Accounting for Joint Products and Byproducts

1. By Rebuma K. Page 1
Chapter 7: Accounting for Joint Products and Byproducts
Learning Objectives:
After studying Chapter 7, you should be able to:
1. Identify the split off point in a joint-cost situation and distinguish joint products from byproducts.
2. Explain why joint costs are allocated to individual products.
3. Allocate joint costs using four methods.
4. Explain when the sales value at split off method is preferred when allocating joint costs.
5. Explain why joint costs are irrelevant in a sell-or-process-further decision.
6. Account for byproducts using two methods.
Concepts of Joint Products, Byproducts and Joint costs
Several manufacturing firm have a single production process yielding two or more products
simultaneously. For example, sugar producing companies, such as Finchawa Sugar Factory, produces
sugar as a main product and other products like molasses as byproducts; other companies may produce
different main products as in the case of petroleum companies, which produce different products:
Kerosene, Naphtha, Gasoline, Benzene, etc from crude oil, using the same process. You may raise, the
question “why we allocate joint costs to individual products or byproducts? This chapter will give you
an answer for this question, and with the methods employed by companies in order to do so. Let us
begin by definition of some terminology:
Joint Cost Terminologies
Joint Product - Joint products are those products manufactured through a single production process or
simultaneous process.
Joint Costs - Joint costs are the costs of a production process that yields multiple products
simultaneously.
Split-off Point - The split-off point is the juncture in a joint production process when two or more
products become separately identifiable.
Separable Costs - these are costs incurred beyond the split-off that are assignable to each of the specific
products identified at the split-off point.
Main Product - this is a product of a single process yielding two or more products that has relatively
high sales value.
By Product - This is a product produced with the main product having relatively low sales value.
Scrap - This is an output that has a minimal sales value.
The classification as main products, by products or scrap are basically based on their relative sales value,
and this can change over time, especially for products whose market price can increase or decrease by
large percentage in any one year. The distinction between these terms is not firm in practice, thus, it is
important to understand the terms as used by the particular organization.
Allocation of Joint costs
Why Allocate Joint costs?
There are several reasons why joint costs are allocated to individual products or services. These reasons
include the following:
1. Computation of inventorible costs and cost of goods sold for financial accounting purposes and
reports for income tax authorities.

2. By Rebuma K. Page 2
2. Computation of inventorible costs and cost of goods sold for internal reporting purposes- such
reports are used in division- profitability analysis, and they affect evaluation of division
managers’ performance.
3. Cost reimbursement under contracts when only a portion of a business’s products or services is
sold or delivered to a single customer, say, government agency.
4. Insurance-settlement computations for damage claims made on the basis of cost information of
jointly produced products.
5. Rate regulations for one or more of the jointly produced products or services that are subject to
price regulation.
For all these reasons; and of course, of several other reasons joint cost allocation is an important issue in
accounting; therefore your next question should be “How to allocate the joint cost to individual
products?”
Approaches to Allocating Joint Costs
There are two basic approaches used to allocate joint costs:
Approach 1: Allocate joint costs using market-based data such as the following approach:
1. Sales value at split-off method,
2. Net Realizable value (NRV) method, and
3. Constant gross-margin percentage Net Realizable value (NRV) method.
Approach 2: Allocate joint costs using physical measures, such as the weigh (say, kilograms) or
volume (say, cubic feet) of the joint products.
Joint costs do not have a cause-and-effect relationship with individual products because the production
process simultaneously yields multiple products. Using the benefit received criterion leads to a
preference for methods under approach 1 because revenues are in general, a better indicator of benefits
received than physical measures. Mining companies for example, receive more benefits from 1 ton of
gold than they do from 10 tons of coal. In the simplest joint production process, the joint products are
sold at split off point without further processing.
Example 1 below illustrates the two methods that apply in this case, i.e., the sales value at split off point
method and the physical measure method. Then introduce you with joint production process that yield
products that can be further processed beyond the split-off point. Finally, Example 2 below illustrates
the NRV method and the constant-gross margin percentage NRV method.
