UNIT 9: JOINT PRODUCTS, COST ALLOCATION AND BY PRODUCTS

Content
9.0 Introduction
9.1 Objectives
9.2 Joint Produced
9.3 Joint Cost Allocation
9.4 Summary
9.5 Answers to Check Your Progress Exercises
9.6 Model Examination Questions

9.0 INTRODUCTION

Joint production occurs whenever two or more products must result from the same production
process. The key word in this definition is “must”. The crucial characteristics of joint products
are that the production of one automatically results in the production of the other. It is often
possible, of course, to eliminate one of the joint products; it is not economic to do so if the
product has a sales value greater than the unique costs of completing and marketing. For
example, in marble quarrying, it is possible to leave all the marble except the best grade at the
quarry site. If other grades must be quarried to obtain the best grade, it is not economic to
leave the other grades at the quarry so long as their sales value exceeds the unique costs of
finishing and selling. In this case, the quarrying of marble is a joint-production process
because, in quarrying pure white marble, it is necessary (from an economic point of view) to
quarry other grades.

The fact that joint products must be produced together is of the major importance to the cost
accountant because it means that all cost allocations among joint products are entirely
arbitrary. If two products must result from a single productive process, one product without
both, the cost of producing only one cannot be isolated. The facts are that it costs a certain
sum of money to produce a certain amount of each of two products. If part of the joint
production cost is assigned to one of the products, it is a meaningless allocation. This is the
most important point to remember about joint cost accounting because it is this characteristics
that makes it necessary traditional cost accounting techniques.

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9.1 LEARNING OBJECTIVES

After studying this chapter, students should be able for

1. Identify split off point in a joint cost situation
2. Distinguish between joint products and by products
3. provide several reasons for allocating joint costs to individual products
4. Distinguish alternative methods of allocating joint costs
5. Describe why we sales value at split off method is widely used
6. Describe the irrelevance of joint costs in to sell or process further
7. Distinguish alternative methods of accounting for by products

9.2 JOINT PRODUCED

Joint products are two or more manufactured products (1) that have relatively significant sales
values and (2) that are not separately identifiable as individual products until their split of
point.

The split-off point is that juncture of manufacturing were the joint products become
individually identifiable. Any cost beyond that stage are called separable cost because they
are part of joint process and can be exclusively identified with individual products. Examples,
of joint products include chemicals, petroleum refining, and meat packing.
Joint cost
Separate Final sale
Bacon
Processing

Final Sale Ham Separable

Common processing
production
Joint
process
Product
pig Pork Separate
roast processing Final Sale

Pork Final Sale

Separate
Chops Processing
Joint product cost
Split off point Joint products Separate

Fig. 1 Product Cost

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Check your progress questions
1. ___________________________are the costs of the common manufacturing
process
2. ___________________________are the products produced from a common input
and a common manufacturing process
a. By-products - -by-products are joint products that are relatively minor in
quantity and/or value
3. ___________________________ is the stage of the common manufacturing
process where the joint products are separated.

9.3 JOINT COST ALLOCATION

A. Characteristics--a common manufacturing process simultaneously produces two or more

products from a common input
1. Joint Costs--joint costs are the costs of the common manufacturing process
2. Joint Products--joint products are the products produced from a common input and a
common manufacturing process
a. By-products--by-products are joint products that are relatively minor in quantity
and/or value
3. Split-off Point--the split-off point is the stage of the common manufacturing process
where the joint products are separated

B. Joint Cost Allocation--joint costs need to be allocated to the joint products for various
reasons (such as inventory valuation for financial accounting purposes, measuring
profitability of joint products, pricing decisions, cost reimbursement, etc.)
1. Physical Quantities Method--joint costs are allocated to the joint products based on
their relative physical measure (such as volume, weight, etc.)
a. Illustration--a corporation incurred joint costs of $2,400 in manufacturing Product A
and Product B to the split-off point; Product A weighed 700 pounds and had a sales value at
the split-off point of $1,800; Product B weighed 300 pounds and had a sales value at the split-
off point of $1,200

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Cost Allocation:
Product A = 700 / (700 + 300) x 2,400 = 1,680
Product B = 300 / 1,000 x 2,400 = 720
2,400
Income Statement:
Product A Product B Total
Sales 1,800 1,200 3,000
Cost of Goods Sold 1,680 720 2,400
Gross Margin 120 480 600

Gross Margin %:
Product A = 120 / 1,800 = 7%
Product B = 480 / 1,200 = 40%
Total = 600 / 3,000 = 20%

