CHAPTER 8
DISCUSSION QUESTIONS
Q8-1. Joint products represent two or more prod- accumulate, both a material understate-
ucts separated in the course of the same pro- ment of inventories and a distortion of
cessing operation, with each product having reported net income of successive peri-
such relative value that no one product can be ods may result.
designated as a major product. Q8-6. Yes, some of the initial manufacturing costs,
A by-product is relatively minor in terms of additional manufacturing costs (when by-
total value and is derived incidentally from the products are further processed after separa-
production or manufacture of one or more tion), and perhaps even marketing and
major products. administrative expenses may be charged to
Q8-2. Revenue from the sale of by-products may be the by-products.
listed as other income, additional sales rev- Q8-7. Methods for allocating the total joint produc-
enue, a deduction from the cost of goods sold tion cost to joint products are:
of the main product, or as a deduction from (a) Allocate the joint cost on the basis of the
the cost of production of the main product. relative market value of the joint products.
Q8-3. Yes, when by-product revenue is deducted (b) Allocate the joint cost by using an aver-
from the total production cost of the main age unit cost obtained by dividing the
product, the unit cost of the main product is total joint manufacturing cost by the total
reduced; consequently, the cost of the ending number of units produced.
inventory changes also. (c) Allocate the joint cost on the basis of
Q8-4. The replacement cost method can be used in weight factors such as size, difficulty of
such cases. In this method, the by-products manufacture, or amount of materials used.
that go into making other units are valued at (d) Allocate the joint cost on the basis of
the cost the company would have to pay if it some unit of measurement such as
were to go out on the market and purchase pounds, tons, or gallons. If the joint prod-
such materials. ucts are not measured in the same way,
Q8-5. (a) The treatment described for by-products they must be converted to a denominator
may be justified when, relative to main that is common to all the units produced.
value products, the revenue generated by Q8-8. The market value method considers the rev-
the by-product is insignificant; when no enue-producing ability of the joint products by
clearly defined basis of identifying by- assuming that each should be valued accord-
product costs exist; or when the cost of ing to its cost absorption ability. Resulting
more refined accounting would be dispro- inventory costs are in harmony with revenue
portionate to the benefits received. producing ability and, if the combined joint
(b) The treatment described has several products are profitable, the market value
shortcomings. All gross profit is ascribed method avoids allocating more cost to a prod-
to major products and is incorrect as a uct than its revenue; thus achieving a neutral
measure of total gross profit, since the effect. However, this method may be difficult
inventories of by-products that may be to apply if the market value at the split-off
unsold at the end of the period will have a point is not known.
zero value. Failure to assign values to by- The average unit cost method, while sim-
products may well mean they are not rec- ple to apply when units are measured in like
ognized as inventories at all. This, in turn, terms, fails to consider the heterogeneous
could lead to their waste, theft, or other nature of the individual products.
mishandling. If by-products are sold irreg- Q8-9. Joint costs must be allocated to joint products
ularly and inventories are allowed to when there is inventory to be costed.
8-1
,8-2 Chapter 8
Q8-10. Not exactly. A new manufacturer would do milling process, it is not possible to eliminate
well to consult the Internal Revenue Service low grade lumber. Thus, the profitability of the
about the methods to be used, so that an IRS operation can be viewed best by considering
agent can make a decision before the tax the aggregate of revenue and costs of both
return is prepared. In other cases, where an the high and low grades of lumber, coupled
allocation method has been applied consis- with controls to assure that all practical steps
tently from year to year, to apply for a ruling are taken to obtain high quality logs and to
would not be good strategy. mill them properly. A higher price for logs may
Q8-11. The method used in calculating unit costs pro- be justified in terms of a greater amount of
duces the same unit cost for all grades of lum- high grade lumber.
ber sold. The owner is then led to believe that Q8-12. For decision making, joint costs are irrelevant
the same costs in the same ratio are attributa- unless they are expected to change as a
ble to the low as well as the high grade lumber. result of the decision. Usually, only costs
It must also be recognized that because of beyond the split-off are relevant.
the inherent nature of the materials and the
8-2
, Chapter 8 8-3
EXERCISES
E8-1 (1) Net revenue method:
Gross revenue from sale of by-product .............. $20,000
Production cost after separation........................ 6,000
Net revenue from sale of by-product.................. $14,000
(2) Market value (reversal cost) method:
Final market value ............................................... $20,000
Less: Profit ($20,000 × 10%)............................... $2,000
Marketing and administrative expenses ... 1,000
Production cost after separation............. 6,000 9,000
Joint cost allocated to the by-product ....................... $11,000
E8-2
(1) Calculation of manufacturing cost before separation for by-products.