Example 1: Farmer’s Dairy 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 an
independent company, which markets and distributes them to supermarkets and other retail outlets.
Summary data for illustration is as follow:
o Raw Milk Processed: 110,000 gallons of raw milk- 110,000 gallons of raw milk yield 100,000
gallons of good products (cream and Liquid skim) i.e., 10,000 gallons shrinkage due to evaporation,
spoilage, and the like.
o Production: 25,000 gallons of cream and 75,000 gallons of Liquid skim
o Sales: Cream, 20,000 gallons at $8 per gallon and Liquid skim, 30,000 gallons at $4 per gallon.
o Inventories: There was no beginning inventories for both products; and there are 5,000 gallons of
creams and 45,000 gallons of Liquid skim as ending inventory.
o The joint cost of purchasing the raw milk and processing to split-off point is $400,000.

3. By Rebuma K. Page 3
Required: Allocate the joint cost using the sales value at split-off point method, and the physical
measure method. i.e., how much of the $400,000 joint costs should be allocated to the cost of goods
sold of 20,000 gallons of cream and 30,000 gallons of Liquid skim, how much should be allocated to the
ending inventory of 5,000 gallons of cream and the 45,000 gallons of liquid skim?
a) Sales value at split-off method
This method allocates joint costs to joint products on the basis of the relative total sales value at the
split-off point of the total production of these products during the accounting period. This method uses
the sales value of the entire production of the accounting period (25,000 gallons of cream and 75,000
gallons of Liquid skim).
Cream Liquid Skim Total
Total sales value at split-off Point (25x8; 75x4) $200,000 $300,000 $500,000
Allocation Rate (2/5; 3/5) 40% 60% 100%
Joint cost allocation (0.4 x 400; 0.6 x 400) $160,000 $240,000 $400,000
Product cost per gallon (160/25; 240/75) $ 6.4 $ 3.2
Note that this method uses the sales value of the entire production of the accounting period not just the
quantity sold; the justification is that the joint costs were incurred on all units produced, not just the
portion sold during the current period.
 The product line partial income statement is prepared below using the above data
Cream Liquid Skim Total
Sales (20x8; 30x4) $160,000 $120,000 $280,000
Cost of goods sold (20x 6.4; 30x3.2) (128,000) (96,000) (224,000)
Gross margin $32,000 $24,000 $56,000
Gross margin percentage (32/160; 24/120; 56/280) 20% 20% 20%
Ending inventory cost (5x6.4; 45x3.2) $32,000 $144,000 $176,000
Note that, the gross margin percentage is the same for both products here; but the gross-margin
percentage will depend on how much of the sales of each product came from beginning inventory and
how much came from current period production. The sales value at split-off method follows the benefits-
received criterion of cost allocation; costs are allocated in proportion to their revenue-generating power.
This method is both straightforward and intuitive. The cost allocation base (total sales value at split-off)
is expressed in terms of common currency (birr, dollar, etc) that is systematically recorded in the
Cream
25,000 gallons
Joint Cost ($400,000)
Liquid skim
75,000 gallons
Split-offpoint
Raw Milk
110,000
gallons
Process

4. By Rebuma K. Page 4
accounting system. Thus, to use this method, selling prices must exist for all products at the split-off
point.
b) Physical Measure Method
The physical-measure method allocates joint costs to joint products on the basis of the relative weight,
volume or other physical measure at split-off point of total production of these products during the
accounting period. In Example 1, the $400,000 joint cost produced 25,000 gallons of cream and 75,000
gallons of liquid skim. The joint cost allocation using these quantities would be as follows:
Cream Liquid Skim Total
Physical measures of Production in gallons 25,000 75,000 100,000
Allocation Rate (25/100, 75/100) 25% 75% 100%
Joint cost allocation (0.25 x 400, 0.75 x 400) $100,000 $300,000 $400,000
Product cost per gallon (100/25, 300/75) $ 4 $ 4
Note that because the physical-measure method allocates joint costs on the basis of gallons produced,
cost per gallon is the same for both products.