2. Sales Value Method

a. Net Realizable Value Method--if the sales value at the split-off point is known, joint
costs are allocated to the joint products based on their relative sales value at the split-off point
1) Illustration--a corporation incurred joint costs of $2,400 in manufacturing Product
A and Product B to the split-off point;

Product A weighed 700 pounds and had a sales value at the split-off point of $1,800; Product
B weighed 300 pounds and had a sales value at the split-off point of $1,200

Cost Allocation:
Product A = 1,800 / (1,800 + 1,200) x 2,400 = 1,440
Product B = 1,200 / 3,000 x 2,400 = 960
2,400

Income Statement:
Product A ProductB Tota
Sales 1,800 1,200 3,000

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Cost of Goods Sold 1,440 960 2,400 Gross Margin 360 240 600

Gross Margin %:
Product A = 360 / 1,800 = 20%
Product B = 240 / 1,200 = 20%
Total = 600 / 3,000 = 20%

b. No Sales-value at Split-off Point--the sales value at the split-off point for one or more
of the joint products is not known
1) Estimated Net Realizable Value Method--sales value at the split-off point of the joint
products is estimated by taking the sales value of each joint product at the first point at which
the products can be sold and deducting the processing costs that must be incurred after the
split-off point up to the first point at which the products can be sold, and then joint costs are
allocated to the joint products based on their relative estimated sales value at the split-off
point
a) Illustration--a corporation incurred joint costs of $2,400 in manufacturing Product A and
Product B to the split-off point; Product A weighed 700 pounds and had a sales value of
$3,600 after incurring additional processing costs of $675; Product B weighed 300 pounds
and had a sales value of $1,400 after incurring additional processing costs of $425

Estimated Net Realizable Value:

Product A = 3,600 – 675 = 2,925
Product B = 1,400 – 425 = 975

Cost Allocation:
Product A = 2,925 / (2,925 + 975) x 2,400 = 1,800
ProductB = 975/3,900x2,40= 600
2,400
Cost of Goods Sold:
Product A = 1,800 + 675 = 2,475
Product B = 600 + 425 = 1,025
Income Statement:
Product A Product B Total
Sales 3,600 1,400 5,000

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 Cost of Goods Sold 2,475 1,025 3,500
Gross Margin 1,125 375 1,500

Gross Margin %:
Product A = 1,125 / 3,600 = 31%
Product B = 375 / 1,400 = 27%
Total = 1,500 / 5,000 = 30%

2) Constant Gross Margin Percentage Method--under the constant gross margin percentage
method joint costs are allocated to the joint products in a way that results in the same gross
margin percentage for each joint product
a) Computation
I. Total Gross Margin Percentage--the gross margin percentage for all of the
joint products is computed by dividing the excess of the sales value of all
the joint products at the first point at which the products can be sold over
the sum of the joint costs and the processing costs that must be incurred
after the split-off point up to the first point at which the products can be
sold by the sales value of all the joint products at the first point at which
the products can be sold
II. Cost of Goods Sold--the cost of goods sold for each joint product is
computed by multiplying the sales value for each joint product by one
minus the total gross margin percentage for all the joint products
III. Joint Cost Allocation-the joint costs allocated to each joint product is
computed by subtracting the processing costs incurred after the split-off
point for each joint product from its cost of goods sold

b) Illustration--a corporation incurred joint costs of $2,400 in manufacturing

Product A and Product B to the split-off point; Product A weighed 700 pounds
and had a sales value of $3,600 after incurring additional processing costs of
$675; Product B weighed 300 pounds and had a sales value of $1,400 after
incurring additional processing costs of $425

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Constant Gross Margin Percentage:
Total Sales = 3,600 + 1,400 = 5,000
Total Cost of Goods Sold = 2,400 + 675 + 425 =3,500
Total Gross Margin = 5,000 – 3,500 = 1,500
Total Gross Margin Percentage = 1,500 / 5,000 = 30%

Cost of Goods Sold:

Product A = (1 – 30%) x 3,600 = 2,520
Product B = 70% x 1,400 = 980

Cost Allocation:
Product A = 2,520 - 675 = 1,845
Product B = 980 - 425 = 555
2,400

Income Statement:
Product A Product B Total
Sales 3,600 1,400 5,000
Cost of Goods Sold 2,520 980 3,500
Gross Margin 1,080 420 1,500

Gross Margin %:
Product A = 1,080 / 3,600 = 30%
Product B = 420 / 1,400 = 30%
Total = 1,500 / 5,000 = 30%

