Cost Accounting
Joint Products and
By-Products
Part A: Discussion of basic theories including (i)
definition of important terms relevant and related to costing of joint products
and by-products, (ii) Methods of accounting for joint products, and (iii) Methods
of accounting for by-products.
Part B: Twelve Illustrations with Solutions.
Introduction
In
certain cases, commonly used input factors
result in the production of multiple products, i.e. two or more products. Use
of same materials and same process operations give the output consisting of
multiple products, i.e. two or more products. One product cannot be produced
without the production of other product or products. In these multiple product
situations, the production of one product is unavoidably accompanied by the
production of other products. These multiple products resulting from commonly
used input factors (i.e. same raw materials and same operations) are referred
to, on the basis of their different features and characteristics, as either of
the following terms:
(i)
Joint products,
(ii)
By-products, and
(iii)
Main products.
Important terms
When
joint product conditions and by-product conditions are prevailing in an
industry, a problem arises in allocating the joint
costs among the joint products and by-products. In order to
understand how this allocation is done, first of all it is necessary to
understand in detail the following terms:
(a)
Joint costs,
(b)
Common costs,
(c)
Joint products,
(d)
By-products,
(e)
Split off point.
Joint costs
Joint costs are those costs which are common to the processing of joint
products or by-products up to the point of separation. In other words, joint
costs represent pre-separation cost of joint products or by-products. Joint
costs are incurred as a lump-sum for the combination and not separately for the
individual products. In short, joint costs are the pre-separation costs of
commonly used input factors for the production of multiple products.
Common costs
Common cost is the cost of facilities or services employed in the output
of two or more simultaneously produced operations, commodities and services.
Common cost is the cost of indirect materials, indirect labour and indirect
services enjoyed by different products in a factory during the course of
production. This cost is referred to as overhead in costing terminology. Common
cost will not include elements of prime cost whereas joint costs do include
prime cost.
Joint products
Joint products have been defined by CIMA as “two or more products
separated in processing, each having a sufficiently high saleable value to
merit recognition as a main product.” If all the products are of equal economic
importance and none of them can be termed as major products, these will be
referred to as joint products. Although joint products are the result of same
raw materials and same processing operations, these products cannot be produced
separately and usually require further processing. Some examples of joint
products may be given as follows:
(a)
In dairy industry – skimmed milk, butter, cream, cheese, yoghourt and
ice-cream.
(b)
In petroleum industry – petrol, diesel, Liquefied petroleum gas, kerosene, gasoline and naphtha.
By-products
By-products have been defined by CIMA as “output of some value produced
incidentally while manufacturing the main product.” By-products are also
produced from the same raw materials and same process operations, but they are
secondary result of operation. A joint product is usually of greater commercial
importance than a by-product. A joint product principally differs from a
by-product in importance. A by-product is of minor commercial importance. That was
once a by-product of an industry, may become a main product and onetime main product
may become a by-product. What is a by-product of one industry may be a main
product of another. By-products are generally formed in continuous process
industries. Some examples of by-products may be given as follows:
(a)
In dairy industry, the production of butter and cheese is accompanied by
the production of butter-milk (butter-milk is the by-product).
(b)
In FMCG industry, the production of soap is accompanied by the production
of glycerine (glycerine is the by-product).
Split off point
This is a point up to which input factors are commonly used for
production of multiple products, which can be either joint products or
by-products. After this point, the joint products or the by-products gain
individual identity. This point has a special relevance in the discussion about
joint products and by-products,
because the joint cost incurred before this point is to be apportioned
appropriately in the jointly produced multiple product-group.
Distinction between
Joint Products and
By-Products
There are no definite criteria for distinguishing between joint products
and by-products. Generally, the difference between joint products and
by-products is based on the relative commercial value of the products. The
jointly produced products of nearly the same importance and value are termed as
joint products. Products of a jointly produced group having minor commercial
importance are termed as by-products. It is possible for a by-product at one
point of time to become a joint product at another point of time and vice versa. Sometimes, distinction
between joint product and by-product is also based on factors like business
objective, profit pattern desired, the need for further processing before sale
and certainty of market.
