Learning Objectives
1. How are the outputs of a joint process classified?
2. What management decisions must be made before beginning a joint process?
3. How is the joint cost of production allocated to joint products?
4. How are by-product and scrap accounted for?
5. How should retail and not-for-profit organizations account for the cost of a joint activity?
ALLOCATION OF JOINT COSTS AND
ACCOUNTING FOR BY-PRODUCT/SCRAP
CHAPTER
11
Chapter 11: Allocation of Joint Costs and Accounting for By-Product/Scrap IM 2
Terminology
Approximated net realizable value at split-off allocation: a method of allocating joint costs to joint
By-product: an incidental output of a joint process; it is salable, but the sales value is not substantial
Joint costs: costs incurred for material, labor, and overhead during a joint process up to the split-off point
Net realizable value (NRV): an amount equal to the product’s sales revenue at split-off less preparation
and disposal costs
Net realizable value approach: a method of accounting for by-products or scrap that requires that the
Net realizable value at split-off allocation: a method of assigning joint costs to joint products based on
Offset approach: (see net realizable value approach)
Other income approach: (see realized value approach)
Realized value approach: a method of accounting for by-products or scrap that does not recognize any
Sales value at split-off allocation: a method of assigning joint costs to joint products based on the
Scrap: an incidental output of a joint process; it is salable but the sales value from scrap is not enough for
Separate costs: costs incurred in later stages of production that are assignable to specific primary
products
Split-off point: the point at which the outputs of a joint process are first identifiable as individual products
Waste: a residual output of a production process that has no sales value
Chapter 11: Allocation of Joint Costs and Accounting for By-Product/Scrap IM 3
Lecture Outline
LO.1: How are the outputs of a joint process classified?
A. Introduction
1. Many companies produce and sell multiple products.
2. A joint process is a manufacturing process that simultaneously produces more than one product
line.
a. Classification of joint process output is based on management judgment about the relative
3. Joint cost refers to the costs incurred for material, labor, and overhead during a joint process up
to the split-off point.
a. Although joint costs must be allocated to the primary products to determine financial
primary products.
5. This chapter discusses joint manufacturing processes, their related product outputs, and the
B. Outputs of a Joint Process
products, by-products, or scrap.
2. Joint products are the primary outputs of a joint process, each of which has substantial revenue–
generating ability.
3. By-products are incidental outputs of a joint process; they are salable, but the sales value of by–
4. Scrap is an incidental output of a joint process; it is salable, but the sales value from scrap is not
value.
sales value.
6. Over time, a product classification may change because of technology advances, consumer
demand, or ecological factors.
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publicly accessible website, in whole or in part.
435) for soybeans.
C. The Joint Process
1. Joint products are typically manufactured in companies using mass production processes and a
process costing accounting method.
individual products.
3. Financial reporting requires that all necessary and reasonable costs of production be attached to
products.
valuation purposes.
4. Costs incurred after split-off are assigned to the separate products for which those costs are
incurred.
a. Text Exhibit 11.3 (p. 437) illustrates a joint process with multiple split-off points and the
LO.2: What management decisions must be made before beginning a joint process?
D. The Joint Process Decision
1. Text Exhibit 11.4 (p. 439) presents the four management decision points in a joint production
process:
a. Management must decide whether the total expected revenues from the sale of the joint
b. Managers must compare the net income from this use of resources to the net income that
would be provided by all other alternative uses of company resources if total anticipated
c. Management must decide how to classify joint process outputs; and
Chapter 11: Allocation of Joint Costs and Accounting for By-Product/Scrap IM 5
publicly accessible website, in whole or in part.
i. Some will be primary; others will be by-product, scrap, or waste.
d. Management must then decide whether any (or all) of the joint process output will be sold (if
i. Such decisions should be made only after considering whether the expected additional
2. Managers must have a reasonable estimate of each joint output’s selling price in order to make
LO.3: How is the joint cost of production allocated to joint products?
E. Allocation of Joint Cost
1. Text Exhibit 11.5 (p. 440) provides data for Gobble Gobble, a company that manufactures three
2. Physical measure allocation
a. Physical measure allocation is a method of allocating common costs to products that uses
b. Physical measurement allocation, unlike monetary measure allocation, provides an
selling prices.
d. A primary disadvantage of the method is that it ignores the revenue-generating ability of
e. This allocation process treats each weight unit of output as equally desirable and assigns
following the exhibit.
3. Monetary measure allocation
a. General
i. The primary benefit of monetary over physical measure allocations is that the monetary
Chapter 11: Allocation of Joint Costs and Accounting for By-Product/Scrap IM 7
publicly accessible website, in whole or in part.
4. In summary:
a. Each method discussed allocates a different amount of joint cost to the joint products and
assignment.
i. This is because, for each joint product, approximated NRV captures the intended level of
separate processing, costs of separate processing, expected selling costs of each joint
LO.4: How are by-product and scrap accounted for?
F. Accounting for By-Product and Scrap
1. General
a. Because the distinction between by-product and scrap is one of degree, these categories are
realized value approach.
c. Text Exhibit 11.11 (P. 446) provides data for a by-product that is produced by Gobble
Gobble.
2. Net realizable value (NRV) approach
a. The net realizable value approach (or offset approach) is a method of accounting for by-
©2013 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a
publicly accessible website, in whole or in part.
Joint Products or Cost of Goods Sold.
c. Although reducing joint cost by the NRV of the by-product/scrap is the traditional method
used to account for such goods, it is not necessarily the best method for internal decision
making or the management of by-products/scrap.
3. Realized value approach
a. When management considers by-product/scrap to be a moderate source of income, the
b. The realized value approach (or other income approach) is a method of accounting for by-
revenue under the “other revenue” method.
i. Additional processing or disposal costs of the by-product/scrap are included with the cost
of producing the primary products, so little useful information is provided to management
ii. Since detailed information on financial responsibility and accountability is provided,
e. Text Exhibit 11.13 (p. 449) shows two comparative income statements using both realized
value methods of accounting for the by-product/scrap income for the example company.
to developing those innovative revenue sources.
G. By-Product and Scrap in Job Order Costing
1. Job order costing systems can have by-products or scrap even though joint products are not
normally associated with such systems.