Check your progress questions

1. Why joint cost need to be allocated?
2. List and discuss the basic joint cost allocation methods.

C. Special Considerations
1. Decision Making

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a. Short-run Decision--at the split-off point the decision to sell a joint product at the split-off
point or to process the joint product beyond the split-off point before selling it is determined
by comparing the additional revenue generated from processing the joint product beyond the
split-off point with the additional costs from processing the joint product beyond the split off
point
1) Illustration
a) A corporation incurred joint costs of $4,600 in manufacturing Product A and Product B to
the split-off point; Product A can be sold at the split-off point for $3,500 or for $5,000 after
incurring additional processing costs of $1,200; Product B can be sold at the split-off point for
$2,500 or for $3,000 after incurring additional processing costs of $700 Additional Profit
From Processing:
Product A = (5,000 – 3,500) – 1,200 = 300
Product A should be processed beyond the split-off point
Product B = (3,000 – 2,500) – 700 = (200)
Product B should not be processed beyond the split-off point.
Profit at Split-off Point = 3,500 + 2,500 – 4,600 = 1,400.

Profit from Processing Product A = 5,000 + 2,500

-(4,600 + 1,200) = 1,700
b) A corporation incurred joint costs of $6,500 in manufacturing Product A and Product B to
the split-off point; Product A can be sold at the split-off point for
$3,500 or for $5,000 after incurring additional processing costs of $1,200; Product B can be
sold at the split-off point for $2,500 or for $3,000 after incurring additional processing costs
of $700
Additional Profit from Processing:
Product A = (5,000 – 3,500) – 1,200 = 300
Product A should be processed beyond the split- off point.
Product B = (3,000 – 2,500) – 700 = (200)
Product B should not be processed beyond the split-off point.

Profit at Split-off Point = 3,500 + 2,500 – 6,500 = (500)

Profit from Processing Product A = 5,000 + 2,500 –

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 (6,500 + 1,200) =
(200)
b. Long-run Decision-at the start of the manufacturing process the decision to manufacture or
not is determine by comparing the total revenues generated from the manufacturing process
with the total costs from the manufacturing process
1) Illustrations
a) A corporation estimated that it will incur joint costs of $6,200 in manufacturing
Product A and Product B to the split-off point; Product A can be sold at the split-off point for
$3,500 or for $5,000 after incurring additional processing costs of $1,200; Product B can be
sold at the split-off point for $2,500 or for $3,000 after incurring additional processing costs
of $700
Additional Profit from Processing:
Product A = (5,000 – 3,500) – 1,200 = 300
Product A should be processed beyond the split- off point.

Product B = (3,000 – 2,500) – 700 = (200)

Product B should not be processed beyond the split-off point.
Profit at Split-off Point = 3,500 + 2,500 – 6,200 = (200)

Profit from Processing Product A = 5,000 + 2,500 –

(6,200 + 1,200) =
100
The joint products should be manufactured.

b) A corporation estimated that it would incur joint costs of $6,500 in manufacturing Product
A and Product B to the split-off point; Product A can be sold at the split-of point for $3,500 or
for $5,000 after incurring additional processing costs of $1,200; Product B can be sold at the
split-off point for $2,500 or for $3,000 after incurring additional processing costs of $700
Additional Profit from Processing:
Product A = (5,000 – 3,500) – 1,200 = 300
Product A should be processed beyond the split off point.
Product B = (3,000 – 2,500) – 700 = (200)
Product B should not be processed beyond the split-off point.

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 Profit at Split-off Point = 3,500 + 2,500 – 6,500 =
(500)

Profit from Processing Product A = 5,000 + 2,500 –

(6,500 + 1,200) =
(200)
The joint products should not be manufactured.

Check your progress questions

1. Explain how joint product related decision would be made short and long run?

2. By-products--by product accounting attempts to reflect the economic relationship between

the by-products and the joint products with a minimum of record keeping costs
a. Sales Value of By-product Sold--the proceeds from the sale of the by-product are treated
either as a reduction of cost of goods sold or as other revenue
1) Illustration--a corporation incurred joint costs of
$16,000 in manufacturing Product A, Product B, and Product C to the split-off point;
Product C is considered a by-product; joints costs are allocated to the joint products using
their relative weights; Product A weighed 2,000 pounds and was processed beyond the split-
off point at a cost of $4,000; Product B weighed 3,000 pounds and was sold at the split-off
point; Product C weighed 500 pounds and had a estimated net realizable value of $1,000;
1,400 pounds of Product A were sold; 2,700 pounds of Product B were sold; 400 pounds of
Product C were sold