By-Product
A B
Sales .............................................................................. $6,000 $3,500
Manufacturing cost after separation .......................... $1,100 $ 900
Marketing and administrative expenses .................... 750 550
Profit allowance (A, 15%; B, 12%) ............................... 900 420
$2,750 $1,870
Manufacturing cost before separation ....................... $3,250 $1,630
DISCUSSION QUESTIONS
Q8-1. Joint products represent two or more prod- accumulate, both a material understate-
ucts separated in the course of the same pro- ment of inventories and a distortion of
cessing operation, with each product having reported net income of successive peri-
such relative value that no one product can be ods may result.
designated as a major product. Q8-6. Yes, some of the initial manufacturing costs,
A by-product is relatively minor in terms of additional manufacturing costs (when by-
total value and is derived incidentally from the products are further processed after separa-
production or manufacture of one or more tion), and perhaps even marketing and
major products. administrative expenses may be charged to
Q8-2. Revenue from the sale of by-products may be the by-products.
listed as other income, additional sales rev- Q8-7. Methods for allocating the total joint produc-
enue, a deduction from the cost of goods sold tion cost to joint products are:
of the main product, or as a deduction from (a) Allocate the joint cost on the basis of the
the cost of production of the main product. relative market value of the joint products.
Q8-3. Yes, when by-product revenue is deducted (b) Allocate the joint cost by using an aver-
from the total production cost of the main age unit cost obtained by dividing the
product, the unit cost of the main product is total joint manufacturing cost by the total
reduced; consequently, the cost of the ending number of units produced.
inventory changes also. (c) Allocate the joint cost on the basis of
Q8-4. The replacement cost method can be used in weight factors such as size, difficulty of
such cases. In this method, the by-products manufacture, or amount of materials used.
that go into making other units are valued at (d) Allocate the joint cost on the basis of
the cost the company would have to pay if it some unit of measurement such as
were to go out on the market and purchase pounds, tons, or gallons. If the joint prod-
such materials. ucts are not measured in the same way,
Q8-5. (a) The treatment described for by-products they must be converted to a denominator
may be justified when, relative to main that is common to all the units produced.
value products, the revenue generated by Q8-8. The market value method considers the rev-
the by-product is insignificant; when no enue-producing ability of the joint products by
clearly defined basis of identifying by- assuming that each should be valued accord-
product costs exist; or when the cost of ing to its cost absorption ability. Resulting
more refined accounting would be dispro- inventory costs are in harmony with revenue
portionate to the benefits received. producing ability and, if the combined joint
(b) The treatment described has several products are profitable, the market value
shortcomings. All gross profit is ascribed method avoids allocating more cost to a prod-
to major products and is incorrect as a uct than its revenue; thus achieving a neutral
measure of total gross profit, since the effect. However, this method may be difficult
inventories of by-products that may be to apply if the market value at the split-off
unsold at the end of the period will have a point is not known.
zero value. Failure to assign values to by- The average unit cost method, while sim-
products may well mean they are not rec- ple to apply when units are measured in like
ognized as inventories at all. This, in turn, terms, fails to consider the heterogeneous
could lead to their waste, theft, or other nature of the individual products.
mishandling. If by-products are sold irreg- Q8-9. Joint costs must be allocated to joint products
ularly and inventories are allowed to when there is inventory to be costed.
8-1
,8-2 Chapter 8
Q8-10. Not exactly. A new manufacturer would do milling process, it is not possible to eliminate
well to consult the Internal Revenue Service low grade lumber. Thus, the profitability of the
about the methods to be used, so that an IRS operation can be viewed best by considering
agent can make a decision before the tax the aggregate of revenue and costs of both
return is prepared. In other cases, where an the high and low grades of lumber, coupled
allocation method has been applied consis- with controls to assure that all practical steps
tently from year to year, to apply for a ruling are taken to obtain high quality logs and to
would not be good strategy. mill them properly. A higher price for logs may
Q8-11. The method used in calculating unit costs pro- be justified in terms of a greater amount of
duces the same unit cost for all grades of lum- high grade lumber.
ber sold. The owner is then led to believe that Q8-12. For decision making, joint costs are irrelevant
the same costs in the same ratio are attributa- unless they are expected to change as a
ble to the low as well as the high grade lumber. result of the decision. Usually, only costs
It must also be recognized that because of beyond the split-off are relevant.
the inherent nature of the materials and the
8-2
, Chapter 8 8-3
EXERCISES
E8-1 (1) Net revenue method:
Gross revenue from sale of by-product .............. $20,000
Production cost after separation........................ 6,000
Net revenue from sale of by-product.................. $14,000
(2) Market value (reversal cost) method:
Final market value ............................................... $20,000
Less: Profit ($20,000 × 10%)............................... $2,000
Marketing and administrative expenses ... 1,000
Production cost after separation............. 6,000 9,000
Joint cost allocated to the by-product ....................... $11,000
E8-2
(1) Calculation of manufacturing cost before separation for by-products.
By-Product
A B
Sales .............................................................................. $6,000 $3,500
Manufacturing cost after separation .......................... $1,100 $ 900
Marketing and administrative expenses .................... 750 550
Profit allowance (A, 15%; B, 12%) ............................... 900 420
$2,750 $1,870
Manufacturing cost before separation ....................... $3,250 $1,630
