In some production processes, particularly in agriculture and natural

resources, two or more products undergo the same process up to a split-off

point, after which one or more of the products may undergo additional
processing. An oil company drills for oil and obtains both crude oil and
natural gas. A second-growth forest is harvested, and lumber of various
grades are milled. A farmer maintains a herd of dairy cows, and after the
cows are milked, the milk naturally separates into skim and cream or can be
separated into various products characterized by the amount of milk fat.
Some of these products then constitute raw materials in the manufacture of
other products such as butter and cheese.

Following are some important terms:

Common costs: These costs cannot be identified with a particular joint

product. By definition, joint products incur common costs until they reach the
split-off point.

Split-off point: At this stage, the joint products acquire separate identities.
Costs incurred prior to this point are common costs, and any costs incurred
after this point are separable costs.

Separable costs: These costs can be identified with a particular joint product.
These costs are incurred for a specific product, after the split-off point.

The characteristic feature of joint products is that all costs incurred prior to
the split-off point are common costs, and cannot be identified with individual
products that are derived at split-off. Furthermore, the costs incurred by the
dairy farmer to feed and care for the cows do not significantly affect the
relative amounts of cream and skim obtained, and the costs incurred by the
lumber company to maintain and harvest the second-growth timber do not
significantly affect the relative quantities of lumber of various grades that
are obtained.

Reasons for Allocating Common Costs:

Given the lack of a cause-and-effect relationship between the incurrence of

common costs and the relative quantities of joint products obtained, any
allocation of these common costs to the joint products is arbitrary.
Consequently, there is no management accounting purpose served by the
allocation of these common costs. Literally, there is no managerial decision
that becomes better informed by such an allocation. Consider the
possibilities:
1. Can the allocation of common costs prompt the manager to favor
some joint products over other joint products and to therefore change the
production process, and hence the quantities of joint products obtained?

No. By definition, the relative quantities obtained from the joint process are
inherent in the production process itself, and cannot be managed. In fact, the
manager probably does have strong preferences for some joint products over
others (high-grade lumber over low-grade lumber; cream over skim milk),
but the managers preferences are irrelevant.

2. Can the allocation of common costs prompt the manager to change

the sales prices for the joint products, or to change decisions about whether
to incur separable costs to process one or more of the joint products further?

No. The decision to sell a joint product at split-off or to process it further

depends only on the incremental costs and revenues of the additional
processing, not on the common costs. In fact, the common costs can be
considered sunk at the time the additional processing decision is made. As
for pricing, most joint products are commodities, and producers are generally
price-takers. To the extent that the producer faces a downward sloping
demand curve, determining the optimal combination of price and production
level depends on the variable cost of production, but this calculation would
have to be done simultaneously for all joint products, in which case no
allocation of common costs would be necessary.

3. Can the allocation of common costs inform the manager that the
entire production process is unprofitable and should be terminated? For
example, does this allocation tell the dairy farmer whether the farmer should
sell the herd and get out of the dairy business?

No. Such an allocation is unnecessary for the decision of whether to

terminate the joint production process. For this decision, the producer can
look at the operation in its entirety (total revenues from all joint products less
total common costs and total separable costs).
Yet despite the fact that allocating common costs to joint products serves no
decision-making purpose, it is required for external financial reporting. It is
necessary for product costing if we wish to honor the matching principle for
common costs, because these common costs are manufacturing costs. For
example, if the dairy sells lowfat milk shortly after split-off, but processes
high milkfat product into cheese that requires an aging process, the
allocation of common costs is necessary for the valuation of ending inventory
(work-in-process for cheese) and the determination of cost-of-goods sold
(lowfat milk).

Alternative Methods for Allocating Common Costs:

Here are four methods of allocating common costs:

1. Physical measure: Using this method, some common physical

measure is identified to describe the quantity of each product obtained at
split-off. For example: the weight of the joint products, or the volume.
Common costs are then allocated in proportion to this physical measure. This
method presumes that the quantities of all joint products can be expressed
using a common measure, which is not always the case. For example, crude
oil is a liquid, while natural gas is, naturally, a gas, and volumes of liquids
and gasses are not normally measured in the same units.