 The following is product line partial income statement under this method:
Cream Liquid Skim Total
Sales (20x8; 30x4) $160,000 $120,000 $280,000
Cost of goods sold (20x4; 30x4) (80,000) (120,000) (200,000)
Gross margin $80,000 $ 0 $80,000
Gross margin percentage (80/160; 0/120; 80/280) 50% 0% 28.6%
Ending inventory cost (5x4; 45x4) $20,000 $180,000 $200,000
Under the benefit-received criterion, the physical-measure method is less desirable than the sales value
at split-off point method. That is because the physical measure of the individual products has no
relationship to the revenue generating power of the individual products. For example for mining
companies, the individual products unit produced or extracted may not have relationship with the
revenue generating power of the product extracted. Consider a gold mine at Laga Dambi, Adola
(Shakiso) - that extracts ore containing Gold, Silver and Lead. Use of a common physical measure
(tones) may result in almost costs being allocated to lead the product that weights the most but has the
lowest revenue-generating power. In this case, this method of cost allocation is inconsistent with the
main reason that the mining company is incurring mining costs – to earn revenues from gold and silver,
not lead. Thus, when a company uses the physical-measure method in a product line income statement,
products that have a high sales value per unit of physical measure (e.g. Gold and silver) would show a
large “profit” and products that have a low sales value per physical measure unit (e.g. Lead) would show
sizable losses.
Example 2 - Assume the same situation as in example 1 except that both cream and liquid skim can be
processed further.
o Cream can be further processed to give butter cream. The 25,000 gallons of cream yield 20,000
gallons of butter cream at additional processing cost of $280,000.
o Liquid skim is processed further to get condensed milk. The 75,000 gallons of liquid skim are
processed further to yield 50,000 gallons of condensed milk at additional processing cost of
$520,000.
o Sales during the month were 12,000 gallons of butter cream for $25 per gallon and 45,000 gallons
of condensed milk for $22 per gallon.

5. By Rebuma K. Page 5
Now let us see how the joint cost of $400,000 is allocated to the butter cream and condensed milk using:
 Estimated Net Realizable (NRV) method,
 Constant gross margin percentage NRV method
Look at the following Exhibit which depicts the basic relationship of how raw milk is converted in to
cream and liquid skim in joint production process, and how cream is separately processed into butter
cream and liquid skim is separately processed to condensed milk.
c) Estimated Net- Realizable Value Method
This method allocates joint costs on the basis of the relative estimated net-realizable, i.e., expected final
sales value in the ordinary course of business minus the expected separable costs of production and
marketing. The joint costs in our example would be allocated as follows.
Butter Cream Condensed Milk Total
Expected final Sales (20x25; 50x22) $500,000 $1,100,000 $1,600,000
Less: Expected Separable Cost (280,000) (520,000) (800,000)
Expected NRV at split-off point $220,000 $580,000 $800,000
Allocation Rate (220/800; 580/800) 27.5% 72.5% 100%
Joint cost allocation (0.275x400; 0.725x400) $110,000 $290,000 $400,000
Joint cost per gallon (110/20; 290/50) $5.50 5.80
Separate cost per gallon (280/20; 520/50) 14.00 10.40
Total production cost per gallon $19.50 $16.20
 Product line partial income statement using the estimated net-realizable value method is presented
below:
Butter Cream Condensed Milk Total
Sales (12x25; 45x22) $300,000 $990,000 $1,290,000
Less: Cost of goods sold (12x19.5; 45x16.2) (234,000) (729,000) (963,000)
Gross margin $66,000 $261,000 $327,000
Gross margin % (66/300; 261/990; 327/1,290) 22% 26.36% 25.35%
Ending inventory cost (8x19.5; 5x16.2) $156,000 $81,000 $237,000
glns = gallons
Raw Milk
110,000
gallons
Process
Cream
25,000glns
Liquid Milk
75,000 gallons
Butter Cream
20,000 gallons
Condensed
Milk 50,000glns
Joint Cost ($400,000)
Separable Cost
($800,000)
Split-off

6. By Rebuma K. Page 6
Note the Following about NRV Method:
o The expected final sales value of the total production of the period is used and not the actual final
sales of the period.
