c
Using revenues as the allocation base would
create significant problems for the Games Group
since it resulted to a net loss. The revenue alone
is an arbitrary base for allocation .

Exercise 26
You Carve Me Up manufactures wood statues,
which yields sawdust as a by-product. Selling costs
associated with the sawdust are P250 per ton sold.
The company accounts for sawdust sales by
deducting the sawdusts net realizable value from
the major products cost of goods sold. Sawdust
sales in 2013 were 1,200 tons at P355 each. If You
Carve Me Up changes its method of accounting for
sawdust sales to show the net realizable value as
Other Revenue, how would its gross margin be
affected?

Exercise 26