2. Sales value at split-off: If a market price can be established for

the products that are obtained at split-off, common costs can be allocated in
proportion to the sales value of the products at split-off. The sales value of
each joint product is derived by multiplying the price per unit by the number
of units obtained. For example, if the dairy farmer obtains 20 gallons of
cream, and if cream can be sold for $3 per gallon, then the sales value for
cream is $60. If the farmer also obtains 40 gallons of skim milk that sells for
$2 per gallon, then the sales value of skim milk is $80. The total value of
both products is $140, and 43% ($60 $140) of common costs would be
allocated to all 20 gallons of cream. This method can be used whether or not
one or more of the joint products are actually processed further, as long as a
market price exists for the product obtained at split-off. In other words, even
if the farmer does not sell any cream, but processes all of the cream into
butter, the fact that there is a market price for cream is sufficient for the
farmer to be able to apply this method of common cost allocation.
3. Net Realizable Value: The net realizable value of a joint product
at split-off is the sales price of the final product after additional processing,
minus the separable costs incurred during the additional processing. If the
joint product is going to be sold at split-off without further processing, the
net realizable value is simply the sales value at split-off, as in the previous
method. Under the net realizable value method of common cost allocation,
common costs are allocated in proportion to their net realizable values. As
with the previous method, the allocation is based on the total value of all
quantities of each joint product obtained (the net realizable value per unit,
multiplied by the number of units of each joint product).

4. Constant Gross Margin Percentage: This method allocates

common costs such that the overall gross margin percentage is identical for
each joint product. The gross margin percentage is calculated as follows:

Gross Margin Percentage = (Sales Cost of Goods Sold) Sales

Cost of Goods Sold for each product includes common costs and possibly
some separable costs. The application of the Constant Gross Margin
Percentage requires solving for the allocation of common costs that equates
the Gross Margin Percentage across all joint products.

Conclusion:

The choice of method for allocating common costs should depend on the
ease of application, the perceived quality of information reported to external
parties, and the perceived fairness of the allocation when multiple product
managers are responsible for joint products. However, as discussed above,
the allocation of common costs is arbitrary, and no method is conceptually
preferable to any other method. All methods of allocating common costs
across joint products are generally useless for operational, marketing, and
product pricing decisions.

MANAGEMENT ACCOUNTING CONCEPTS AND TECHNIQUES

By Dennis Caplan, University at Albany (State University of New York)

Smeal College of Business Managerial Accounting: B A 521

Pennsylvania State University Professor Huddart

Joint Costs

1. Definitions

Joint Cost Allocation: A cost allocation problem arises when two or more

products (frequently intermediate products) emerge

from a single production process. This situation is

common in the manufacture of chemicals, semiconductors,

and agricultural products.

Split-off Point: the stage of production at which the different individual

products can be identified.

Joint Costs: all manufacturing costs incurred prior to the splitoff

point.

By-product: Products with relatively low sales value that are

simultaneously produced in the manufacture of the

main product(s).

This note is based on a note by Nahum Melumad.

Steven Huddart, 19952009. All rights reserved. www.personal.psu.edu/sjh11

B A 521 Joint Costs

2. Methods of Joint Cost Allocation

There are four commonly used methods for allocating joint costs:

1. Physical Measure Method: Some common physical measure is used to

describe the quantity of each product produced. This may be weight,

volume, or BTUs (a measure of thermal energy). The joint costs are

then allocated in proportion to the chosen physical measure at split-off

point.
2. Sales Value at Split-off Point Method: If a market price can be established

for the (intermediate) products at the split-off point, the joint

costs can be allocated in proportion to the sales value of the products.

These values are calculated by multiplying the prices by the quantities

that the joint process yields.

3. Net-Realizable Value (NRV) Method: Here, we focus on the sales value

of the finished products; we take into consideration the incremental costs

incurred subsequent to the split-off point. The net-realizable value of

a product is the final sales price minus incremental processing costs.

Under this method, joint costs are allocated in proportion to their
netrealizable

values.