o The NRV method is typically used in preference to the sales value at split off method only when
selling prices for one or more products at split off do not exist.
o Estimating the net realizable value of each product at the split off point requires information about
the subsequent processing steps to be taken and their expected separable costs.
o The expected net realizable value method is clear-cut when there is only one split off point.
However, when there are multiple split off points, additional allocations may be required if
processes subsequent to the initial split off point remerge with each other to create a second joint
cost situation.
d) Constant Gross Margin Percentage NRV Method
This method allocates joint costs in such a way that the overall gross margin percentage is identical for
all the individual products. The method works backward in that the overall gross margin is computed
first. Then, for each product, this gross margin percentage and any separable costs are deducted from the
final sales value of production in order to back into the joint cost allocation for that product. This
method entails three steps:
Step 1: Compute the overall gross margin percentage for all joint products together.
Step 2: Compute total production costs for each product - use the overall gross margin percentage and
deduct the gross margin from the final sales values to obtain the total costs that each product
should bear.
 Multiply the overall gross-margin percentage by final sales values of total production for
each product to calculate gross margin for each product.
 Subtract gross margin for each product from final sales value of production for each
product to obtain total costs that each product will bear.
Step 3: Compute allocated joint costs - deduct separable costs from total costs that each product will
bear to obtain the joint-cost allocation.
The three steps to allocate the Br 400 joint cost in our example would be as follow:
Step 1: Expected Final sales value of products (20x25) + (50x22) $1,600,000
Less: Joint costs and separable costs (400 + 280 + 520) 1,200,000
Overall-gross margin 400,000
Gross margin percentage (400/1,600) 25%
Step 2: Butter Cream Condensed Milk Total
Expected sales value of products $500,000 $1,100,000 $1,600,000
Less: Gross margin (500x0.25; 1,100x0.25) (125,000) (275,000) (400,000)
Total production costs $375,000 $825,000 $1,200,000
Step 3:
Total production costs $375,000 $825,000 $1,200,000
Less: separable costs (280,000) (520,000) 800,000
Joint cost allocated $95,000 $305,000 $400,000
Cost per gallon (375/20; 825/50) $18.75 $16.50

7. By Rebuma K. Page 7
 Presented below is a product line partial income statement using the above method of joint cost
allocation:
Butter Cream Condensed Milk Total
Sales (12x25; 45x22) $300,000 $990,000 $1,290,000
Less: CGS (12x18.75; 45x16.5) (225,000) (742,500) (967,500)
Gross margin $75,000 247,500 322,500
Gross margin % (75/300; 247.5/300) 25% 25% 25%
Ending inventory cost (8 x 18.75; 5 x 16.50) $150,000 $82,500 $232,500
The assumption underlying the constant gross margin percentage NRV method is that all the products
have the same ratio of cost to sales value. A constant ration of cost to sales value across products rarely
has been in companies that produce multiple products but have no joint cost situations. Another
limitation of the constant gross margin percentage NRV method is that it uses all separable costs (not
just separable manufacturing costs) to compute constant gross margin. The result is that inventory
figures may implicitly include separable marketing and other “downstream” costs, which is contrary to
generally accepted accounting principles.
Note also that the constant gross-margin percentage NRV method is different in one fundamental way
from the two other market-based joint-cost-allocation methods described earlier. Recall that the sales
value at split-off point method and the NRV method allocate only the joint costs to the joint products.