Accounting for Joint Products
Unless the joint cost is apportioned appropriately among the products,
product cost determination will not be correct. This will also affect the
following:
(a)
Valuation of closing inventory.
(b)
Pricing of product.
(c)
Profit or loss on sale of different products.
Therefore, problem in regard to accounting for joint
products consists in apportioning the joint cost up to the point of separation
(or split-off point) between the products.
As per
Cost Accounting Standard – 19 (CAS – 19) any of the following methods shall be
used for apportioning / assigning the joint cost incurred up to the split off
point to the joint products:
1.
Physical Units Method,
2.
Survey Method, and
3.
Net Realisable Value (NRV) Method.
Physical Units
Method
Under this method, the joint cost is apportioned to
the products in the ratio of some physical coefficient present in the products.
The physical coefficient may be the raw materials contained in the products in
terms of weight, length, volume, calories, etc. The process loss is to be borne
by the joint products. Practical application of this method may be very
difficult, if the nature of the joint products is quite different.
Survey Method
Under this method, the joint cost of the joint
products are apportioned after taking into consideration a number of factors
like quantity of materials used, labour operations involved, time consumed,
technicalities involved, etc. For each factor a point value is assigned. Each
product gets point values on the basis of the factors. The joint cost is
apportioned in the ratio of [production units x point value]. So, this method
is also known as Point Value Method or Technical Estimates Method.
Net Realisable
Value (NRV) Method
Under this method, first of all NRV of each product at
split off point is calculated as follows:
|
Particulars |
Rs |
|
Sale value of each product (selling price per unit ×
quantity sold) |
××× |
|
LESS: Post-split off costs (i.e. further processing
costs) incurred for each product |
××× |
|
Net
Realisable Value (NRV) of each product at split off point |
××× |
Finally, the joint cost is apportioned / assigned to
the joint products in the ratio of net realisable value at split off point.
Accounting
for By-Products
By-products are jointly produced products of minor
importance and do not have separate costs up to the split-off point. There may
be further processing of the by-products after the split-off point incurring
further processing costs before the by-products are finally either sold in the
market or consumed by the producer itself as a raw material. By-products are
often found in continuous process industries, viz., meat packing, chemical, oil
refining and coal.
Problem in regard to accounting for by-products
consists in –
(a)
Assignment of cost to the by-products, and
(b)
Deducting the sale value of the by-products from the total cost
of the main product and by-products so that unit cost of the
main product can be arrived at.
Alternatively,
(b) Deducting profits
of the by-products from the total cost
of the main product so that unit cost of the main product can be
arrived at.
There are various methods used for by-product accounting. They can be
grouped under two heads:
(i)
Non-cost methods (i.e. methods based on the sales value of the
by-products), and
(ii)
Cost methods (i.e. methods based on apportioning the joint cost,
incurred up to the point of split- off, to the by-products).
Non-cost methods
The
following methods are grouped under this head:
1.
Other income method.
2.
Total cost less sales value of by-products method.
3.
Total cost less sales value of by-products (after deducting selling and distribution
overheads of the by-products) method.
4.
Total cost less sales value of by-products (after deducting
post-separation costs incurred on the by-products and selling and distribution
overheads of the by-products) method.
5.
Reverse cost method.
Other income method
Under this method, the sales value of by products is not credited to
process account, but is credited to profit and loss account as miscellaneous or
other income.
Total cost less sales value of by-products
method
Under this method, the sales value of by-products is credited to the
total cost of production.
Total cost less sales value of by-products
(after deducting selling and distribution overheads of the by-products) method
Under this method, the sales value of by-products after deducting
selling and distribution overheads incurred in connection with the sale of the
by-products is credited to the total cost of production.
Total cost less sales value of by-products
(after deducting post-separation costs incurred on the by-products and selling
and distribution overheads of the by-products) method
Under this method, the sales value of by-products after deducting the
post-separation cost incurred on the by-products and selling and distribution
overheads relating to the sale of the by-products is credited to the total cost
of production.
Reverse cost method
Under this method, sales value of by-products is first reduced by:
(a)
Estimated profit margin in the sales value of by-products,
(b)
Selling and distribution overheads relating to the sale of by-products,
and
(c)
Post-separation cost incurred on the by-products.