Note: Complications might arise when there is more than one

split-off point. See Appendix II.

4. Constant Gross Margin Percentage NRV Method: This method allocates

the joint costs such that overall gross margin percentage is identical for

each individual product. To achieve this we follow the following three

steps:

Step 1: Compute overall GM%.

Step 2: For each product, deduct GM from sales value to get the

Cost of Goods Sold (CGS).

Step 3: Deduct separable costs from the CGS (calculated in step 2)

to get the joint cost allocation.

3. Key Point

Any method for assigning joint costs to joint products or by-products is

useful only for the purpose of product costing; any such allocation is useless

for planning or control purposes.

Page 2

Joint Costs B A 521

4. Accounting Methods for By-products and Scrap

Recognition at point of production

Recognition at point of sale

For an illustration of these methods via journal entries see Appendix I.

5. Example

The Happy Wimp Co. is in the business of processing corn into oil, sugar,

meal, and chaff. Each month the Happy Wimp Co. processes 20,000 pounds.
The yields, additional processing costs, and selling prices are:

Sales Value at

Product Yield Split-off Point Added Costs Price per lb.

Oil 200 lbs. $1.25 .50 per lb. $2.00

Sugar 200 lbs. .80 .30 per lb. 1.30

Meal 500 lbs. .40 .20 per lb. .60

Chaff 100 lbs. .10 .10

Joint processing costs per 1,000 pounds are: raw materials $100, labor

$80, and depreciation $4,000/20 = $200; Total $380.

Required: Allocate the total joint costs to the different products according

to the four allocation methods. Treat chaff as a main product.

Answer:

1. Allocate by physical volume:

Oil (200/1000)(380) = 76

Sugar (200/1000)(380) = 76

Meal (500/1000)(380) = 190

Chaff (100/1000)(380) = 38

$380
2. Allocate by relative sales value at split-off point:

Oil (1.25) (200) = 250 (250/620) (380) = 153

Sugar (.80) (200) = 160 (160/620) (380) = 98

Meal (.40) (500) = 200 (200/620) (380) = 123

Chaff (.10) (100) = 10 (10/620) (380) = 6

$620 $380

Page 3

B A 521 Joint Costs

3. Allocate by NRV:
Oil (2.0 .5)(200) = 300 (300/710)(380) = 161

Sugar (1.3 .3)(200) = 200 (200/710)(380) = 107

Meal (.6 .2)(500) = 200 (200/710)(380) = 107

Chaff (.1 0)(100) = 10 (10/710)(380) = 5

$710 $380

4. Constant GM%

Total Sales Value $970

Costs:

Joint 380

Separable 260

GM $330

so the GM ratio is 33/97.

Oil Sugar Meal Chaff

Sales Value 400 260 300 10

GM (33/97) 136 88 102 4

CoGS 264 172 198 6

Sep. Costs 100 60 100

Allocated Joint Costs 164 112 98 6

Page 4

Joint Costs B A 521

APPENDIX I: By-products and Scrap

1. Recognition at point of production

a. At production

Chaff Inventory

$10

WIP (oil, sugar, meal) 10

Valued at NRV net of disposal cost when applicable.

Or credit Joint Cost if we have such an account.

b. At sale of Chaff

CGS 10

Chaff Inventory 10

Cash 10

Revenue 10

2. Recognition at point of sale (of Chaff )

a. At production

no entries

b. At sale

Cash 10

Revenue 10

Page 5

B A 521 Joint Costs

APPENDIX II

NRV under Multiple Split-Off Points: An Example of the Backward-Forward

Method

Department 1 has costs of $100,000 that are to be allocated between

intermediate joint products A and B. Product A is processed further in

Department 2 which has costs of $60,000; final products C and D emerge.

Similarly, product B is processed further in Department 3 which has costs of

$200,000; final products E and F emerge. The net realizable value method

is to be used for joint cost allocation by all three departments. There are no

established market prices for A and B.