Cost Allocation:
Product A = 2,000 / (2,000 + 3,000) x 16,000 = 6,400
Product B = 3,000 / 5,000 x 16,000 = 9,600
16,000

Cost of Goods Sold:

Product A = 1,400 / 2,000 x (6,400 + 4,000) = 7,280
Product B = 2,700 / 3,000 x 9,600 = 8,640
Product C = 400 / 500 x 1,000 = (800
(800))
15,120

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b. Net Realizable Value--the estimated realizable value of the by-product manufactured is
treated as a reduction of the joint costs
1) Illustration--a corporation incurred joint costs of $16,000 in manufacturing Product A,
Product B, and Product C to the split-off point; Product C is considered a by-product; joints
costs are allocated to the joint products using their relative weights; Product A weighed 2,000
pounds and was processed beyond the split-off point at a cost of $4,000; Product B weighed
3,000 pounds and was sold at the split-off point; Product C weighed 500 pounds and had a
estimated net realizable value of $1,000; 1,400 pounds of Product A were sold; 2,700 pounds
of Product B were sold; 400 pounds of Product C were sold

Cost Allocation:
Product A = 2,000 / (2,000 + 3,000) x
(16,000 – 1,000) = 6,000
Product B = 3,000 / 5,000 x 15,000 = 9,000
15,000

Cost of Goods Sold:

Product A = 1,400 / 2,000 x (6,000 + 4,000) = 7,000
Product B = 2,700 / 3,000 x 9,000 = 8,100
15,100

Check your progress question

1. Define by products
2. What is the need for accounting for by products?

9.4 SUMMARY

I. Costing joint products

A. Basics
1. Joint costs: costs of production process that yields multiple products
simultaneously

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 2. Split off point: juncture in joint production process when two or more products
become separately identifiable
3. Separable costs: all costs (manufacturing, marketing, distribution, etc.) incurred
beyond the split off point that are assignable to each of the specific products
identified at split off point

B. Focus of joint costing

1. Assigning costs to individual products at split off point
2. Classifying outputs by sales value
3. Changing values of products over time and distinctions of terms in organizations
C. Purposes for allocating joint costs
1. Computation of inventoriable costs and cost of goods sold for financial accounting
purposes and reports for income tax authorities
2. Computation of inventoriable costs and cost of goods sold for internal reporting
purposes, used in division profitability analysis and affect evaluation of division
managers’ performance
3. Cost reimbursement under contracts for companies that have few, but not all, of
products or services reimbursed under cost-plus contracts
4. Insurance-settlement computations for damage claims made on basis of cost
information by company having joint products, main products, or byproducts
5. Rate regulation for one or more of the jointly produced products or services are
subject to price regulation
6. Litigation in which costs of joint products are key inputs
7. Other reasons

D. Approaches to allocating joint costs

1. Market-based data, such as revenues, used as basis of allocation
2. Physical measures data, such as weight or volume, of joint products

E. Criterion to support use of market-based data as basis of joint cost allocation

1. Cause-and-effect criterion not applicable by definition at individual product level
2. Benefits-received criterion: revenues better indicator of benefits received than
physical measures

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F. Illustrations in production settings of joint cost allocation methods
1. Example 1: Simplest production setting in which joint products sold at split off
point without further processing
a. Sales value at split off method
b. Physical-measure method
2. Example 2: Products processed beyond the split off point to bring to marketable
form or to increase their value above their selling price at split off point
a. Net realizable value (NRV) method
b. Constant gross-margin percentage NRV method
G. Choosing a method
1. Use sales value at split off method when selling-price data available (even if
further processing done)
a. Measures the value of the joint product immediately at end of joint process—
best measure of benefits received relative to other methods of allocating joint
costs
b. No anticipation of subsequent management decisions as required by NRV and
constant gross-margin percentage NRV methods
c. Availability of meaningful basis to allocate joint costs to products
d. Simplicity

2. Use other methods when selling prices of all products at split off point not
available
a. NRV method attempts to approximate sales value at split off by subtracting
separable costs incurred after split off point on each product from selling prices
—assuming markup or profit margin attributable to joint process and not to
separable costs
b. Constant gross-margin percentage NRV method assumes all products have the
same ratio of cost to sales value (very uncommon in companies that produce
multiple products that have no joint costs)
c. Physical-measure method may be used in rate regulation
3. Purpose of joint-cost allocation important in choosing allocation method