Neither method takes account of profits earned either before or after the split-off point when allocating
the joint costs. In contrast, the constant gross margin percentage NRV method is both a joint-cost
allocation method and a profit allocation method. The total difference between sales values of
production of all products and separable costs of all products includes joint products and total gross
margin. Gross margin is allocated to the joint products under the constant gross-margin, percentage
NRV method to determine the joint cost allocations so that each product has the same gross-margin
percentage.
Choosing a method
Which method of allocating joint costs should be used?
Each method of joint cost allocation has its advantage and disadvantage. Because the costs are joint in
nature, as was mentioned, managers cannot use the cause and effect criterion in making this choice.
The sales value at split-off method is widely used when selling price data are available (even if further
processing is done). Reasons for using the sales value at split-off method include:
1. Measurement of the value of the joint products at the split-off point- sales value at split-off is the
best measure of the benefits received as a result of joint processing relative to all other methods of
allocating joint costs, it is a meaningful basis for allocating joint costs because generating revenue is
the reason why a company incurs joint costs in the first place.
2. No anticipation of subsequent management decisions. The sales value at split-off method does not
require information on the processing steps after split-off, if there is further processing. In contrast,
the NRV and constant gross margin percentage NRV methods require information on the specific
sequence of further processing decisions, the separable costs of further processing, and the point at
which individual products will be sold.
3. Availability of a common basis to allocate joint costs to products. The sales value at split-off method
has a common basis to allocated joint costs to products, which is revenue. In contrast, the physical
measure may lack an easily identifiable common basis that can be used to allocate joint costs to
individual producers.

8. By Rebuma K. Page 8
4. Simplicity- the sales values at split-off method is simple. In Contrast, the NRV and constant gross-
margin percentage NRV methods can be complex for processing operations having multiple
products and multiple split-off points.
 When selling prices of all products at the split-off point are not available, the NRV method is
commonly used because it attempts to approximate sales value at split-off by subtracting
separable costs incurred after the split-off point on each product form selling prices.
 The main advantage of constant gross- margin percentage NRV method is that it is relatively
easy to implement. This method treats the joint products as though they comprise product by
calculating an aggregate gross-margin percentage, applying this gross margin percentage to each
product, and backing into the joint costs allocated to each product. It avoids the complexities
inherent in the NRV method to measure the benefits received by each of the joint products at the
split-off point.
 Although there are difficulties in using the physical-measure method, such as lack of congruence
with the benefit received criterion, there are instances when the physical measure is preferred, for
instance in case of rate regulation.
Irrelevance of Joint Costs for Decision Making
The concepts of relevant revenues, expected future revenues that differ among alternative courses of
action, and relevant costs, expected future costs that differ among alternative courses of action. These
concepts can be applied to decisions on whether a joint product or main product should be sold at the
split off point or processed further.
Sell-or-Process-Further Decisions
Consider Farmers’ Dairy’s decision to either sell the joint products, cream and liquid skim, at the split
off point or to further process them into butter cream and condensed milk. The decision to incur
additional costs for further processing should be based on the incremental operating income attainable
beyond the split off point. Example 2 assumed it was profitable for both cream and liquid skim to be
further processed into butter cream and condensed milk, respectively. The incremental analysis for the
decision to process further is as follows:
Further Processing Cream into Butter cream
Incremental revenues ($25/gallon x 20,000 gallons) - ($8/gallon x 25,000 gallons) = $300,000
Deduct incremental processing costs (280,000)
Increase in operating income from butter cream $20,000
Further Processing Liquid Skim into Condensed Milk
Incremental revenues ($22/gallon x 50,000 gallons) - ($4/gallon x75,000 gallons) = $800,000
Deduct incremental processing costs (520,000)
Increase in operating income from condensed milk $280,000
In this example, operating income increases for both products, so the manager decides to process cream
into butter cream and liquid skim into condensed milk. The $400,000 joint costs incurred before the split
off point are irrelevant in deciding whether to process further. Why? Because the joint costs of $400,000
are the same whether the products are sold at the split off point or processed further.