Although one could immediately allocate the cost of Departments 2

and 3, another approach is to determine the net realizable value (NRV) of A

and B so that the cost of Department 1 can be allocated first:

NRV of A: ($10 10,000) + ($5 4,000) $60,000 = $60,000

NRV of B: ($10 4,000) + ($20 20,000) $200,000 = $240,000

Hence, 60

300 (i.e., 1

) of Department 1s cost of $100,000 is allocated to

product A and 240

300 (i.e., 4

) to product B. Thus, Department 2s cost should

be revised to

$60,000 +

($100,000) = $80,000

Page 6

Joint Costs B A 521

and Department 3s should be revised to

$200,000 +

($100,000) = $280,000.

Since

NRV of C: $10 10,000 = $100,000

NRV of D: $5 4,000 = $20,000,

product C is allocated 100

120 of $80,000 and D the remaining 20

120 . Similarly,

for D3,

NRV of E: $10 4,000 = $40,000

NRV of F: $20 20,000 = $400,000,

so E is allocated 40

440 of $280,000 and F the remaining 400

440 . The final per-unit

costs of C, D, E, and F are therefore as follows:

(C)

($80,000)

10,000 units

$66,667

10,000

= $6.6667

(D)
1

($80,000)

4,000 units

$13,333

4,000

= $3.3333

(E)
1

11 ($280,000)

4,000 units

$25,454

4,000

= $6.3635

(F)

10

11 ($280,000)

20,000 units

$254,546

20,000

= $12.7273

This method can always be successfully applied, provided (1) we are

given the final sales value and the costs of each department and (2) there
are no loops, that is, products originating at prior split-off points and are
later recombined.

Joint and by-product costing

Joint and by-products are complications that can occur within the context of process
costing.

Definitions

Joint products

Joint products are two or more products separated in the course of processing, each
having a sufficiently high saleable value to merit recognition as a main product.

Joint products include products produced as a result of the oil-refining process,

for example, petrol and paraffin.

Petrol and paraffin have similar sales values and are therefore equally important
(joint) products.

By-products

By-products are outputs of some value produced incidentally in manufacturing

something else (main products).

By-products, such as sawdust and bark, are secondary products from the timber
industry (where timber is the main or principal product from the process).

Sawdust and bark have a relatively low sales value compared to the timber which
is produced and are therefore classified as by-products

Treatment of joint costs

Accounting treatment for joint products

The distinction between joint and by-products is important because the accounting
treatment of joint products and by-products differs.
 Joint process costs occur before the split-off point. They are sometimes called
pre-separation costs or common costs.

The joint costs need to be apportioned between the joint products at the split-off
point to obtain the cost of each of the products in order to value closing inventory
and cost of sales.

The basis of apportionment of joint costs to products is usually one of the

following:

o sales value of production (also known as market value)

o production units

o net realisable value.

Accounting treatment for by-products

As by-products have an insignificant value the accounting treatment is different.

The costs incurred in the process are shared between the joint products alone.
The by-products do not pick up a share of the costs, like normal loss.

The sales value of the by-product at the split-off point is treated as a reduction in
costs instead of an income, again just the same as normal loss.

If the by-product has no known value at the split-off point but does have a value
after further processing, the net income of the by-product is used to reduce the
costs of the process.
Net income (or net realisable value) = Final sales value - Further processing costs
http://kfknowledgebank.kaplan.co.uk/

INTRODUCTION

Cost allocation is an important topic because many of the costs associated

with designing, producing and distributing products and services are not
easily identified with the products and services that are created. Although an
introduction to overhead cost allocations is provided in Chapter 4, the overall
topic is much broader than using a predetermined overhead rate. The
purpose of this chapter is to extend the Chapter 4 discussion to include the
concepts underlying cost allocations as well as a variety of methods for
assigning costs to the various products and services produced. The chapter
provides some previously omitted conceptual and technical material to help
us move from the abbreviated cost systems discussed in Chapters 4 and 5
closer to the point where we can visualize an operational cost accounting
system.