By doing this, costs of the by-products
at the point of separation are ascertained. The total of
these costs of the by-products at the split-off point is then subtracted from
the total joint costs to determine the share of joint costs to be assigned to
the main product.
Cost methods
The following methods are grouped under this head:
1.
Replacement cost or opportunity cost method.
2.
Standard cost method.
3.
Apportionment of joint cost method.
Replacement
cost or opportunity cost method
When by-products are consumed in an undertaking itself
as a raw material, the by-products are valued at opportunity cost or
replacement cost, i.e. the cost which would have been incurred, had the by-products
been purchased from outside source. This opportunity cost of the by-products is
credited to the total cost of production of the main products.
Standard cost
method
Under this method, the by-products are valued at a
standard rate determined for each product. The standard cost may be based on
technical assessment. This standard cost of the by-products is credited to the
total cost of production of the main products.
Apportionment
of joint cost method
Where the by-products are of some significance, the joint costs are apportioned between the main products and the by-products on a most suitable and acceptable basis.
Part B
Cost Accounting
Joint Products and
By-Products
Selected Problems
Illustration:
1
XYZ Ltd. manufactures product A which yields two by-products B and C. The profits on each product as a percentage of sales are 33⅓%, 25% and 15% respectively. Post-Separation expenses and sales of each product are as follows:
|
Particulars |
A
(Rs) |
B
(Rs) |
C
(Rs) |
|
Material |
100 |
75 |
25 |
|
Direct Labour |
200 |
125 |
50 |
|
Overheads |
150 |
125 |
75 |
|
Total Post-Separation Expenses |
450 |
325 |
150 |
|
Sales |
6,000 |
4,000 |
2,500 |
Determine the
Joint Cost and apportion the same among the main product and two By-Products.
Click here for Solution: 1 in PDF
Illustration:
2
A chemical process yields 60% of the material
introduced as main Product - A and by Product B 15% by - Product - C 20% and 5%
being the wastage.
The ratios of absorption of Raw material and direct labour
in the process products are as follows:
(i)
One
unit of product C requires half the raw material required for one unit of
product - B, one unit of product - A requires 1½ time the raw material
required for product B.
(ii)
Product
A requires double the time needed for the production of one unit of B and one
unit of C.
(iii)
Product
C requires half the time required for the production of one unit of product B.
(iv)
Overheads
are to be absorbed in the ratio of 6:1:1.
(v)
Joint
cost data:
|
Input of 1,000 units |
Rs 4,600 |
|
Direct labour |
Rs 4,100 |
|
Overheads |
Rs 6,000 |
Apportion the joint costs among the above products.
Click here for Solution: 2 in PDF
Illustration: 3
The following
data have been extracted from the books of M/s. Southern Coke Co. Ltd.
|
Joint Products |
Yield in lb of
recovered products per tonne of coal |
|
Coke |
1,420 |
|
Coal tar |
120 |
|
Benzol |
22 |
|
Sulphate of Ammonia |
26 |
|
Gas |
412 |
|
Total |
2,000 |
The price of
coal is Rs 80 per tonne. The direct labour and overhead costs to the point of
split-off are Rs 40 and Rs 60 respectively per tonne of coal. Calculate the
material, labour and total cost of each product on the basis of weight.
Click here for Solution: 3 in PDF
Illustration: 4
A factory is engaged
in the production of Chemical X and in the course of manufacture a by-product Y
is produced which after a separate process has a commercial value. Following
are the information for the month of March.
|
|
Joint Exp |
Separate Exp |
|
|
X |
Y |
||
|
Materials (Rs) |
10,000 |
2,000 |
2,800 |
|
Labour (Rs) |
4,000 |
2,500 |
2,500 |
|
Overheads (Rs) |
2,500 |
1,400 |
1,000 |
The output for the month was 150 quintals of X and 50 quintals of Y. The selling price of product Y is Rs 200 per quintal. The profit on product Y is 33⅓% on cost price. Prepare an Account to show the cost of X per quintal.