Incremental costs are the additional costs incurred for an activity, such as further processing. Do not
assume all separable costs in joint cost allocations are always incremental costs. Some separable costs

9. By Rebuma K. Page 9
may be fixed costs, such as lease costs on buildings where the further processing is done; some
separable costs may be sunk costs, such as depreciation on the equipment that converts cream into butter
cream; and some separable costs may be allocated costs, such as corporate costs allocated to the
condensed milk operations. None of these costs will differ between the alternatives of selling products at
the split off point or processing further; therefore, they are irrelevant.
Accounting for Byproducts
Joint production process may yield not only joint products and main products but by products as well.
Although by products have low total sales values compared with total sales values joint or main
products, the presence of by products in joint production process can affect the allocation of joint costs.
The accounting methods for by products address two major questions. These are:
1. When are by products recognized in the general ledger?
At the time of production or At the time of sales
2. Where do by products revenue appear in the income statement?
As a cost reduction of the main joint product or
As a separate item of revenue or other income
Combining the above two questions and choices give us the following four possible ways of accounting
for by products:
Method
When to Recognize
by product in the
general ledger?
Where Revenue of by product
appear on income statement?
Where by product inventory
appear on balance sheet?
1 Production Reduction of cost Inventory reported at
selling price2 Production Revenue-Other Revenue
3 Sales Reduction of costs
No by product inventory4 Sales Revenue-Other income
As you can see from the above exhibit methods 1 and 2 recognize the by product at the point of
production. However, by product inventories are reported at selling price on the balance sheet rather
than at a cost amount. One variant of method 1 and 2 is to report by product inventories at selling price
minus a normal profit margin; this variant avoids including unrealized gains as an offset to cost of goods
sold in the period of production.
Method 3 and 4 above are justified primarily on the grounds of immediately or on cost benefit criterion.
By products are not recognized in general ledger until a sale occurs. By products are viewed as
incidental and therefore does not warrant costly accounting procedures.
To illustrate, assume that Brown Coal Company purchases coal at $30 a ton. Its coking plant produces
two products-open fire coke and tar. The only saleable product at split-off point is tar, which is a by-
product. After further processing open fire coke appears. Each 100 tons of coal costs $1,000 to process
up to split-off point. The separable costs of further processing the 100 tons of coal beyond split-off point
is $1,400. The outputs from 100 tons of coal are:
Out put Tons Selling price Per ton
Open fire 70 $100
Tar 10 20
In Jan 2011 Brown Coal Company processed 10,000 tons of Coal. It had no beginning inventories of
finished product coal. On Jan 31, it has also no ending inventories of coal. No work in process, and 300
tons of open fire and 20 tons of tar in ending inventory.

10. By Rebuma K. Page 10
Required:
 Prepare an income statement using the methods (1, 2, 3 and 4) expressed in above Exhibit
 Record all the necessary journal entries.
Solution:
Method 1: Recognize by products in the general ledger at production and treat by products as reduction
of cost:
Ending inventory: Main product = $16,303 and Byproduct = $400
Method 2: Recognize by products in the general ledger at production and revenue form by products as
an income:
Ending inventory-Main product = $17,143 and Byproduct = $400
Method 3: Recognize by product in general ledger when sold and treat it as a reduction from cost:
Revenues:
Open fire Coke (6,700x100) $670,000
Cost of goods sold:
Total manufacturing cost (300,000 + 100,000) $400,000
Less: By-product Sales (980x20) 19,600
Net manufacturing cost $380,400
Less: Main product inventory (300 x 380,400)/7000 16,303
Byproduct inventory (20x20) 400 16,703
Cost of goods sold 363,697
Gross margin 306,303
Gross margin percentage 45.72%
Revenues:
Open fire Coke (6,700x100) $670,000
Tar (980x20) 19,600
Total Revenue $689,600
Cost of goods sold:
Total manufacturing cost (300,000 + 100,000) $400,000
Less: Main product inventory (300 x 400,000)/7000 17,143
Byproduct inventory (20x20) 400
Total inventory cost 17,543
Cost of goods sold 382,457
Gross margin 307,143
Gross margin percentage 44.54%
Revenues:
Open fire Coke (6,700x100) $670,000
Cost of goods sold:
Total manufacturing cost (300,000 + 100,000) $400,000
Less: By-product Sales (980x20) 19,600
Net manufacturing costs $380,400
Less: Main product inventory (300 x 380,400)/7000 16,303
Cost of goods sold 364,097
Gross margin 305,903
Gross margin percentage 45.66%

11. By Rebuma K. Page 11
End inventory cost – main product = $16,303 and Byproduct= $0
Method 4: Recognize by product in the general ledger when sold and treat it as revenue (other income):
Ending inventory- main product $17,143 and Byproduct $0.