More specifically, the chapter includes four main sections. The first section
provides a discussion of the conceptual foundation for cost allocations
including the purposes and underlying logic associated with the various
methods. Section two is the longest section and includes several subsections
related to service department costs. The first subsection provides a brief
discussion of three general approaches for assigning service department
costs to products. These methods include using a plant wide rate,
departmental rates and activity based rates. This section also includes a
discussion of the circumstances that are necessary for each of these
methods to provide accurate product costs. The following subsection extends
the discussion of departmental overhead rates to include the allocations
from service departments to producing departments. This part includes three
methods for accomplishing these first stage allocations in what many refer to
as the traditional two stage approach. In addition, a technique referred to as
the dual rate or flexible budget method is presented to show how fixed and
variable service department costs can be allocated separately. This section
compares dual rate and single rate methods and illustrates how spending
and idle capacity variances can be calculated for service departments.
Section three compares a plant wide overhead rate with departmental rates
and shows how product costs tend to be distorted when a plant wide rate is
used. The last section is included in an appendix and introduces two special
categories of products referred to as joint products and by-products. This
section addresses the issues associated with assigning costs to these
products and includes a variety of methods

PURPOSES OF COST ALLOCATIONS

The purposes of cost allocations are closely related to the purposes of
information systems outlined in Chapter 2 (See Exhibit 2-4 for a review). Cost
allocations are needed to value inventory for external reporting purposes, for
planning and monitoring the cost of activities and processes, and for various
short term and long term strategic decisions. Some examples include
decisions to "make or buy" sub-components and services, how to price
products and services, when to add or discontinue various products and
services and when to expand or contract the size of a segment of the
company. Cost allocations are also needed to support a price when "cost-
plus" pricing is used, as in government contracting, and in situations where
costs must be justified before reimbursement can be obtained, as in
Medicare reimbursements to medical facilities. In addition, since cost
allocation methods are components of the overall performance evaluation
system, cost allocations tend to influence the behavior of the participants
within the system. Therefore, system designers must also carefully consider
the motivational, or behavioral aspects of alternative cost allocation
methods.