Click here for Solution: 4 in PDF
Illustration: 5
In
manufacturing the main product ‘A’ a company processes the resulting waste
material into two by products B and C. Using Reverse Cost Method of By-Products
Accounting, prepare a comparative profit and loss statement of the three
products from the following data:
(i)
Total cost up to separation point was
Rs 68,000.
|
Particulars |
A (Rs) |
B (Rs) |
C (Rs) |
|
(ii) Sales |
1,64,000 |
16,000 |
24,000 |
|
(iii) Estimated
net profit (% of sales) |
– |
20% |
30% |
|
(iv) Estimated
selling exp (% of sales) |
20% |
20% |
20% |
|
(v) Costs
after separation |
– |
4,800 |
7,200 |
Click here for Solution: 5 in PDF
Illustration: 6
The
progressive manufacturing company manufactures one main product and two
by-products. Data for a month are shown below:
|
Particulars |
Main Product (Rs) |
By-Products (Rs) |
|
|
A |
B |
||
|
Sales |
1,50,000 |
12,000 |
7,000 |
|
Post separation mfg. cost |
23,000 |
2,200 |
1,800 |
|
Administration cost |
12,000 |
1,500 |
1,000 |
|
Share of selling cost in %-age |
85% |
10% |
5% |
|
%-age of Net Profit on sales |
20% |
15% |
10% |
Joint cost of producing the main product and the two by-products is Rs
75,000. Assuming no beginning and ending inventories, apportion the joint cost
among the main product and the two by-products.
Click here for Solution: 6 in PDF
Illustration: 7
In a factory
producing joint products of two varieties, the following data are extracted
from the books:
|
Particulars |
Rs |
|
Sales of products X and Y at split off point |
7,50,000 |
|
Joint costs: |
|
|
Direct materials |
2,25,000 |
|
Direct labour |
1,10,000 |
|
Variable overheads (150% of D/Labour) |
1,65,000 |
|
Fixed overheads |
2,00,000 |
The
analysis of sales reveals that the percentage of sale of product X is 662/3%.
Management contemplates to process
further joint products so that they could be sold at higher rates. Facilities
for this are available. The additional expenditure for the further process and
total sales anticipated at higher selling prices are given below. Make
recommendations presenting the affect of the proposal.
|
Particulars |
Product
(Rs) |
Total
(Rs) |
|
|
X |
Y |
||
|
Sales after further
processing |
6,00,000 |
3,00,000 |
9,00,000 |
|
Further processing cost: |
|
|
|
|
Direct materials |
50,000 |
20,000 |
70,000 |
|
Direct labour |
20,000 |
8,000 |
28,000 |
Click here for Solution: 7 in PDF
Illustration: 8
A
vegetable oil refining company obtains four products whose cost details are:
Joint
costs of the four products: Rs 8,
29,600
Outputs: A - 5, 00,000 litres; B -10,000 litres; C -
5,000 litres and D - 9,000 kgs.
Further processing
costs: A - Rs 2, 40,000; B - Rs 48,000; C – Nil; and D - Rs 8,030.
The products
can be sold as intermediates i.e., at split-off point without further
processing. The sale prices are:
|
|
As Finished Product |
As Intermediate |
|
A (Rs/litre) |
1.84 |
1.2 |
|
B (Rs/litre) |
8 |
4 |
|
C (Rs/litre) |
6.4 |
6.4 |
|
D (Rs/kg) |
26.67 |
24 |
a)
Calculate the product-wise profit
allocating joint costs on the basis of Net Realisable Values (NRV) at split off
point;
b)
Compare the profitability in selling
the products with and without further processing.
Click here for Solution: 8 in PDF
Illustration: 9
T Ltd., in
the course of refining crude oil obtains four joint products A, B, C and D. The
total cost till the split off point was Rs 97,600. The output and sales in the
year 2015 were as follows:
|
Product |
Output (Gallon) |
Sales (Rs) |
Separate Costs (Rs) |
|
A |
5,00,000 |
1,15,000 |
30,000 |
|
B |
10,000 |
10,000 |
6,000 |
|
C |
5,000 |
4,000 |
– |
|
D |
9,000 |
30,000 |
1,000 |
You
are required to:
a)
Calculate the net income for each of
the products if the joint costs are apportioned on the basis of NRV at split off point;
b)
Calculate
the net income of the company from each product if it decides to sell the
products at the split off point itself at the following rates per gallon: A –
15 paise; B – 50 paise; C – 80 paise; and D – Rs 3.
c)
Determine in case the company expects to operate at the same
level of production and sales in the year 2016 could the company increase the net income by altering
its processing decisions? If so, what would be the expected overall net income?