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 H. Situations in which joint costs not allocated
1. Inventories carried at NRV recognizing income when production completed
2. Inventories carried at net realizable value minus estimated operating income
margin

II. Irrelevance of joint costs for decision making

A. Decision to sell at split off or process further
1. Joint-cost allocations somewhat arbitrary—no cause-and-effect relationship that
identifies resources demanded by each joint product that can be used as basis for
pricing

2. Key concept of relevance—joint costs incurred up to the split off point whether
product sold at split off point or processed further
3. Do not assume all separable costs in joint-cost allocation always incremental costs

B. Performance evaluation
1. Potential conflict between cost concepts used for decision making and cost
concepts used for evaluating performance of managers
2. Conflict less severe if used market-based methods of joint-cost allocation

III. Accounting for byproducts

A. Presence of byproducts can affect allocation of joint costs although byproducts have
much lower sales value than joint or main products
B. Two methods of accounting for byproducts
1. Method A: production method—byproducts recognized at time production is
completed
2. Method B: sale method—byproducts recognized at time of sale

9.5 ANSWERS TO CHEEK YOUR PROGRESS

Check your progress I

1. Joint costs
2. Joint products

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3. Split off point

Cheek your progress II

1. Joint cost need to be allocated for:
 Inventory valuation purpose
 For financial accounting purpose
 To measure profitability of products
 For pricing decision and likes

2. Sales value method

3. NRV method
4. Physical units method
5. Gross profit method

Cheek your progress III

In short run, the decision to process further or sell at split off point is based on comparing
additional revenue to be generated by processing further and additional cost to be incurred to
do so. In long run, the decision is to be made by comparing total revenue and expense of
manufacturing process.

9.6 MODEL EXAM QUESTIONS

The following data apply to questions 1–5.

Brant Corporation manufactures two products out of a joint process—Scout and Andro. The
joint (common) costs incurred are $400,000 for a standard production run that generates
70,000 pounds of Scout and 30,000 pounds of Andro. Scout sells for $9.00 per pound
while Andro sells for $7.00 per pound.

1. If there are no additional processing costs incurred after the split off point, the amount of
joint cost of each production run allocated to Scout on a physical-quantity basis is
a. $300,000. b. $280,000.
c. $120,000. d. $100,000.

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2. If there are no additional processing costs incurred after the splitoff point, the amount of
joint cost of each production run allocated to Andro on a sales value at splitoff basis is
a. $300,000. b. $225,000.
c. $175,000. d. $100,000.
3. If additional processing costs beyond the splitoff point are $1.00 per pound for Scout and

$2.33 13 per pound for Andro, the amount of joint cost of each production run allocated to
Andro on a physical quantity basis is
a. $300,000. b. $280,000.
c. $120,000. d. $100,000.
4. If additional processing costs beyond the splitoff point are $1.00 per pound for Scout and

$2.33 13 per pound for Andro, the amount of joint cost of each production run allocated to
Andro on an estimated net realizable value basis is
a. $80,000. b. $147,350.
c. $175,000. d. $320,000.

5. Assume the same cost information as in question 4. The amount of joint cost of each
production run allocated to Scout using the constant gross-margin percentage NRV method is

a. $224,910. b. $260,120.
c. $335,090. d. $405,090.

5. For purposes of allocating joint costs to joint products, the sales value at split off method
could be used in which of the following situations?
No costs beyond split off Cost beyond split off
a. Yes No
b. Yes Yes
c. No Yes
d. No No

6. Products G and H are joint products developed from the same process with each being
processed further. Joint costs are incurred until split off; the separable costs are incurred
in further refining each product.

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 Sales values of G and H at split off are used to allocate joint costs. If the sales value of G at
split off increases and all other costs and selling prices remain unchanged, the gross margin of

G H
a. increases increases
b. increases decreases
c. decreases decreases
d. decreases increases

7. Tanner Company manufactures products Katran and Klare from a joint process. Product
Katran has been allocated $7,500 of total joint costs of $30,000 for the 1,500 units
produced. Katran can be sold at the splitoff point for $4 per unit, or it can be processed
further with additional costs of $2,000 and sold for $7 per unit. If Katran is processed
further and sold, the result would be

a. a break-even situation.
b. an overall loss of $1,500.
c. a gain of $2,500 from further processing.
d. a gain of $1,000 from further processing.
8. In accounting for byproducts, the value of the byproduct may be recognized at the time of
Production Sale
a. Yes No
b. Yes Yes
c. No No
d. No Yes
9. Mohler Corporation manufactures a product that yields the byproduct, Jep. The only costs
associated with Jep are selling costs of $0.10 for each unit sold. Mohler accounts for sales
of Jep by deducting Jep’s separable costs from Jep’s sales and then deducting this net
amount from the major product’s cost of goods sold. Jep’s sales were 200,000 units at
$1.00 each. If Mohler changes its method of accounting for Jep’s sales of showing the net
amount as additional sales revenue, the Mohler’s gross margin would

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 a. increase by $180,000.
b. increase by $200,000.
c. increase by $220,000.
d. be unaffected.