CAS-19 COST ACCOUNTING STANDARD ON JOINT COSTS The following is the

Cost Accounting Standard 19 (CAS - 19) on JOINT COSTS. In this standard,
the standard portions have been set in bold Italic type. These are to be read
in context of the background material which has been set in normal type. 1.
Introduction The standard deals with the principles and methods of
measurement and assignment of Joint Costs and the presentation and
disclosure in cost statement. 2. Objective The objective of this standard is to
bring uniformity, consistency in the principles, methods of determining and
assigning Joint Costs with reasonable accuracy. 3. Scope The standard shall
be applied to cost statements which require classification, measurement,
assignment, presentation and disclosure of Joint Costs including those
requiring attestation. 4. Definitions The following terms are being used in this
standard within the meaning specified. 4.1 By-Product: output of some value
produced incidentally while manufacturing the main product 1 4.2. Cost
Object: This includes a product, service, cost centre, activity, sub activity,
project, customer or distribution channel or any other units in relation to
which costs are ascertained2 . 4.3 Imputed Cost: Hypothetical or notional
costs, not involving any cash outlay computed for any purpose3 . 1 Adapted
from CIMA Terminology 2 Adapted from CIMA Terminology 3 Adapted from
CAS 1 paragraph 6.5.13 2 | Page 4.4 Joint Costs: Joint costs are the cost of
common resources used to produce two or more products or services
simultaneously. 4.5 Joint product : two or more products produced by the
same process and separated in processing, each having a sufficiently high
saleable value to merit recognition as a main product4 . 4.6 Scrap: Discarded
material having some value in few cases and which is usually either disposed
of without further treatment (other than reclamation and handling) or
reintroduced into the production process in place of raw material5 . 4.7 Split
off point: The point in the production process at which joint products become
separately identifiable. The terms split off point and separation point are
used interchangeably. 4.8 Waste: Material loss during production or storage
due to various factors such as evaporation, chemical reaction,
contamination, unrecoverable residue, shrinkage, etc. and discarded material
which may or may not have a value6 . 5. Principles of Measurement 5.1 The
principles and methods for measuring Joint costs upto the split off point will
be the same as stipulated in other cost accounting standards. 5.2 Cost
incurred after split-off point on product separately identifiable shall be
measured for the resources consumed for each Joint/By-Product. 5.3 Cost
incurred after split- off point for further processing of joint product/By-Product
shall be the aggregate of direct and indirect costs. 5.4 Cost of further
processing of joint product/By-Product carried out by outside parties shall be
determined at invoice or agreed price including duties and taxes, net of
discounts (other than cash discount) taxes and duties refundable or to be
credited and other expenditure directly attributable to such processing . This
cost shall also include the cost of resources provided to outside parties. 4
Adapted from CIMA Terminology 5 Adapted from CAS 6 paragraph 4.9 6
Adapted from CAS 6 paragraph 4.11.1 3 | Page 5.5 In case the production
process generates scrap or waste, realized or realizable value, net of disposal
cost, of scrap and waste shall be deducted from the cost of Joint Product. 5.6
Any Subsidy / Grant / Incentive or any such payment received / receivable
with respect to any joint product /By-Product shall be reduced for
ascertainment of the cost to which such amounts are related. 5.7 Penalties,
damages paid to statutory authorities or other third parties shall not form
part of the cost of the joint product /By-Product. 6. Assignment 6.1 Joint cost
incurred shall be assigned to joint products based on benefits received,
which is measured using any of the following methods: a) Physical Units
Method. b) Net Realisable Value at split-off point. Net realisable value for this
purpose means the net selling price per unit multiplied by quantity (Quantity
sold). Net realizable value is to be adjusted for the post- split off costs. c)
Technical estimates 6.2 The value of By-Product shall be estimated using any
of the following methods for adjusting joint costs : a. Net realizable value Net
realizable value for this purpose means the net selling price per unit
multiplied by quantity (Quantity sold). Net realizable value is to be adjusted
for the post- split off costs. b. Technical Estimates This method may be
adopted where the By-Product is not saleable in the condition in which it
emerges or comparative prices of similar products are not available. 7.
Presentation 4 | Page The Cost Statement shall present the element wise
cost of individual products produced jointly and the value assigned to By-
Products. 8. Disclosures 8.1 The Cost statement shall disclose the basis of
allocation of Joint costs to individual products and the value assigned to the
By-Products 8.2 The Cost statement shall also disclose: 8.3 The disclosure
should be made only where material, significant & quantifiable. 8.4
Disclosures shall be made in the body of Cost Statements or as a foot note or
as a separate schedule. 8.5 Any change in the cost accounting principles and
methods applied for the measurement and assignment of the Joint costs and
the value assigned to by-product during the period covered by the cost
statement which has a material effect on the Joint/ By-Products shall be
disclosed. Where the effect of such change is not ascertainable wholly or
partly the fact shall be indicated. 9. Effective date: This Cost Accounting
Standard shall be effective from the period commencing on or after 1 st April
2014 for being applied for the preparation and certification of General
Purpose Cost Accounting Statements.

