By-Product
A product of relatively small total value produced simultaneously with a product of greater total value.
Main Product
The product with the greater value.
Usually produced in greater quantities than the by-products.
Joint Products
Are produced simultaneously by a common process or series of processes, with each product possessing more than nominal value in the form in which it is produced.
Production is simultaneous because the manufacturing process inevitably creates all of the pr
Split-Off Point
The point at which these several products emerge as separable, individual units.
Before that point, the products form a homogenous whole.
Origins of the By-Product
*From the cleansing of the main product (generally have a residual value).
*Leftover scrap or waste.
*From preparing raw materials before they are used in the manufacture of the main product.
By-products can be classified into 2 groups:
(according to their marketable condition at the split off point)
(1) Those sold in their original form without need of further processing
(2) Those that require further processing to be salable
Joint Cost
The cost that arises from the simultaneous manufacturing of products produced from the same process.
Whenever 2 or more different joint or by-porducts are created from a single resource, a joint cost results.
Incurred prior to the split-off point,
in an i
Separable Product Costs
The total production cost of multiple products involves both joint cost and separate, individual product costs.
Identifiable with the individual product & need no allocation.
Difficulties in Costing By-Products & Joint Products
A true joint cost is indivisible.
Methods of Costing By-Products
2 Categories:
(1) A joint production cost is not allocated to the by-product, 2 methods are used
Method 1
Method 2
(2) Some portion of the joint cost is allocated to the by-product, 2 methods are used
Method 3
Method 4
*This allocation of joint costing is often
equival
Method 1: Recognition of Gross Revenue
Any revenue resulting from sales of the by-product is credited to either income or to the cost of the main product.
This method is distinguished by its treatment of GROSS revenue from the by-product.
The gross revenue from sales of the by-product is presented on the income statement as any of the following:
a. Other Income
b. Additional Sales Revenue
c. A deduction from the Cost of Goods Sold of the main product
d. A deduction from the Total Production Cost of the main product
Method 2: Recognition of Net Revenue
The by-product's cost subsequent to split-off are offset against the by-product revenue.
This variation is distinguished by its treatment of the NET revenue from the by-product.
Net By-Product Revenue
Ex.
Revenue from sales of the by-product
Less: marketing and administrative costs
Less: any cost of processing the by-product after split off
The net by-product revenue is presented on the income statement as any of the following:
a. Other Income
b. Additional Sales Revenue
c. A deduction from the Cost of Goods Sold of the main product
d. A deduction from the Total Production Cost of the main product
Method 3: Replacement Cost Method
...
Method 4: Market Value Method
a.k.a. the Reversal Cost Method
Gross Revenue Method (M1)
The final inventory cost of the main product is overstated to the extent that some of the cost belongs to the by-product.
Method 1A: By-Product Revenue as OTHER INCOME
Sales (main product)
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit
- Marketing & Administrative Expenses
Operating Income
- **Other Income: Revenue from sales of by-
Method 1B: By-Product Revenue as ADDITIONAL SALES REVENUE
Sales (main product)
+ *
Revenue from sales of by-product
*
Total Sales Revenue
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit (^)
- Marketing & Administrative Expense
Method 1C: By-Product Revenue as A DEDUCTION FROM THE COGS
Sales (main product)
- COGS:
Beginning Inventory
+Total Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
- *
Revenue from sales of by-product
*
Gross Profit (^)
- Marketing & Administrative Expenses
Operating Income (
Method 1D: By-Product Revenue DEDUCTED FROM PRODUCTION COST
Sales (main product)
- COGS:
Beginning Inventory
Total Production Cost
-*
Revenue from sales of by-product
*
+
Net Production Cost
Cost of Goods Available for Sale
-Ending Inventory
=Cost of Goods Sold
Gross Profit (^)
- Marketing & Administrative Expense
Journal Entries for Methods 1a, 1b, 1c, & 1d
Methods 1A, 1B, & 1C:
Cash or Accounts Receivable
Income from Sales of By-Product
Method 1D:
Cash or Accounts Receivable
the production cost of the main
product, usually Work In Process
Net Revenue Method (M2)
Recognizes the need for assigning traceable costs to the by-product.
It does not attempt to allocate any joint production cost to the by-product.
Journal Entries for Method 2
Involve charges against by-product revenue for costs incurred after split-off.
Marketing and administrative expenses are also allocated to the by-product.
Replacement Cost Method (M3)
Used by companies whose by-products are used somewhere within the same company.
The existence of the by-product removes the necessity of purchasing equivalent materials from suppliers.
Ex. of intracompany transfer pricing.
Debit: to the dept. that uses th
Market Value Method (M4)
a.k.a Reversal Cost Method
Similar to technique in 1D.
Reduces the manufacturing cost of the main product, not by the actual revenue received, but by an estimate of the by-product's value at the time of recovery.
The by-product is charged with this estima
Methods of Allocating Joint Production Cost to Joint Products
Joint production costs (incurred before split-off), can be allocated to joint products under one of the following methods:
1. Market Value Method
based on the relative market values of
the individual products
2. Average Unit Cost Method
3. Weighted Averag
Market Value Method
for allocating joint production cost to joint products
Is neutral, and does not affect the relative probability of the joint products.
*Joint products salable at split-off
*Joint products not salable at split-off
Joint Products Salable at Split-Off
The market value method allocates joint cost on the basis of relative market values of the joint products.
~Uses the total mkt value of each product
-the total quantity produced multiplied
by the unit sales price
Under the mkt value method, each joint pro
Joint Products Not Salable at Split-Off
Require addition processing before the sale.
The basis for allocation of joint cost is a hypothetical market value at the split-off point. The subsequent processing cost is subtracted from the ultimate sale value to find a hypothetical market value.
Average Unit Cost Method
Attempts to allocate joint cost among joint products so that each product is allocated the same per unit amount of joint cost, called the average unit cost.
The average unit cost is obtained by dividing the total number of units produced into the total jo
Weighted Average Method
for allocating joint production cost to joint products
In some cases, individual units of the various joint products differ markedly.
Predetermined weight factors may be assigned to each unit.
The weight factors are based on attributes such as size of the unit, difficulty to manufacture, time consumed in maki
Quantitive Unit Method
Allocated joint cost on the basis of some common unit of measurement.