Work out
1. Daily company produce a product used in preserving grain and other food products
many of the firms product are made in joint production progress one of such group is
called phenol group which resulted in a joint cost of Br. 240.000 and the following
production quantities and cost after split off in the month of June.
Product Out put in kg Selling Cost after split NRV at split off
price/kg off
PH 01 60.000 Br. 4 Br. 60.000 120.000
PH 02 30.000 8 120.000 100.000
PH 03 10.000 12 30.000 80.000
Total 100.000 210.000 300.000
Required
1. Allocate the joint cost for joint products in each of the following allocation bases
a. Physical units allocation method
b. Sales value allocation method
c. NRV joint cost allocation method
d. Gross profit percentage method

2. XYZ Company produced 500 units at a unit cost of $ 100. On March 4, 2000 inspection
shows that 5 units have defects and have an estimated sales value of $30 per unit.
Instructions:
A. assuming that the units are spoiled , prepare journal entry to record the estimated value
of the rejected units assuming that
i. the spoilage is normal and common to all jobs
ii. the spoilage is normal and peculiar to a specific job
iii. the spoilage is abnormal

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 B. assuming that the units are defective instead of spoiled, prepare journal entry to record
the total rework cost of $190(raw materials, $40; labor, $100 and FOH applied,
$50).Assume that
i. the defective units are normal and common to all jobs
ii. the defective units are normal and peculiar to a specific job
iii. the defective units are abnormal

3. Rich supply corporation maintains a scrap inventory account for metal scrap recovered
from operations in the cutting department. On December, 11, 2000, 5300 pounds of scrap
with an estimated market value of $ 2385 are transferred from the factory to the store
room.
Instructions: prepare the necessary journal entries to record
i. The storage of metal scrap
ii. The sale of 1900 pounds of scrap at recorded value for cash
iii. The sale of 2100 pounds of scrap at $0.52 a pound on credit
iv. The sale of 1300 pounds of scrap at $0. 39 a pound on credit

Assuming:
Case A) the scrape is a high value and can be identified to a specific job
Case B) the scrap is a low value and can be identified to a specific job

4. The manufacturing process in the Shaping Department of PARADISE Company results in

a by product. The company accumulate the by product and periodically sells it. During April
20x4, by product with estimated sales of Br.1, 300 were removed from the factory floor and
stored in a warehouse. In May 20x4, the materials were sold for Br.1, 220.
Instructions: Give journal entries to record the above facts assuming that
i. Byproducts are recognized at the point of sales and treated as
a) as a cost reduction from the main product
b) as other income
ii. Byproducts are recognized at the point of production and treated as
a) as a cost reduction from the main product
b) as other inc

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5. In Shaping Department of Royal Company, a byproduct is removed. The material is
further processed and then sold. The company uses the reversal cost method to account for the
by product. Data for December 20x3 follow:
Byproduct removed, 8, 200 kilograms.
Estimated sales price of the by product after further process, Br.1 per K.G.
Estimated manufacturing cost after separation, Br.0.30 per K.G.
Estimated selling and Administrative costs, 20% of sales price.
Estimated normal net profit, 6% of sales price.

Instruction:
a) Compute the value to be assigned to the by product and removed from WIP at the
point of separation.
b) Make the necessary journal entries to:
i. Record the transfer of estimated costs incurred before separation to
the by product.
ii. Record the additional processing costs after separation. Assume that
costs to further process the byproduct follows:
Materials……………………………………… Br. 1, 000
Labor…………………………………………. 1,200
Overhead…………………………………..…. 260

6. In Fasika Machine Shop, 10 machine parts out of lot of 100 machine parts are spoiled.
Costs assigned up to the point of inspection are Br. 4, 000 per unit. The current disposal price
of the spoiled parts is estimated to Br 1, 200.
Instructions:
a. Prepare the necessary journal entry as the spoiled units are identified and given that they are
related to the particular jobs.
b. Calculate the cost of good units.

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