http://icmai.in/

RELEVANT TO FOUNDATION LEVEL PAPER MA2 2012 ACCA Process costing

joint products This is the third and final article in a series that has
considered various aspects of the accounting for process costs. This article
deals with the situation where joint (two or more) products emerge from a
single process. Joint products are not separately identifiable until a certain
stage is reached in the processing operations. This stage is the 'split-off
point'. Costs incurred prior to this point are common costs. There are two
main aspects to the accounting for joint products: (i) How the common
process costs should be apportioned between the joint products at the split-
off point. (ii) Whether it is more profitable to sell joint products at the split-off
point or whether to process products further (in situations where both of
these opportunities arise). (i) APPORTIONMENT OF COMMON PROCESS COSTS
There are two main methods of apportioning the common process costs at
the split-off point: Physical measurement (weight or volume) of output.
Market value (sales or net realisable value) of output. The apportionment of
common process costs between joint products is arbitrary whichever method
is used. Apportionment is required for inventory valuation of each product
but decisions about the viability of the joint products can only be taken on
the basis of the process as a whole. Physical measurement is the most
straightforward method of common cost apportionment. The weighting of the
physical output of each joint product is applied to the common costs. Each of
the joint products will have the same cost per unit. Market value is also a
relatively straightforward method of common cost apportionment when the
joint products can be sold at the split-off point. The output of each product is
multiplied by their selling price at the split-off point to provide the respective
weighting to be applied to the common costs. Unit costs vary between
products, but the result of using the market value for apportionment of
common costs is that the gross profit percentage margin of each product at
split-off point is the same. It is only in a situation where the joint products
cannot be sold at the split-off point (ie they have to be processed further to
produce saleable products) that 2 PROCESS COSTING JOINT PRODUCTS
NOVEMBER 2012 2012 ACCA calculation of the net realisable value is
required (if market value, rather than physical measurement, is to be used as
the basis of common process cost apportionment). The net realisable value is
the sales value after further processing less the further processing costs after
the split-off point. Illustrations of each of the methods and situations
described above are provided below. Apportionment of common costs using
physical measurement A typical two-mark examination question follows: Joint
products A and B result from a single manufacturing process. Common costs
totalled $192,000 in a period during which output was 2,500 units of product
A and 3,000 units of product B. Products A and B can be sold at the split-off
point for $40 and $80 per unit respectively. What amount of the common
process costs will be apportioned to product B on the basis of physical
measurement? Answer: The proportion of the process costs apportioned to
product B is 3,000/(2,500 + 3,000)]. Thus, $192,000 3/5.5 = $104,727.
Such a question may be set, in a computer-based exam, as a number entry
question or as a multiple-choice question with four options. All questions in
the paper-based exam are multiple choice. If the question is multiple choice,
the distractors are likely to be based on using the wrong product and/or
incorrectly using market value as the basis of apportionment. Apportionment
of common costs using market value (1) Using the same question scenario as
above, the question requirement may instead be: What amount of the
common process costs will be apportioned to product B on the basis of
market value? Answer: The proportion of the process costs apportioned to
product B is [(3,000 80)/(2,500 40) + (3,000 80)]. Thus, $192,000
24/34 = $135,529. 3 PROCESS COSTING JOINT PRODUCTS NOVEMBER 2012
2012 ACCA If the question is multiple choice, rather than number entry,
the distractors may be based on incorrectly using selling prices (rather than
total revenue), using the wrong product or using physical measurement. NB.
Using selling prices (rather than total sales value) is a very common error
made by candidates ie: $192,000 80/(40 + 80) = $128,000. This
incorrect answer only reflects the market values per unit rather than the total
market value of each product's output. Apportionment of common costs
using market value (2) The following further information is added to the
above question scenario: Products A and B can also be processed further.
After further processing, products A and B have selling prices of $60 and
$104 respectively. What amount of the common process costs will be
apportioned to product B on the basis of market value? A $135,529 B
$128,000 C $129,662 D $121,756 Answer: The correct answer remains
$135,529 (option A) because where there is a market value at the split-off
point, it is irrelevant what happens in any further processing. In any case, the
net realisable values cannot be calculated because the costs of the further
processing are not given in the question. Distractors: Option B this
distractor incorrectly uses the selling prices of the two products at the split-
off point rather than the total sales values at that point (see calculation
above). Option C this distractor incorrectly uses the market values of the
two products after further processing (rather than before further processing).
The calculation is $192,000 [(3,000 104)/(2,500 60) + (3,000 104)].
Option D this distractor uses the selling prices of the two products after