In any method the joint cost is not allocated to the by product; the product is valued at expected selling
price. The following are required journal entry for the byproduct part only:
Method Descriptions Dr Cr
1) (i) To record the Production of by product – Here “Tar":
Byproduct (tar) 20,000
WIP inventory 20,000
(ii) To record Sales of by product:
Cash (A/R) 19,600
Byproduct (tar) 19,600
2) (i) To record the Production of by product (Tar):
Byproduct inventory (tar) 20,000
WIP inventory 20,000
(ii) To record Sales of by product:
Cash (A/R) 19,600
Byproduct (tar) 19,600
3) (i) To record the Production of by product (Tar):
No journal entry is made to record production of by product
(ii) To record Sales of by product (tar):
Cash (A/R) 19,600
Finished Goods (Cost of Sales) 19,600
4) (i) To record the Production of by product (Tar):
No journal entry is made to record production of by product
(ii) To record Sales of by product (tar):
Cash (A/R) 19,600
Other income 19,600
Revenues:
Open fire Coke (6,700x100) $670,000
Tar (980x20) 19,600
Total Revenue $689,600
Cost of goods sold:
Total manufacturing cost (300,000 + 100,000) $400,000
Less: Ending inventory (300 x 400,000)/7000 17,143
Cost of goods sold 382,857
Gross margin 306,743
Gross margin percentage 44.48%

12. By Rebuma K. Page 12
Check Your Understanding!
1. What do you understand by Joint Product?
2. Explain the important features of Joint Production.
3. What are the objectives of Joint Product Costing?
4. Explain the different methods of apportionment of Joint Product Costs.
5. What is mean by Byproducts?
6. What are the important methods of valuation of Byproducts?
7. Explain how joint production costing could be used in a service industry?
Work out!!
(Adopted from: Cost Accounting: A Managerial Emphasis 14th
edition Horngren, Datar and Rajan)
Memory Manufacturing Company (MMC) produces memory modules in a two-step process: chip
fabrication and module assembly. In chip fabrication, each batch of raw silicon wafers yields 400
standard chips and 600 deluxe chips. Chips are classified as standard or deluxe on the basis of their
density (the number of memory bits on each chip). Standard chips have 500 memory bits per chip, and
deluxe chips have 1,000 memory bits per chip. Joint costs to process each batch are $28,900.
In module assembly, each batch of standard chips is converted into standard memory modules at a
separately identified cost of $1,050 and then sold for $14,000. Each batch of deluxe chips is converted
into deluxe memory modules at a separately identified cost of $2,450 and then sold for $26,500.
Required:
1. Allocate joint costs of each batch to deluxe modules and standard modules using
(a) the NRV method,
(b) the constant gross-margin percentage NRV method, and
(c) the physical-measure method, based on the number of memory bits. Which method should MMC
use?
2. MMC can process each batch of 400 standard memory modules to yield 350 DRAM modules at an
additional cost of $1,600. The selling price per DRAM module would be $46. Assume MMC uses
the physical-measure method. Should MMC sell the standard memory modules or the DRAM
modules?