Which product should be sold at split off point? Assume that all costs
incurred after the split off
point are variable.
Click here for Solution: 9 in PDF
Illustration: 10
Beauty Soap Company
manufactures four different brands of soaps namely Komal, Lovely, Makeup and
Nice. The data on production and sale of these brands during 2015 is reproduced
below.
|
Brand Name |
Production and sales (units) |
Sale Value (Rs in lakh) |
|
Komal |
3,00,000 |
15 |
|
Lovely |
5,00,000 |
31 |
|
Makeup |
70,000 |
2.8 |
|
Nice |
40,000 |
1.2 |
Sale value of
each of the products as given in the above table includes profit at 25% on
total cost of the respective product.
All the above
soaps are manufactured jointly up to a particular process. At split off point
they are formed into cake – sans packed.
Out of the
above brands, Make up is sold in unpacked condition without further processing
while other 3 brands are further processed at an additional cost as follows:
|
Komal |
Rs 1,20,000 |
|
Lovely |
Rs 1,30,000 |
|
Nice |
Rs 50,000 |
You
are required to:-
a)
Work out the profit and cost of each
brand of soap after allocating joint cost on the basis of Net Realisable value
at split off point. (Per unit cost is not required).
b)
Find out revised cost and profit on
each brand if the company decides to sell all the soap brands at the split off
point at following prices:
|
Komal |
Rs 4.50 per unit |
|
Lovely |
Rs 6.00 per unit |
|
Makeup |
Rs 4.00 per unit |
|
Nice |
Rs 1.50 per unit |
Assume that for allocation of joint cost Net
Realisable Value method is used.
c)
With
the working results in (a) and (b) above advise Beauty Soap Company about the
processing decision as to which soap to be sold at split off point and which to
be processed further so as to maximise profit. Substantiate your decision with
suitable costing technique.
Click here for Solution: 10 in PDF
Illustration: 11
In the course
of manufacture of the main product ‘P’ by-products ‘A’ and ‘B’ also emerge. The
joint expenses of manufacture amount to Rs 1, 19,550. All the three products
are processed further after separation and sold as per details given below:
|
Particulars |
Main Product P (Rs) |
By-Products (Rs) |
|
|
A |
B |
||
|
Sales |
90,000 |
60,000 |
40,000 |
|
Cost incurred after separation |
6,000 |
5,000 |
4,000 |
|
Profit as %-age of sales |
25% |
20% |
15% |
Total
fixed selling expenses are 10% of total cost of sales which are apportioned to
the three products in the ratio of 20: 40: 40.
Required:
a)
Prepare a statement showing the
apportionment of joint costs to the main product and the two by products.
b)
If the by-product ‘A’ is not
subjected to further processing and is sold at the point of separation for
which there is a
market, at Rs 58,500 without incurring any selling expenses, would you advise
its disposal at this stage. Show the workings.
Click here for Solution: 11 in PDF
Illustration: 12
“If
the products are truly joint products the cost of the process can be applied to
these products
(i)
On the basis of the weight or other
physical quantity of each product.
(ii)
In respect of the marginal cost of
the process on the basis of physical quantity and in respect of fixed costs of
the process on the basis of the contribution made by the various products.
(iii)
On the basis of selling values of the
different products”
Illustrate the
above statement by using the following figures in respect of joint production
of ‘A’ and ‘B’ for a month and assuming that the products are sold at the split
off point.
|
Total Joint Cost: |
|
|
Direct materials |
Rs 5,000 |
|
Direct labour |
Rs 3,000 |
|
Variable overheads |
Rs 2,000 |
|
Fixed overheads |
Rs 2,000 |
|
Sales: |
|
|
Product ‘A’ (100 tons) |
Rs 80 per ton |
|
Product ‘B’ (150 tons) |
Rs 40 per ton |
Click here for Solution: 12 in PDF
No comments:
Post a Comment