further processing. The calculation is $192,000 104/(60 + 104). The above
question is similar to a multiple-choice question in the June 2012 Paper MA2
exam. Just under half of the candidates selected the correct option. 4
PROCESS COSTING JOINT PRODUCTS NOVEMBER 2012 2012 ACCA The
remainder of the candidates were split fairly evenly between the three
distractors. Thus, over 30% of candidates incorrectly used selling prices per
unit rather than total sales values as the basis of apportionment on market
value. Apportionment of common costs using market value (3) The following
illustration is based on the previous question scenario, except that it is now
assumed that products A and B cannot be sold at the split-off point and
further processing costs are given. Thus, the question scenario becomes:
Joint products A and B result from a single manufacturing process. Common
costs totalled $192,000 in a period during which output was 2,500 units of
product A and 3,000 units of product B. Each of the joint products is further
processed to provide saleable output. Further processing costs of $12 per
unit and $16 per unit are incurred for products A and B respectively and the
products are sold for: Product A $60 per unit Product B $104 per unit What
amount of the common process costs will be apportioned to product B on the
basis of market value? Answer: Market value in this situation requires the
calculation of the net realisable value of each product because the joint
products cannot be sold at the split-off point. The net realisable value per
unit of product A is $48 (selling price $60 less $12 further processing cost)
and of product B is $88 (selling price $104 less $16 further processing cost).
The proportion of the process costs apportioned to product B is [(3,000
88)/(2,500 48) + (3,000 88)]. Thus, $192,000 264/384 = $132,000. If
the question is multiple choice, rather than number entry, the distractors
may be based on incorrectly using selling prices (either final price or net of
further processing costs) or using total market values based on the final
selling prices. (ii) WHETHER OR NOT TO PROCESS FURTHER In situations
where a decision has to be made, as to whether joint products are sold at the
split-off point or alternatively processed further before being sold, relevant
cost principles apply. Candidates often have difficulty with the approach that
is required. 5 PROCESS COSTING JOINT PRODUCTS NOVEMBER 2012
2012 ACCA Key principles are: the apportionment of common costs is
irrelevant in decisions concerning whether or not to process individual
products further. Common costs are only relevant to decisions about the
process as a whole decisions about whether or not to process further
should be made on the basis of incremental revenue (final sales value after
further processing less the sales value at the split-off point) less incremental
cost (the cost of processing further). Example The following multiple-choice
question is similar to a question in the December 2011 Paper MA2 exam.
Joint products A and B result from a single manufacturing process. Each
product could be sold at the split-off point or alternatively processed further.
The following data about the two products are available: Product A Product B
$ per unit $ per unit Share of common costs from joint process 25.20 25.20
Selling price at split-off point 24.00 38.40 Cost of further processing 8.60
12.20 Selling price after further processing 32.00 48.40 Which product(s)
should be sold at the split-off point? A Both products B Product A only C
Product B only D Neither product Answer: A product should be sold at the
split-off point if there is not any incremental profit from processing the
product further. As long as the process as a whole is profitable, it is irrelevant
if an individual product is not profitable. It has to be assumed, in this
example, that the process as a whole is profitable. The incremental profit/
(loss) from further processing is calculated as: Product A $ per unit Product B
$ per unit Incremental revenue 8.00 (32.00 24.00) 10.00 (48.40 38.40)
Incremental cost 8.60 12.20 Incremental profit/(loss) (0.60) (2.20) 6
PROCESS COSTING JOINT PRODUCTS NOVEMBER 2012 2012 ACCA Both
products, therefore, should be sold at the split-off point (option A) because
further processing of either product is not financially justified. In the
December 2011 Paper MA2 exam only 23% of candidates reached this
conclusion. Further analysis (which is not required for the decision) may have
influenced candidates' option choices: Product A $ per unit Product B $ per
unit Line 1: profit/(loss) at split-off point (1.20) (24.00 25.20) 13.20 (38.40
25.20) Line 2: profit/(loss) after further processing (1.80) (32.00 33.80)
11.00 (48.40 37.40) Incremental profit/(loss) (0.60) (2.20) Distractors: 37%
of candidates incorrectly selected option C (only product B sold at the split-
off point). This may have been based on a calculation of the Line 1 figures
above ie influenced by the fact that only product B makes a profit at split-
off point. But what then happens to product A? It is a joint process, which
means that both products will be manufactured as long as the process as a
whole is profitable. As already stated this must be assumed, although the
profitability of the process would seem to be confirmed anyway by the above
analysis ie the profit per unit on product B is much greater than the loss per
unit on product A. 28% of candidates incorrectly selected option B (only
product A sold at the split-off point). This may have been based on a
calculation of the Line 2 figures above ie influenced by the fact that product
A makes a loss after further processing, whereas product B makes a profit.
The remaining 12% of candidates incorrectly selected option D (neither
product to be sold at split-off point). Written by a member of the Paper MA2
examining team